The US Federal Reserve has made an announcement of raising interest rates by a quarter-point (25 basis points), in the range between 5.25% and 5.50%. This marks the eleventh increase since the start of last year. The statement also indicates that there is still high inflation, and the labor market is strong, which suggests that the economy of the US will continue to grow.
Inflation is the enemy
The Federal Reserve has noticed that inflation is still high, which could cause an increase in the prices of goods and services. This may affect consumers’ ability to afford them. In response, the Federal Reserve may take additional measures in the future, such as raising interest rates even higher, to control inflation.
The last increase in interest rates is part of a trend of the US economy to continue improving economic performance and inflation.
The Federal Reserve’s goal is to ensure stable prices and a robust labor market. Due to this increase, both companies and individuals may face higher borrowing costs, which could impact economic growth in the short term.
What was the effect?
After this decision was made, the dollar index, which measures its value compared to other currencies, decreased by 0.168% to 101.130. Meanwhile, the euro increased by 0.19% to $1.1074.
The Federal Reserve held interest rates steady during its June meeting, following ten consecutive increases that began in March 2022.
The US experienced a significant decrease in annual inflation in June, dropping to 3% from the previous month’s 4%. This decline was more than what analysts had predicted. The Federal Reserve’s goal is to maintain a long-term inflation rate of approximately 2%, which it is now getting closer to achieving.
It’s important to mention that when interest rates go up, it usually has a negative effect on the gold market. This is because gold doesn’t provide a return to its holders like government bonds, which offer a return that goes up with interest rates. However, the decision to raise interest rates by 25 basis points didn’t negatively impact gold because the markets had already anticipated this increase and priced it in.
In contrast, the positive recovery trend of the US dollar, which lasted for five consecutive sessions, came to an end. The dollar began to decline during yesterday’s session and continued to do so today by 0.2%, as indicated by the dollar index, which measures its performance against a basket of six major currencies.
Currently, US bond yields are steady and have maintained their recent increase. The following session saw a rise in the yield of 10-year bonds to 3.922%, the highest it has been in two weeks.
The relationship between government bond yields and gold limits the potential gains for gold. This is because when bond yields increase, investors tend to move their investments away from the gold market.