(Kitco News) - The gold market is experiencing notable volatility below $3,400 an ounce as the Federal Reserve continues to lower its economic growth forecasts, raise its inflation expectations, and signal the possibility of two rate cuts this year.
As expected, the Federal Reserve left interest rates unchanged, maintaining the target range between 4.25% and 4.50%. However, markets are primarily focused on the central bank’s updated economic projections.
The Fed still expects interest rates to fall to 4% by the end of the year, but it remains in no rush to initiate rate cuts—even as economic growth is projected to slow.
“Uncertainty about the economic outlook has diminished but remains elevated. The Committee is attentive to the risks to both sides of its dual mandate,” the central bank stated in its monetary policy announcement.
Despite the market’s volatility, gold prices remain relatively stable following the release of the Fed’s policy statement. Spot gold last traded at $3,390.81 an ounce, largely unchanged on the day.
While the Fed still expects to cut rates in 2025, the updated dot plot indicates shallower rate cuts in 2026 and 2027. The federal funds rate is projected to fall to 3.9%, unchanged from March. However, interest rates are now expected to end next year at 3.6%, up from the previous 3.4% forecast. For 2027, rates are projected to end at 3.4%, an increase from March’s estimate of 3.1%.
The Fed’s revised projections also show a downward revision to economic growth. GDP is now expected to grow 1.4% this year, down from the 1.7% forecast in March. Growth in 2026 is projected at 1.6%, down from 1.8%. For 2027, GDP growth is forecast to hold steady at 1.8%.
The U.S. labor market is also expected to cool further. The unemployment rate is projected to rise to 4.5% this year, up from March’s estimate of 4.4%. It is expected to remain elevated through 2026, reaching 4.4% in 2027—also up from the previous 4.3% forecast.
On inflation, the Fed sees consumer prices staying elevated through 2027. Core inflation is forecast to rise 3.1% this year, sharply higher than March’s 2.8% estimate. In 2026, core inflation is expected to be 2.4%, up from 2.2%, and to rise to 2.1% in 2027, compared to the previous 2.0% estimate.
Headline inflation is also projected to rise. The Fed now expects inflation to increase 3.0% this year, up from 2.7%. In 2026, it is forecast to rise 2.4%, up from 2.2%, and to increase to 2.1% in 2027, up from 2.0%.
Michael Brown, Senior Research Analyst at Pepperstone, described the Fed’s policy decision as a placeholder, reflecting a neutral stance.
“Powell & Co continue to sit on the sidelines, awaiting further clarity on how the economy evolves and how the balance of risks to each side of the dual mandate is shifting. While the direction for rates is clearly downward, the bar for a cut before Q3 remains very high given recent data. My base case is a single 25bp reduction this year, most likely in December,” he said.
Brown also dismissed the Fed’s hawkish revision to its interest rate outlook.
“The 'dots', though, are pretty useless at the best of times—least of all in a period as volatile and uncertain as this,” he added.
Jamie Cox, Managing Partner at Harris Financial Group, noted that the Fed appears overly focused on inflation.
“The Fed continues to overplay the inflation story and isn't paying attention to burgeoning demand weakness. While the dot plot forecasts three rate cuts through 2026, the more likely scenario is three rate cuts by the end of 2025,” he said.
