The Fed’s rate decision is due tomorrow, and markets see a nearly 90% chance of rates staying put, although there are already reasons to raise them again.
First, inflation remains high, with CPI rising to 3.7% in September from 3.4% in August, while producer prices jumped 1.3% over the month (their biggest monthly increase in four and a half years) bringing annual producer price growth to 6.3%.
Second, the US economy remains resilient: initial jobless claims fell to 194,000, the PMI climbed to 56, and GDP grew at a 2.2% annualized pace in Q2, while consumer spending rose at a 3.8% annualized rate, up from just 0.7% in Q1.
Why wait?
Inflation isn’t out of control just yet, so the Fed may prefer to wait and see how prices and the economy evolve before making another move. A hike now could also fuel expectations of further increases, something the Fed may want to avoid.
Waiting another six weeks would give policymakers more time to assess the data while keeping the door open to another hike if inflation stays above the 2% target. There is also a timing factor: rate hikes typically take around two quarters to feed through to the economy, meaning the Fed has yet to see the full impact of its previous moves.
The Fed may also be hoping tensions in the Middle East ease, easing the energy crisis and taking some pressure off inflation, which could give central banks more room to rethink further rate hikes. However, elevated oil prices and rising commodity prices could complicate that outlook.
Markets, however, are less optimistic, with Brent trading above $116 a barrel amid fears of a fresh escalation in the Middle East ahead of the US midterms. Even talk of progress in Russia-Ukraine peace talks has done little to calm the market, despite the possibility of Russian energy supplies returning if a deal is reached.
Gold, meanwhile, remains under pressure as markets fear the Fed may have to hike rates again to keep inflation in check. And since the precious metal pays no interest, higher rates make it less attractive. Silver could face similar headwinds from higher interest rates, although its industrial uses mean that concerns about economic growth and manufacturing demand can also influence silver price chart.
What could sink oil and send gold higher if not Middle East peace?
There is one scenario, though it’s not a pretty one for risk assets: if Big Tech delivers decent results this week but raises concerns about monetising AI, the sell-off we saw late last week could deepen. That could push investors towards safe havens like gold while weighing on oil on fears of weaker economic growth and demand.