Global inflation concerns lead to aggressive action by central banks

Inflation is not unique to the United States. It is a global phenomenon that prompts central banks around the world to act. Central banks around the world are rapidly adopting more aggressive monetary policies to try to stave off spiraling international inflation. Federal Reserve Bank of New York President John Williams told Bloomberg Television that a 0.5 percent rate hike was a “very reasonable option” for May.

He also detailed the end game and timeline to achieve interest rate normalization, saying: “We need to get to a more neutral or more normal level in the fed funds rate, although it will depend on if that is the end of the year will or when exactly data… The Fed should bring “real” interest rates – nominal borrowing costs minus the expected inflation rate – back to more normal levels by next year.”

According to the CME’s FedWatch tool, there is a 91.06% chance that the Federal Reserve will hike rates by at least ½% and implement that rate hike after next month’s FOMC meeting. Changes in Federal Reserve monetary policy that take steps to curb the highest levels of inflation in the United States in 40 years are not an isolated stance. According to Reuters, “Central banks are rushing to rein in rising inflation, with New Zealand and Canada aggressively raising interest rates by half a point this week and the ECB on Thursday sticking to plans to scale back stimulus this year.”

Central banks tackling rising inflation include New Zealand, Norway, Canada, the UK, the United States, Australia, Sweden, Switzerland, Japan and the European Union. This is truly a global issue that requires action from countries around the world. At the same time, central banks are also well aware that the war in Ukraine is having repercussions that are sweeping through economies on multiple continents.

As a safe haven, gold is sensitive to rising interest rates. However, rate hikes will reduce demand for holding unyielding bullion. As of 5:18 p.m. EDT on a gold futures basis, the most active June 2022 contract is down $7.60 and fixed at $1977.10. The futures contract traded today at a low of $1962.70 and a high of $1984. The gold chart accompanying this letter shows that there is strong technical support for gold at around $1,963 an ounce. This aligns with today’s low of $1962.70 along with resistance at that price point that occurred in early and late March.

However, central banks have generally acknowledged that the rise in inflation includes a large part of the consequences of the war in Ukraine. This war has had a major impact on world food and energy costs, which will not decrease as long as the conflict in Ukraine continues. Even with central bank intervention, simply raising interest rates will not reduce demand for essential commodities such as food and energy costs, which together account for a significant percentage of current inflationary pressures.

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