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Gold, XAU/USD, Federal Reserve, Average Inflation Targeting, Bond Yields – Talking Points:
- The Federal Reserve’s adoption of average inflation targeting may underpin precious metal prices
- Rising inflation expectations driving gold prices[2] to record highs
Gold Fundamental Forecast: Bullish
Record low interest rates, accommodative monetary policy[3] and extraordinary fiscal stimulus have buoyed precious metal prices and seemingly created the perfect environment for non-yielding assets to outperform.
This fundamental environment nurturing gold’s surge to fresh record highs is showing little signs of abating, as Federal Reserve Chairman Jerome Powell unveiled the central bank’s updated monetary policy strategy “that will seek to achieve inflation that averages 2 percent over time”.
Speaking at the annual Jackson Hole economic symposium, Powell flagged the “persistent undershoot of inflation from our 2 percent longer-run objective” as a cause for concern and stressed that “inflation that is persistently too low can pose serious risks to the economy [and] lead to an unwelcome fall in longer-term inflation expectations”.
With “well-anchored inflation expectations critical for giving the Fed the latitude to support employment when necessary” the central bank opted to introduce “a flexible form of average inflation targeting[4]”.
Data Source – Bloomberg
Average inflation targeting essentially allows the Federal Open Market Committee[5] (FOMC) to extend accommodative monetary policy measures following periods of below-target price increases to “achieve inflation moderately above 2 percent for some time”.
Given the Fed’s preferred measure of price growth has consistently undershot the mandated target since its implementation 8 years ago and current 5-year inflation expectations sit at just under 1.8%, record low interest rates appear here to stay for the foreseeable future.
Although the Fed’s intolerance to elevated levels of inflation
