Speaking at the Economic Club ofChicago, US Federal Reserve (Fed) Chairman Jerome Powell was in the spotlightyesterday and highlighted the potential economic consequences of PresidentDonald Trump’s tariffs on the US economy.

‘Tariffs are highly likely to generate at least a temporary rise ininflation’

Powell underlined that Trump’s policychanges are ‘unlike anything in modern history and have put the central bank inuncharted waters’, adding that ‘the policies are still evolving and theireffects on the economy remain highly uncertain’. He stated that the announcedtariff increases were higher than anticipated, and that ‘the same is likely tobe true of the economic effects, which will include higher inflation and slowergrowth’.

According to survey and market-basedmeasures, near-term inflation expectations have increased, but longer-terminflation expectations remain ‘well anchored’. However, Powell said that‘inflationary effects could be more persistent’.

Powell indicated that a part of thetariff burden would be paid by the public, and unemployment is expected to riseas the economy cools. US President Donald Trump is clearly not a very happychap this morning regarding Powell’s recent remarks, noting that the FedChairman’s termination ‘cannot come fast enough’:

Fed on hold for now

Powell stressed that the Fed’s best course of action right now is to remainon hold until data reveals a clearer path. He noted that the central bank is‘well-positioned to wait for greater clarity before considering any adjustmentsto our policy stance’. Despite this, Powell refrained from providing anyindication as to the future rate path. Markets are pricing in nearly 90 basispoints (bps) of easing this year, so the expectation is for about three ratecuts by the end of the year, with June or July’s meeting on the table for apotential 25 bp cut.

Providing a more candid perspective on the new government, Powell remarkedthat the effects of the administration’s tariffs may steer them away from theirobjectives, indicating that the Fed could face a conflicted mandate – maximumemployment and stable prices. He stated that if this conflict comes tofruition, ‘we would consider how far the economy is from each goal, and thepotentially different time horizons over which those respective gaps would beanticipated to close’.

Gold: Buy the dip?

Powell’s comments immediately guided US equities southbound and underpinneda bid in the price of Spot Gold to yet another fresh all-time high, with priceaction currently trading off highs of US$3,574 ahead of the US cash open.

With Goldman Sachs and UBS raising their year-end Gold price forecasts, andthe trend evidently to the upside, this would be a challenging market to shortat this point.

Despite the yellow metal registering long-term overbought conditions – themonthly chart’s Relative Strength Index is testing levels not seen since 2008 –picking tops in a trend demonstrating strong momentum at all-time highs isdifficult.

Consequently, investors will likely seek dip-buying opportunities. I amseeing very little support to work with on the monthly scale right now, thoughthe daily chart highlights an interesting decision point zone atUS$3,193-US$3,245, located just north of notable support from US$3,148. Thedaily demand zone at US$3,000-US$3,058 is also a worthwhile base to pencil inthe watchlist. Ultimately, if a correction should materialise from currentlevels, I will watch how price behaves at US$3,193-US$3,245, given I believethat this area warrants some caution due the possibility of a whipsaw throughthe noted area (tripping stops) into US$3,148.

Written by FP Markets Chief MarketAnalyst Aaron Hill

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