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Last week, I wrote that it was highly uncertain whether the Fed, as it had promised, would raise interest rates twice more this year. The fact that gold prices initially reacted positively on the rate hike in mid-March, might indicate that the gold market also questions the future rate hikes that the Fed promised.

I finished last week by saying that I would comment on another fact of utmost importance with repercussions for precious metals markets. Here it is.

There is, indeed, another reason why the gold price continues to rise after the recent Fed rate hike. In general, we could argue that gold prices tend to go up when monetary policy is expansionary and tend to go down when monetary policy is restrictive.

As I said before, the Fed raised interest rates from 0.75 to 1 percent in March. This new target range means that U.S. monetary policy, from any point of view, ought to be called very expansionary. But, you might be thinking, what mostly counts in this matter are the future expectations regarding the Fed rate. That is completely correct! But we would still leave out the other half of the story.

To see whether monetary policy is expansionary, we tend to look at the nominal interest rate, currently at 1 percent, which is rather meaningless. To be able to conclude if monetary policy is expansionary or not, we must subtract the inflation rate from the official Fed rate or, in other words, calculate the real interest rate.

Far Below Normal

Source: ST Louis fed

Real Rates Are What Matters, Silly!

st louis fed

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