Gold hovers close to new high of $2,600 post Fed meeting
LONDON (September 19) Gold (XAU/USD) edges higher and trades back in the $2,580s on Thursday after falling to the $2,540s following the US Federal Reserve (Fed) decision on interest rates the prior day.
The yellow metal popped to a new record high of $2,600 on Wednesday before quickly falling back following the much-anticipated Fed meeting, at which they decided to implement a 50 basis point (0.50%) cut to the fed funds rate. This lowers the Fed’s base rate to a range of 4.75%-5.25% from 5.25%-5.50% previously.
Gold peaks after Fed meets
Gold hit a record high of $2,600 after the Fed went ahead with a 50 bps rate cut on Wednesday, although the yellow metal failed to sustain its new highs. Several analysts explained the lack of volatility (financial asset prices changed only modestly after the announcement) due to the Fed’s easing cycle having already been priced in by financial markets ahead of the event.
“Is the easing cycle already priced in?” opined Thomas Mathews, Head of Markets, Asia Pacific for Capital Economics in a note on Thursday. “Markets barely reacted to the Fed’s 50 bps rate cut, on balance, and our base case is that further cuts won’t move the needle too much either.”
Gold upside may have been capped by the basically clean bill of health assigned to the US economy by the Fed. Gross Domestic Product (GDP) growth forecasts were only slightly revised down to 2.0% in 2024 from 2.1% previously and is expected to remain at that level until the end of 2027.
“Accompanying the larger cut was a signal of a fundamentally strong (US) economy with no suggestion that continued 50 bps cuts were likely,” said Jim Reid, Global Head of Research at Deutsche Bank. “Growth projections were little changed and the dot plot showed the median FOMC member expecting the fed funds range at 4.25-4.50% at year-end.”
Weaknesses in the labor market now appear to be the Fed’s major concern. The central bank revised up its Unemployment Rate forecast to 4.4% in 2024-2025 and only sees this falling back to 4.2% by the end of 2027. The focus for markets from here on, therefore, is likely to be on how well the labor market holds up.
But even the labor situation is not yet dire enough to give Gold a haven boost.
“Jobless Claims are actually still at very low levels, nothing like what you would see in a recession, and even quits’ rates and JOLTS’ rates are still stronger than they have been over the course of the last ten years,” said Janet Henry, Global Chief Economist at HSBC. The higher Unemployment Rate was partially due to high immigration in the US, she added, rather than inherent weakness.
Labor market metrics are a lagging indicator, said Henry, so there was a risk of unpleasant surprises ahead.
“If we get a shocking payrolls in November then we might be back to talking about another 50 bps cut,” said the economist in the interview with Bloomberg News.
FXStreet
