(Kitco News) – The Federal Reserve should disregard the President’s wishes and market expectations and hike rates at today’s meeting – tamping down inflation while pushing back on political interference – but it will most likely succumb to both and deliver a 25-basis-point cut, according to Darin Newsom, senior market analyst at Barchart.com.
“It’s interesting to listen to the rhetoric – I’m sorry, I mean debate – regarding what Chairman Powell should announce,” Newsom wrote ahead of Wednesday afternoon’s rate decision. “The interesting thing about this ongoing ‘debate’ is that most of it has nothing to do with economics but falls along political lines instead. Stop and think about it for a moment: Most of the opinions, loudly expressed, would fall on the other side of the debate if a member of the opposing party occupied the big chair in the US White House.”
Newsom said it’s odd to have a sitting U.S. president pushing the Fed to lower interest rates when the move would signal “the economy is suffering due to his one-word trade policy.”
“[W]hat tends to happen when interest rates are lowered is that the country’s currency tends to weaken,” he said. “And when a currency weakens, the price of goods and services tends to go up. This after the US continues to deal with the self-imposed consumer tax also known as ‘tariffs.’”
Newsom pointed out what happened from 2018 to 2020 “when the ongoing trade wars and tariffs were new” and President Trump demanded interest rates stay low, or even become negative. “The US is still dealing with the fire of inflation that was fanned back then,” he said. “Why does the US president want low to negative interest rates? Because he equates the economy with US stock indexes, and the latter tends to trend up as interest rates move down.”
Newsom lists the four potential decisions the Fed could take, and likeliness of each outcome.
First, a 50-basis point rate cut. “Based on what we see in the Fed fund futures forward curve, a 50-basis point rate cut doesn’t seem likely this week,” he said. “At last Friday’s close, the September 30-day fed funds futures contract (ZQU25) was priced at 95.785, implying a rate of 4.215%, below the low end of the current range at 4.25%. Meanwhile, the October contract (ZQV25) closed at 95.95 putting the implied rate at 4.05% with the next FOMC meeting scheduled for October 28 and 29. However, the November contract (ZQX25) closed at 96.145 (3.855%) with December (ZQZ25) at 96.3 (3.7%) and the last meeting of 2025 scheduled for December 9 and 10.”
The second option – and the most likely by far – is a 25-basis point rate cut. “[T]he September futures contract puts the implied rate below the low end of the current range at 4.25%,” Newsom noted. “If Chairman Powell announces a 25-basis point rate cut, the range drops to between 4.0% and 4.25% with the October contract putting the implied rate slightly above the low end 4.0%.”
“Once we get past the October meeting, though, things could get fun,” he added. “There is no meeting scheduled for November, and the December futures contract puts the implied rate at 3.7%, below not only the expected low end of 4.0% but another 25-basis point cut to 3.75%.”
“In other words, the market is indicating a possible 50-basis point rate cut at the conclusion of the December meeting.”
The third possible outcome is that the Fed opts to keep rates unchanged. “While this is the most logical conclusion given continued US inflation and questions about the jobs sector, the Fed isn’t likely to take the unchanged route this time,” he said. “Why? The US president needs to be pacified, and so a 25-basis point cut would be like giving a cookie to a screaming child. The economic logic is easy to see: If the Fed goes through with a 25-basis point cut, it most likely won’t change the situation all that much for the average person. Yes, inflation will likely heat up a bit, but the FOMC would still be in position to raise rates to dampen the fire at the conclusion of either the October or December meetings.”
The final possibility is a 25-basis-point rate hike. Newsom said that while “it isn’t going to happen,” he believes this would actually be the right move.
“From an economic point of view, this would be an indication the Fed is actually keeping an eye on real inflation rather than the mixed signals coming from government reports,” he said. “From a political point of view, this would tell us the Fed is trying to stay neutral, taking its role of monetary policy seriously rather than getting caught up in the political nonsense of the day. From a personal point of view, I would thoroughly enjoy watching the US president blow a gasket if Chairman Powell announced a rate hike.”
“However, the Butterfly Effect tells us it could create an unforeseen storm,” Newsom concluded. “And that is a risk the Fed won’t likely take.”
Gold is trading in the upper half of its daily range after hitting a session low of $3,660 per ounce at 7 am EDT.
CHART
Spot gold last traded at $3,683.51 for a loss of 0.17% on the session.
