Market analysis

Where are gold investors headed according to the Fed’s interest rate path?

By Inki Cho

29 February 2024

gold and charts

One of the most prominent topics in the current market dialogue involves the possibility of disinflation in the United States and the potential implication of this event on the Federal Reserve's decision to cut interest rates. As inflation gradually stabilizes, the prevalent sentiment in the market is leaning towards the possibility of the Fed abandoning its current restrictive monetary policy and shifting towards a more accommodating stance.

However, there has been a gradual decline in the market's confidence about these expectations.

The current state of the US economy, coupled with the robust labor market, has decreased the likelihood of a Fed interest rate cut. This trend is further supported by the Fed officials' hawkish comments, as well as the consistent upward trajectory of the dollar and Treasury yields. 

Moreover, concerns regarding inflation still remain relevant and could escalate at any given time, thereby reinforcing the aforementioned trend.

Gold had reached its previous high of $2,120 (USD) per ounce in the wake of a weakening dollar and Treasury yields in anticipation of a Fed interest rate cut at the end of last year. 

However, with the possibility of an interest rate cut in the March FOMC falling to 0.5%, gold's decline this year has extended to the $1,985 per ounce level. Since then, it has demonstrated a sluggish movement within a narrow range around the $2,000 level.

Gold followers should pay attention to the tone of the Fed officials’ speeches

With only one month remaining until the March FOMC meeting, Wall Street expressed high confidence that the Fed will freeze its current interest rate. This is attributed to the latest FOMC meeting, where Chairman Jerome Powell indicated that a rate cut is unlikely to happen, citing the need for more reliable data on the path of inflation.

Subsequently, the majority of Fed officials have consistently expressed sentiments comparable to those of the Chairman, Mr. Powell.

During a recent statement, Jeffrey Schmid, the President of the Kansas City Fed, stressed that preemptive rate cuts are unnecessary, as demand remains robust and the inflation rate is currently above the target. In his opinion, the most appropriate course of action at this moment would be to focus on combating inflation.

Fed Director Michelle Bowman also expressed her opinion that cutting interest rates at the current juncture would be premature. She further opined that it would be prudent to wait until the release of data that shows that the 2% inflation target is achievable before implementing any rate cuts.

Speaking about gold, it is anticipated that the current market sentiment will be influenced by the Fed's hawkish stance, which will likely result in the continuation of the ongoing upward trend of the US dollar and 10-year Treasury yields. Consequently, the attractiveness of gold is expected to be reduced by the strong dollar and Treasury yields, and with the continuation of hawkish speeches by Fed officials, the increase in gold prices is expected to be limited.

Risk appetite in the market will persist

Gold investors should consider a crucial aspect besides the Fed's current monetary policy position: the appeal of gold as a safe haven asset. The United States economy is currently flourishing, and the previous speculation on Wall Street about the impact of high interest rates tightening the economy seems to be unfounded.

The US economy is currently experiencing a favorable Goldilocks scenario with a steady decline in inflation, leading to an upswing in the stock market with new all-time highs reached every day. While there are concerns regarding the interest rates remaining constant until the second quarter of this year, Goldman Sachs presented a positive outlook for the US economic growth rate at 2.4% for the first quarter.

Investors often consider gold a safe investment option, particularly during economic uncertainty or negative geopolitical events. Conversely, during periods of economic growth and stability, such as the current state of the US economy, investors may be more inclined to pursue higher-yielding investment opportunities rather than investing in gold as a hedge against potential economic downturns.


This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.


Author:

Inki Cho
Inki Cho

Inki Cho is a Market Strategist in Exness. He completed his authorized Financial Engineering courses and he has official certificate for the 'Financial exchange specialist'. He has more than 6 years of experience in writing macro columes with a wide range of financial ideas.