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The Call For Fed Rate Cuts Is Paper Thin - BMO's Doug Porter

Kitco News

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(Kitco News) - The argument for the Federal Reserve to cut interest rates is growing “paper thin,” according to Doug Porter, chief economist at BMO Capital Markets. However, the bank doesn’t expect one rate hike will be enough to spook gold investors.

According to the CME FedWatch Tool markets are pricing in a nearly 50% chance of a rate cut by the end of the year, but Porter warned, in a research note Monday, that the health of the U.S. economy doesn’t warrant looser monetary policy.

After a weak start to the year, Porter said that conditions have significantly improved.

“We have oil prices right back around last year’s average level, and up more than 40% since the start of the year. Equities have pretty much reversed 2018’s late-year nastiness, with the S&P less than 2% from its all-time high,” he said in the report.

“The one remaining case for even considering Fed easing was that domestic growth appeared to be softening amid the many earlier weights, as well as fading fiscal stimulus and past rate hikes. But that case was cut down to size this week amid a string of generally decent U.S. economic releases,” he added. “Most importantly, payrolls popped back to their trend rate with a solid 196,000 gain in March, while the ISMs stayed firmly in mid-50s terrain in the month, and auto sales rebounded to 17.5 million in March, salvaging Q1 as a whole.”

Porter added that he sees the U.S. central bank will raise interest rates one more time this year.

However, the potential for one more rate hike won’t spook gold prices very much, according the bank’s commodity analysts. The bank is sticking with its call for gold prices to average the year around $1,293 an ounce, which is just down from current prices. June gold futures last traded at $1,302 an ounce, up 0.49% on the day.

In an email statement to Kitco News, Colin Hamilton, managing director of commodities research at BMO said that even if interest rates rise one more time in this cycle, real interest rates will remain relatively low.

“There is little to worry about,” he said.

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