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Gold prices drop but holding $1,500 after fractured Federal Reserve cuts rates

Kitco News

(Kitco News) - Gold prices are under pressure but holding critical support above $1,500 an ounce as the Federal Reserve cuts interest rates but strikes fairly neutral tone on the U.S. econom and a fractured central bank.

In a widely anticipated move Wednesday, the U.S. central bank cut interest rates by 25 basis points, lowering the interest rate band to between 1.75% and 2.00%.

Gold prices were holding modest gains ahead of the central bank’s monetary policy decision and has not lost some ground following less dovish than expected sentiments. December gold futures last traded at $1,507.60 an ounce, down 0.34% on the day.

In its monetary policy statement the central bank noted that economic activity is been rising at “a moderate pace.” The central bank also remains optimistic that the economy will continue to see positive growth in a low rate environment.

“This action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain,” the central bank said.

Defying market expectations, the latest central bank projections, also known as the dot plots, show that committee members are not expecting to see further rate cut through 2020.

According to some economists, gold prices could be finding some modest support among as future monetary policy is not clear. The latest vote saw three dissenters, the first in three years.

Two dissenters wanted to no rate cut at this meeting and one voter wanted to see a 50 basis-point move. According to reports only seven 0f 17 members want to lower rates at least one more time this year.

Avery Shenfeld, senior economist at CIBC, said that the latest comments from the U.S. central bank are a bit on the hawkish side. However, he added that one more rate cut could be coming this year.

“There were no meaningful changes in growth or inflation forecasts, but clearly, there's still a lot of uncertainty surround that path, and in the policy assumptions on trade etc. that go with it,” he said. “We'll therefore stick to our call for one more cut this year, and then a pause through 2020.”

The following is a recap of the Federal Reserve’s economic projections.

In the latest interest rate projections, also known as the dot plots, the central bank's median forecast is for interest rates to be around 2.9% this year and next, down from June’s forecast of 2.4%. In the long-term, the central bank sees interest rates at 2.1%, in 2021, down from the previous forecast of 2.4%. For 2020 the central bank sees interest rates at 2.4%.

Looking at growth, the Federal Reserve expects U.S. gross domestic product to grow by 2.2% in 2019, up slightly from June’s estimates. Economic activity is expected to grow 2.0% in 2020, unchanged from June’s estimates; the economy is expected to grow 1.9% in 2020, up from the previous estimate of 1.8%. In the first look for 2022, the central banks expects to see growth of 1.8%.

The committee sees a relatively stable labor market for the next few years, as the unemployment rate is expected to hover around 3.7% this year and next, relatively unchanged from the June projections. The unemployment rate is expected to rise to 3.8% in 2021, and 3.9% by 2022.

Despite persistently weak inflation pressures throughout the past year, the U.S. central bank continues to expect prices pressures to continue to build. The projections show inflation rising 1.5% this year rise 1.9% next year and hitting 2% in 2021 and 2022.

Core inflation expectations, which strip out volatile food and energy prices, are expected to push to 1.8% this ye

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