Federal Reserve expected to raise interest rates this week by 0.25%

Introduction

Good Morning to all our current and new viewers. Today's article visits several topics such as the Federal Reserve's decision to increase interest rates, inflation figures and implications, Bank of England rate hike, and gold prices.

Federal Reserve

All eyes will be on the Federal Reserve this Wednesday (16th March 2022) as investors expect policymakers to raise the benchmark interest rate by 0.25% (0.25% to 0.50%). The rate hike is said to be the first time since 2018.
The reduction in consumption and slowing of the labour market could reduce some inflation pressure over time. However, if higher gas costs and increased price pressures persist, policymakers could convince consumers that the price hikes will last. Consumer behavioural patterns may change permanently to readily accept price increases and request higher rates to combat such issues.
Fed Chairman Jerome Powell has indicated that the central bank will approach interest rate adjustments carefully as they learn more about the implications of the Ukraine war.
Russia-Ukraine war has created market turmoil, sending commodity prices soaring. Oil prices have roughly increased by 23% since the invasion. Brent crude oil prices on Friday was at $112/barrel, with its high at $139/barrel.

Inflation

Last week's Consumer Price Index (CPI) report indicated a rise of 7.9% in inflation, the fastest annual inflation pace in 40 years. The Bureau of Labour Statistics suggests that the main contributors to inflation are rising food, rent and gas prices.
Officials expect the CPI report to increase further for March as gas prices surge. Rising costs have impacted consumers significantly, causing confidence to fall and affecting household budgets. Despite higher employment figures, increased wages and savings during the pandemic, many low-income households are affected considerably as a large percentage of their income is used on daily necessities.
President Biden is aware of combating rapid inflation in troubled times. The president has pointed fingers at Russia's President Vladimir Putin, blaming the cause of inflation due to his decision to invade Ukraine.
Mr Biden is confident that the sanctions placed on Russia have a more significant effect on Russians' costs than Americans.

Bank of England

How will the BOE respond to the Russia-Ukraine conflict? Investors have expected the BOE to raise interest rates for the 3rd time this week since the pandemic.
UK inflation rate hit a 30-year high at 5.5% in January, well before the impact of higher oil prices and Western sanctions on Russia.
The BOE believes that the rate hikes are warranted to reduce the risk of higher inflation that can have detrimental effects in the long term if left uncontrolled.

Gold

Global financial markets have been experiencing extreme volatility since the invasion of Ukraine. Many investors are turning to the traditional asset of gold as a safe haven.
Gold prices last week soared to nearly $2,070/ounce, within proximity to its all-time high of 2,072.50 (August 2020). However, gold retreated to below $2,000/ounce despite the further tensions in Ukraine. Many investors are questioning the longevity of the precious metal rally.
The loss of traction in gold could be connected to the increased hopes of a ceasefire between Russia and Ukraine and easing differences between China and the United States.
Exchange-Traded Fund (ETF) managers bought heavily into gold as prices rose. The demand for Gold ETFs saw investors adding 96.2 tonnes to their total holdings with a total cost of more than $6.1billion as of 9th March.
Goldman Sachs has raised its gold price forecast of the commodity to $2,500 over the next six months from its previous of $2,050. Goldman expects that demand for gold will increase throughout the year, mainly from ETF investors, consumers in Asia and central banks.