The Fed's Decision Leans Hawkish: High Interest Rate Expectations Weigh on Gold
$Gold - main 2604(GCmain)$$USD/XAU(USDXAU.FOREX)$On Wednesday (March 18), spot gold experienced significant volatility, briefly approaching the $4,800 mark before closing at $4,818.83 per ounce, down 3.73%. During the session, it hit a more than one-month low of $4,807 per ounce. On one hand, the escalating geopolitical conflict in the Middle East, particularly the attack on Iran's Pars gas field triggering a chain of retaliation, kept Brent crude oil above $110, exacerbating inflation concerns and dampening expectations of a Federal Reserve rate cut. On the other hand, the Fed's latest decision to maintain interest rates at 3.50%-3.75% and signaling persistent inflation and a cautious approach to rate cuts boosted the US dollar index, both contributing to downward pressure on gold prices. On Thursday (March 19) in early Asian trading, spot gold hovered at lower levels, currently trading at $4,838.75.
The Fed's Decision Leans Hawkish: High Interest Rate Expectations Weigh on Gold
The Federal Reserve held rates steady at its meeting, maintaining the target range for the federal funds rate. The dot plot showed policymakers expect only one rate cut (25 basis points) in 2026, consistent with their December forecast. More importantly, Chairman Powell admitted at the press conference that the uncertainty surrounding the Iran war has made the policy path "highly unclear," with the economic impact potentially being "much smaller or much larger," and nobody really knows. The Fed's latest forecast raises the year-end PCE inflation rate to 2.7%, higher than the previous expectation of 2.4%, with core inflation also rising, reflecting concerns about rising energy prices being embedded in the decision-making framework.
Powell emphasized that the Fed's current stance is "good" and that it will decide its next move based on data and the balance of risks. However, he also mentioned that the possibility of a rate hike, while not the baseline scenario, has been discussed by some officials.
The market interprets this statement as a clear hawkish signal: expectations of a rate cut have been significantly delayed, with interest rate futures showing traders have pushed their bets on the first rate cut to April 2027. The US dollar index rose 0.72% in response, and US Treasury yields climbed across the board, with the two-year yield reaching 3.737% and the ten-year yield hitting 4.249%. A stronger dollar directly increases the cost of gold for non-dollar holders, while the high-yield environment raises the opportunity cost of holding gold—investors are more inclined to turn to interest-bearing assets rather than non-interest-bearing gold.
Powell's dovish hints were far from enough to boost the market, and gold's recent trading behavior is more akin to that of risk assets. If the market expected a Fed ready to intervene at any time, they were disappointed this time. Although the technical drop below $5,000 is worrying, the long-term bullish trend has not reversed.
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