Higher interest rates tend to boost the dollar and push bond yields up, putting pressure on greenback-denominated, non-yielding bullion.
Jim Caron, a bond portfolio manager at Morgan Stanley Investment Management, told Barron’s there are two aspects to the most recent Fed announcement that caused him some anxiety.
In emerging markets, the Mexican peso fell 0.3 percent to 17.8125 peso per US dollar following reports of extensive damage to buildings in Mexico City in the aftermath of the second major quake that rocked that country in less than two weeks.
It is hoped the runoff will see reductions in the tens of billions of dollars per month.
The move, analysts say, suggests the Fed will proceed cautiously.
All the easy money sloshing around on financial markets burnished bullion’s reputation as a hedge against inflation and as a storer of wealth amid the debasement of paper currencies sending gold to an all-time nominal high above $1,900 an ounce by August 2011. But economic growth and low unemployment suggest they should act.
The U.S. dollar rallied strongly on the hawkish Fed stance, while U.S. Treasury prices sold off. U.S. stock indexes ended the day mixed Wednesday.
“You could see mortgage rates going up as a result of them (reducing) their balance sheets”, he said.
“Yellen has delivered on her promises and we believe this paves the way for other central banks to reduce QE where it is still alive and tighten monetary support slowly but surely”.
The question of when and how the Fed will manipulate its main policy lever – its target for short-term interest rates – in coming months is less clear.
While a September interest rate increase is not expected, investors will closely watch Fed Chair Janet Yellen’s views on inflation, as they look for clues on whether or not the Fed will raise rates in December. “The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate”, Federal Reserve stated in last meet on 25-26 July 2017.
The market hopes of another interest rate being implemented before the end of the year were dampened in the past months due to the current inflation rate as well as the ongoing presence and effect of the geopolitical issues between the United States and North Korea. The main gauge rose 0.1 percent.
U.S. stocks have continued to climb this year, with the S&P up about 12 percent so far, helped by strong corporate profits and optimism that U.S. President Donald Trump will cut taxes for businesses.