Is DBG-Gold bottoming out?

Jefferson, vice-chairperson of the Federal Reserve, said the central bank should be cautious after the surge in US Treasury yields. The escalation of the Israeli-Palestinian conflict also made it less likely that the Federal Reserve will raise interest rates again. Gold prices recorded their biggest increase since May.

Top Federal Reserve officials are showing more consistency in the view that tighter financial conditions following the recent surge in Treasury yields may have replaced higher interest rates.

On Monday local time, Federal Reserve Vice Chairperson Philip Jefferson said that while inflation remains too high, he is closely monitoring the rise in U.S. Treasury yields because it could further constrain the economy. He will "closely monitor the tightening of financial conditions resulting from higher bond yields" to assess "the path of policy going forward," echoing similar comments from other policymakers in recent days.

Speaking at the National Association for Business Economics conference in Dallas, Mr. Jefferson said officials were "capable of carefully assessing the extent of any additional policy strengthening that may be needed".

"Looking ahead, I will keep an eye on the tightening of financial conditions, particularly the rise in bond yields, and take this into account when assessing the future policy path."

DBG ForexNoting that after raising the benchmark federal funds rate by more than 5 percentage points over the past year and a half, it would be appropriate for most members of the Federal Reserve to expect another 25 basis point hike by the end of 2023 at their September policy meeting. But since the September meeting, the yield on the 10-year Treasury note has risen by about 40 basis points. Fed officials, including San Francisco Fed President Daley and Dallas Fed President Logan, noted that,The recent tightening of financial conditions may have replaced further interest rate hikes。

The key question for officials is whether the recent rise in borrowing costs reflects investors' expectations of a stronger economy or is simply additional compensation needed to bear interest rate riskIt may keep them on the sidelines at least for the next interest rate decision。

"We are in a sensitive period of risk management where we have to balance the risk of not tightening enough with the risk of being too strict," Mr. Jefferson said.

Futures markets show a less than 20% chance of a 25 basis point rate hike at the upcoming FOMC policy meeting from Oct. 31 to Nov. 1, and a similar chance at the final meeting in December at the end of the year.

In response to questions after his speech, Jefferson said he did not want to prejudge how the Fed would respond to economic developments. "Our responsibility is to bring inflation down to 2 percent and be flexible about what might happen in the economy," Jefferson said. "Whatever happens, I want the public to know that we will remain vigilant and will use data in real time to choose the appropriate response."

Despite rising borrowing costs, the US economy has shown surprising resilience. According to the latest data released on Friday, the US labour market added 336,000 jobs in September.In his speech, Mr. Jefferson listed two risks: the potential impact on the US of a slowdown in growth in regions such as Europe, and a labour market that may still be "too strong to reduce inflation further".

The Federal Reserve is cautious. Has gold bottomed out?

"The market is suddenly doing all the dirty work for the Fed," said Yelena Shulyatyeva, a senior U.S. economist at BNP Paribas. "It seems that most people, including some of the more hawkish policymakers, agree to move more cautiously."

"Jefferson basically tells you that not only is the Fed going to stay put, but they have to take into account that higher long-term interest rates are slowing the pace of economic growth," said Andrew Brenner, head of international fixed income at NatAlliance Securities LLC. "The Fed is finally recognizing that rising real interest rates are having an impact and is achieving some of the goals they hope to achieve by raising the policy rate," he said.

"Improving inflation is why they can be patient, and rising yields are why they should be," said Lou Crandall, chief economist at Wrightson ICAP LLC. The widespread rise in borrowing costs for many debt securities has increased the impact of monetary policy and increased "the risk of non-linear responses to fragility and financial stability," said Mr. Crandall.

In addition,Last weekend's Hamas raid on Israel also made it less likely that the Federal Reserve would raise interest rates again.Tensions in the Middle East could mean that the Fed will not "continue to raise interest rates in the face of increased uncertainty, and the prospect of peak rates is suddenly closer, despite possible inflationary pressures from high oil prices," said Ole Hansen, head of commodity strategy at Saxo Bank."We conclude that this development could signal a floor in the price of gold, which could be subject to additional demand from investors as the focus shifts from interest rate hikes to rate cuts."

Gold prices rose as much as 1.7 percent on Monday, their biggest gain since May, as heightened Middle East tensions following the Hamas attack on Israel increased demand for safe havens. December gold futures rose the most since August, whileComex gold's implied volatility and bullish skew also rose。

"The US bond market was closed today [Monday] as gold rallied and investors scrambled to find safe havens due to new geopolitical risks," said Ed Moya, senior market analyst at Oanda. "The Israel-Hamas war has shocked the market, raising the risk of further contagion to the Middle East."The technical support for gold in the short term is at the $1920 level。