Gold Bulls Look Past Looming Fed Rate Hike, Load Up on ETFs

The Fed kept to earlier predictions it might raise its target rate once more this year. The central bank last month added a counter-cycle adjuster to the yuan's daily fixing formula, a move that boosted the currency's exchange rate by about 1 per cent against the USA dollar.

While traders are pricing a 91 percent chance of an increase in borrowing costs when US policy makers conclude their meeting Wednesday, skepticism is growing the Fed will be aggressive in monetary tightening amid growth risks.

Wall Street gave up earlier gains after the Federal Reserve announced its second interest rate increase this year, signalling another rate hike as well as a start to trimming its balance sheet this year.

After the Fed's widely telegraphed 25 basis point interest rate increase on June 14, the Chinese central bank injected 90 billion yuan of funds into the interbank market, keeping the rates of the 7-day, 14-day and 28-day bills unchanged at 2.45 per cent, 2.6 per cent and 2.75 per cent respectively.

Despite the increase - the fourth since December 2015 - interest rates remain near historic lows, but the move will mean higher borrowing costs for consumers. The Fed began buying the bonds after the Great Recession to try to depress long-term loan rates.

Inflation has been more problematic, having long stayed below the central bank's 2 percent target rate. But Fed officials have said they think inflation will soon pick up along with the economy.

The Federal Open Market Committee said it will initially stop reinvesting in maturing securities by $US10 billion a month ($US6 billion Treasuries and $US4 billion mortgage bonds).

The Fed also issued updated economic forecasts that showed it foresees one additional rate increase this year to follow Wednesday's increase and an earlier rate hike in March.

Since late 2015, increases in USA borrowing costs were followed by a rebound in gold prices, fueling optimism a recovery is in the offing.

In particular, hiring in the United States remains solid if slowing, with employment at a 16-year-low of 4.3 percent - even below the level that the Fed associates with full employment.

They forecast US economic growth of 2.2 percent in 2017, an increase from the previous projection in March. They continue to expect the economy to grow 2.1 percent next year and 1.9 percent in 2019.

During his campaign, President Trump criticized Yellen for keeping interest rates down.

Yellen, the first woman to lead the Fed, is serving a term that will end in February.

Chair Janet Yellen was asked at a news conference whether she anxious that the Fed could rattle markets once it starts shrinking its bond holdings.

She said Americans now have more than a trillion dollars in credit card debt - debt that's getting more expensive.

  • Zachary Reyes