FX.co ★ Change in Fed forecast guidance affects markets

The Federal Reserve first spoke about its forward guidance at last year's economic symposium in Jackson Hole. In particular, it was Chairman Jerome Powell's keynote speech that hit the American public. It's about the Fed's intention to raise rates and keep those higher rates until the Fed hits its 2% inflation target.

Following the December FOMC meeting, the Federal Reserve released its economic forecasts for 2023–2025, including the most recent dot plot.

The dot plot is the Fed's mechanism for predicting future rates by having 17 Fed officials vote on the future of monetary policy. The December dot plot revealed an overwhelming majority that the Fed would raise rates to a target of just over 5% and keep rates high throughout calendar year 2023.

Although the Fed has maintained its policy, it is market expectations that have recently shifted from disbelief to recognition that the Federal Reserve is unlikely to abandon its hawkish monetary policy. This includes further rate hikes and maintaining those higher rates throughout the year.

During February, market sentiment on the Federal Reserve's forward guidance changed from uncertainty to approval. This put pressure on precious metals prices.

While it is true that inflation has been declining since the Federal Reserve began raising rates last March, recent data suggests that inflation is not declining as fast as the Fed had hoped. The January employment report is well above the forecast of 188,000 compared to 517,000, combined with the latest inflation reports, which suggest that inflation remains high and resilient in some sectors.

The most recent data has reinforced the idea that the Federal Reserve will maintain its hawkish monetary policy with the real possibility of two more rate hikes and, most importantly, maintain new elevated rates in 2023.