At the March FOMC meeting, the Federal Reserve raised its key federal funds rate by 25 basis points, marking the first rate hike by the Federal Reserve since 2018. It was the start of the Federal Reserve’s pivot from an extremely accommodative monetary policy to a monetary tightening policy. The Federal Reserve would continue to raise rates at each of the three FOMC meetings that followed. In May, the Fed raised rates by 50 basis points, 75 basis points in June and another 75 basis points in July. This has increased the cost of borrowing capital from virtually zero to 2½%.
With inflation rising to its highest pace in 41 years, the Federal Reserve has been slow to launch a series of rate hikes and has lagged too long. The biggest mistake made by the Federal Reserve was its assumption that rising inflation levels were transitory and would naturally dissipate over a relatively short period of time. The fact that the Federal Reserve was wrong in its assumption would force it to launch an extremely aggressive series of rate hikes over a short period of time.
The chart above produced by Statista plots the 12-month inflation rate from January 2020 to July 2022. It clearly shows that at the time the Federal Reserve launched its first interest rate hike, the CPI or headline inflation had already reached 8.5%. More so, it underscores how long the Federal Reserve has turned a blind eye to out-of-control inflation with consistent, consecutive increases month after month.
In April this year, following the Federal Reserve’s first rate hike, inflation fell slightly from 8.5% to 8.3%. At the time the Federal Reserve raised rates three times, inflation continued to rise to a peak in June of 9.1%, a level not seen in 41 years. The first significant drop in inflation occurred last month, pushing the CPI from 9.1% to 8.5% in July.
Meanwhile, the dollar index rose from 99.26 in March to its highest closing value in 20 years yesterday, when the dollar index closed at 108.965. It also had a dramatic bearish impact on gold which peaked in March this year, trading at $2077 at its lowest for 2022 on July 21 when gold futures gold hit a low of $1680.
The chart above is a two-month Japanese candlestick chart of the dollar index. It identifies the last two times the dollar traded at this value. The first case occurred in 2000 when the dollar index broke above 109 and traded at a high of around 120. The second case occurred during the correction that occurred immediately after reached 120 in 2003.
The chart above is a daily Japanese candlestick chart of gold futures. As of 5:45 p.m. EDT, the most active contract for December 2022 is set at $1761.10 after taking into account today’s gain of $12.70 or 0.73%. The dollar index fell 0.47% today, meaning it accounted for around half of gold’s gains, with the remaining gains directly attributable to market participants offering the precious metal yellow on the rise.
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