Earlier this year, markets anticipated as many as six rate cuts. However, by March, expectations were scaled back to two or three cuts, with forecasts fluctuating throughout the summer. Just last month, the possibility of a larger 50 basis point reduction sparked further volatility.
The impending rate cut is now viewed by many as a close call, generating optimism across global markets. Gold, in particular, ended the week at a record high of over $2,600 per ounce, up more than 3% from the previous week. Silver also surged, closing above $31 per ounce, reflecting a nearly 10% increase.
Market sentiment regarding the Fed’s next move is mixed. According to the CME FedWatch Tool, there is a 45% chance of a more aggressive rate cut next week. However, this outlook seems at odds with the current state of the U.S. economy, which remains relatively stable despite slowing activity. Inflation, although still above the Fed’s 2% target, has eased in recent months.
The August Consumer Price Index (CPI) rose 2.5%, below the expected 2.6% and down from July’s 2.9%. Core inflation, excluding volatile energy and food prices, edged up to 3.2%, slightly higher than the previous month. This data doesn’t point to an economy in dire need of aggressive monetary easing.
Nonetheless, many analysts believe this rate cut is about more than just the short-term outcome. According to TD Securities, attention will be focused on the Fed’s “dot plots,” which reflect the central bank’s future interest rate expectations. “We expect the Fed to adopt a broadly dovish tone in its forward guidance,” analysts said, indicating that the journey toward economic recovery is just beginning.
While the Federal Reserve’s decision is the main event, it’s important to note that other major central banks have already started their easing cycles. The European Central Bank (ECB), the Bank of England, the Bank of Canada, and the Swiss National Bank have all cut rates recently. This past week, the ECB made its second rate cut, with more expected.
As interest rates fall globally, real yields are declining, driving gold prices higher. The latest gold rally was ignited by the euro’s weakness, following the ECB’s recent rate reduction. Gold also reached record highs against other major currencies, including the British pound, Canadian dollar, and Australian dollar.
Though some profit-taking may occur if the Fed delivers a modest 25 basis point cut, many investors believe gold’s long-term upward trajectory is just beginning. The global “race to the bottom” in currency markets, fueled by central banks easing to support their slowing economies, is far from over.
With just a few weeks left in September, it seems the traditional seasonal downturn in gold prices has been broken, signaling potential further gains ahead.
