(Kitco News) - The FOMC’s March meeting is underway, and the central bank will issue its interest rate decision on Wednesday at 2 pm EST. While analysts and traders are virtually unanimous in their belief that a rate cut is not on the table this month, there’s still potential for drama.
The Fed is due to share the first updated ‘dot plots’, or rate path projections, since the December meeting, and many market participants believe the latest FOMC voter data could suggest 50 rather than 75 basis points of cuts this year.
But what if there’s an even more fundamental change in the cards? What if two consecutive months of higher-than-expected inflation prints push the Fed to pull back from its implied easing bias, and instead set the central bank’s monetary policy on more neutral footing?
Bob Haberkorn, Senior Commodities Broker at RJO Futures, told Kitco News that gold prices are showing a great deal of sensitivity to inflation data ahead of the FOMC. He said last week’s price declines on Tuesday and Thursday show the market is worried the Fed could be rethinking the path for rates.
“That is what you saw here with the sell off, was CPI, PPI both coming in hotter than expected,” he said. “The month before it was the same thing. And in terms of expectations, three months ago we would have been talking probably March, they would be doing rate cuts, but that's obviously been pushed back a few times now.”
“How can they be talking about rate cuts when CPI, PPI are showing the levels they're showing?”
Shift to neutral policy is possible
Haberkorn sees risk surrounding the content of the FOMC statement following last week’s high inflation readings. “Are they going to say that they have to hold steady? I mean, there's a possibility they might even have to say something about raising rates with the data we've been seeing here,” he said.
For several months now, the market has been hanging on to the idea that the next data point could be confirmation that easing is imminent, that the next Fed meeting may be the one to signal rate cuts. But what if they don't want the market on the edge of its seat anticipating the start of the easing cycle? Could the Fed decide to simply return monetary policy to a neutral position, get gold back below $2,000 per ounce, and pull trigger-happy traders back from the edge?
“If the Fed goes more neutral here, gold will probably sell off,” Haberkorn said. “Everything's going to be dependent on Wednesday's announcement, and if they do go neutral and say something along those lines, gold and silver would sell off.”
“You'd see a big sell-off, it would be a short-lived sell-off, but it would be drastic,” Haberkorn said. “It's really going to depend on what they do, but I could see them switching to neutral, I really can.”
Adam Button, chief currency strategist at Forexlive.com, told Kitco News that a Fed shift to neutral would have a massive impact on precious metals as well as the broader markets.
“If the Fed were to abandon an easing bias, it would be terrible for risk assets, including gold,” he said. “There's some real fear about the Fed shifting towards neutral, but to take a neutral stance would be a real game-changer.”
Button said it would also damage the central bank’s own credibility, which is why he doubts they will do it.
“It would go against a lot of what they've been saying for the past two months, including just a few weeks ago at Humphrey Hawkins,” he said. “I don't see that as a major risk, because the Fed is struggling with credibility already and to do that is unnecessary."
He also thinks a sudden switch to neutral would limit Powell’s options going forward. “It could put the Fed in a really bad spot if the data does deteriorate between now and June,” Button said. “The last thing the Fed wants to do is switch it up. I don't see anything in the data that says the Fed should be hiking, so it's really a matter of time when they should be cutting.”
“The shift in the last month has been the Fed going from talking about rate cuts in mid-year to talking about rate cuts sometime this year,” he added. “I think that's indicative of how the market has shifted as well. June's down to about 60 [percent chance of a cut]. That sounds about right.”
Dot plots could weigh on metals
Button also thinks the Fed’s dot plots will be a major focus for markets on Wednesday, as they could well signal a shift from three cuts to two in 2024.
“When you get the headline that the dots moved 75 to 50, probably gold falls $30,” Button said. “And I'd fade that. I think it's really a classic sell-the-rumor, buy-the-fact type of trade.”
Haberkorn also sees potential for the updated dot plots to take a toll on gold and silver, even if the Fed maintains its current easing bias.
“If the dot plots moved down lower to 50, if they move even lower to a quarter, depending on what happens Wednesday, metals will take a hit,” Haberkorn said. “The assumption is rate cuts are coming, but no one knows when. I mean, June has been the number, and we went from March, now they're at June, they'll be pushing to September before you know it.”
Gold’s longer-term prospects remain strong
Button said that despite the strong likelihood of a pullback in the wake of the FOMC announcement and accompanying data, the yellow metal has already chosen its direction going forward. “Gold has already voted,” he said. “Gold has broken out. It's a buy-the-dips gold market from here on out. And whether it's the Fed or something else, unless there's a true game-changer, that's going to be the game.”
He added that losing one 25-basis-point cut this calendar year doesn’t change the fundamental calculus for traders. “At the end of the day, do I care if the Fed cuts in June or September?” he asked. “All I care about is that I've got a Fed put. If anything goes wrong, I know the Fed's going to cut. And if it's not in June, then it means the global economy is doing great. So, why should I worry?”
Haberkorn does see reasons to worry if CPI and PPI continue to trend above expectations. “If all these inflation numbers continue to come in hot, it'll be neutral,” he said. We'll see a sell-off, but then you will get some flight to safety buying [gold] up, and central bank buying as well. That'll be supportive. So I think $2,000 is good support for right now.”
Button said that with the precious metal already hitting new all-time highs week after week while most investors are still on the sidelines, he likes the prospects for gold, as well as silver and the mining stocks, once the investment community finally joins the party.
“It's just a wonderful setup,” he said. “You have everything in place for what could be an ongoing, aggressive move higher, including a turn in the dollar. The dollar is still very close to its highs, and so is gold. I really think that in a lot of the metals, when the dollar turns, the money will flow, and suddenly something like $2,500 seems too conservative.”
