Another pivotal week is here for investors and traders who have been trying to gauge the next move from the Federal Reserve in terms of its monetary policy. If we look at the US equity markets or fixed income markets, one can see clearly that there have been a few adjustments in terms of the Fed rate cut expectations. However, it is this week that we are going to have the most important event that is more than likely to dictate the future path of the Fed rate cut, while Wall Street giants have already scaled back in terms of their rate cut bets for this year while being a lot more optimistic for 2025.
Background
Controlling inflation and navigating the economy in current turbulence times have been the most challenging tasks for the Federal Reserve in the aftermath of the COVID-19 crisis. Last week, two punches of bad news on producer prices and consumer prices once again raised alarm bells among investors and traders that the inflation reading, which was on the right track in terms of easing off and moving closer to the Fed target rate of 2%, has started to plateau, and the data confirmed that the inflation data’s nature has become more sticky than their current anticipation.
The Federal Reserve’s Chairman has already let the cat out of the bag if one had paid close attention to his comments during his testimony to the Senate and the House a few weeks ago when he said that the nature of inflation and how the Fed measures it have been impacted on a permanent basis due to COVID. Basically, I believe that the message between the lines was that the Fed needs to think about their inflation target once again, and this is because an inflation target of 2% is no longer a realistic value. The recent readings of consumer prices (a broad measure of goods and services costs that increased by 0.4% for the month and by 3.2% from a year ago) and producer prices (which measure pipeline costs for raw, intermediate, and finished goods and jumped by 0.6% on the month, double the Dow Jones estimate) have had the echo of the same argument.
The Data
On Wednesday, the Fed Chairman will once again be on the spot as the Fed announces its monetary policy decision. A few months ago, traders were expecting a rate cut during this meeting, but the sticky nature of inflation changed all of that. Going into this event, it is now widely anticipated that the Fed will keep the rate at its current level, which is 5.50%. So the question is: if market players already know that the Fed is not going to move its muscle with respect to its interest rate, why is this event important? The reason that there will be fireworks at this event is because the Fed will make a speech about their monetary policy, and it is in this speech that traders are going to look for further evidence of future rate cuts. Remember that the Fed already knows that their 2% inflation target is not realistic anymore and is not going to be achieved as COVID has changed some dynamics forever. So, the interesting fact to note will be if the Fed will mention this particular factor once again during the press conference. But the fact that inflation reading continues to remain immensely sticky means that the Fed will have less incentive to take any aggressive measures to bring the interest rates back to their normal level, which means that any hopes of interest rate cuts of four times are more than likely to face a reality check.
Goldman Sachs, the Wall Street giant, has already scaled back on its expectations of rate cuts today. The bank said that now it expects the Fed to cut rates three times this year, rather than four times.
Data is Not Everything.
Remember, this year is also an election year, and the fact that there are more chances of Donald Trump coming back to office than before opens a new door for the rate cuts. In his previous term, he made his views clear about the Fed’s monetary policy: he favours lower interest rate cuts, and although the candidates that are announced by his advising team for the Fed Chairman role are still hawks, the odds are that as resident, he would put pressure on the Fed to lower the interest rates faster in order to give a big push to the economy.
What About the Stock Market and Gold
The US stock indices have been on a roller coaster ride, and it is mainly due to the sell-off among some members of the so-called magnificent seven stocks. Anything which is less than currently hawkish would be positive for the US stock market and vice versa. As for the precious metal, it recorded its first negative week on Friday in more than three weeks, during which period it recorded several new record highs. The current record high for the precious metal is only about $5 shy of $2,200, and at the time of writing this research report, the price seems to be holding well near the 2155 price mark. The first immediate support level stands at $2137, and any violation of this price point would open the door towards the next support level, which is at $2087. The resistance continues to remain at the previous high of $2195.
