In a much-anticipated speech, Powell affirmed expectations that officials will begin lowering borrowing costs next month and made clear his intention to prevent further cooling in the US labor market.
“The time has come for policy to adjust,” the Fed chair said in the text of a speech at the annual Jackson Hole conference. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.”
Treasury yields and the dollar both pushed lower on his comments, helping boosting bullion by as much as 1.3% during the day, within striking distance of its all-time high of $2,531.75 hit Tuesday.
The precious metal has been setting new record highs over recent weeks as expectations mounted that the Fed is getting closer to its pivot to lower rates, which tend to benefit non-interest bearing gold.
The price rally comes despite the headwind of high borrowing costs, which surprised seasoned analysts as bullion typically has an inverted relationship with bond yields. The decoupling at that time was largely due to strong central bank purchases, Chinese consumer buying and haven demand due to rising geopolitical risks.
The recent run-up was boosted by lower rates, which signals that traditional macro drivers such as bond yields are returning to the fore. In recent days, swap traders have cemented bets that Fed policymakers will cut by as much as one percentage point by year-end, starting in September with the likelihood of a 25- or even 50-basis-point cut.
Minutes from the central bank’s July meeting signalled several officials saw a case for lowering borrowing costs next month, and the latest jobs data, which revealed that employment growth was far less robust than previously reported, reinforces that the cuts are all but assured.
After Powell’s speech, the traders held steady in their bets for the total rate cuts they expect through the end of the year, with odds remaining steady for a quarter-point cut in September.
“His speech seems to be accretive for gold, copper and risk assets generally, as his citing his confidence that inflation is on a path to 2%,” said Bart Melek, global head of commodity strategy at TD Securities, in a Bloomberg note.
“He does not want a further cooling of the labor market, which suggests he is ready to cut in September and may get more aggressive than 25 bps if there is more weakness than anticipated.”
Powell’s speech also confirmed what gold traders had expected that rates are going to come off, according to Melek. TD expects bullion to rise further to more than $2,700 in the coming quarters.
(With files from Bloomberg)