Fed minutes, interest rates and gold
Category: Invest
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Introduction
The Federal Reserve (the ‘Fed’), the central bank of the United States, plays a crucial role in shaping the country’s economic landscape. One of its primary tools is the manipulation of interest rates to guide inflation, which can have wide-reaching effects on various financial markets.
Changes in interest rates, and interest rate expectation, especially for the homogenous US dollar, can have a real-time impact on the evolution of the gold price.
Policy update
The Fed met for its latest two-day policy meeting on 11–12 June. Officials acknowledged the US economy appeared to be slowing, whilst probably avoiding a hard landing, and noted that ‘price pressures were easing’.[i] However, officials advised to adopt a cautious stance and refrain from committing to interest rate cuts until further economic data came to light.
The meeting minutes, which were published after trading on 3 July, saw the gold price trading broadly sideways in the next day’s session, and the general cautious tone could keep a lid on the gold price in the short term.
The minutes also mentioned that inflation has proven trickier to tackle than was envisaged at the start of the year. ‘New projections revealed that Fed officials, at the median, anticipated only one quarter-percentage-point rate cut this year, a revision from the three cuts expected at the March 19–20 meeting.’ [ii]
Looking at economic data released on the day of the publication of the Fed minutes, it appears service sector and labour market activity is pointing to a cooling. In fact, the US services sector fell to a four-year low in June, whilst those picking up jobless claims rose to a two and a half year high.[iii]
It seems the economic picture is changing beneath the feet of policymakers, and the latest data would suggest an increased likelihood of a September rate cut from the current target 5 to 5.25% interest rate range. In fact, investors are now pricing a 68% chance of a rate drop in September. Markets gave their opinion with the gold price climbing to a near two-week high at around $2,360 per troy ounce (Gold Price | The Royal Mint).
The conflicting tone and uncertainty, coupled with a pending US presidential election, may provide a bid for gold despite interest rates staying higher than first projected. However, any catalyst to begin dropping US rates in earnest could see the gold price build from its new base.
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Sources
i, ii FOMC Minutes saw further signs that the economy is losing momentum | fxstreet.com[EF1]
iii Gold hits near 2-week high as soft US data lifts Fed rate-cut bets | Reuters
Notes
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