Gold Tops $4,000 Then Retreats After Fed’s Mixed Signals on Future Cuts

Fed Cuts Interest Rate in Data Drought
Just like a pilot flying a plane through a blizzard in white-out conditions, the Federal Reserve is making interest rate decisions blindfolded. Fed officials lack fresh economic data, because of the government shutdown. Today, amid the data drought, Fed officials voted 10-2 to cut its official interest rate to 3.75% – 4%. The Fed also said it will stop shrinking its balance sheet on December 1. 

Fed policymakers said that “job gains have slowed” and “risks to employment rose in recent months” and the rate cut was intended to help ease the weakness in the labor market, the second cut this year.  

Gold Market Reacts 

Gold edged slightly higher poking back above $4,000 initially on the news but then drifted back below that level after Federal Reserve Chairman Jerome Powell put future rate cuts into question.  

“A further reduction in the policy rate at the December meeting is not a foregone conclusion–far from it,” Powell said. “Policy is not on a pre-set course.” 

The comments surprised Wall Street, which had been banking on another rate cut this year. Treasury yields climbed and the stock market wiped out its gains after the Fed Chair’s comment.  

Bigger Picture 

Gold has retreated in recent days as a corrective pullback took hold following the record-high move above $4,370 mid-month. Short-term momentum traders took profits on the double-digit gains seen in precious metals this year. However, buyers entered the market and bought the dip in gold prices, and the long-term uptrend remains intact.  

Even after the recent pullback, gold remains up over 50% this year, supported by central bank buying and safe haven buying as investors seek to protect their wealth amid runaway budget deficits.  

Dissent Grows at the Fed 

Not all voting members of the Federal Open Market Committee agreed on today’s rate cut. New Fed governor Stephan Miran was against the quarter point drop, saying he believed the central bank should lower rates faster with a half percentage point cut.  

On the opposite side, Kansas City Fed President Jeffrey Schmid voted against today’s rate cut saying he thought the central bank should hold steady on rates. Dissent is growing at the Fed, which is unusual after many years of voting committee members acting in unison.  

Why the Discord at the Fed? 

Inflation remains stubbornly high and sits above the Fed’s 2% target rate. Fed officials conceded today that inflation “has moved up since earlier this year and remains somewhat elevated.”  

When the Fed cuts rates, that typically creates easier money conditions, which can make inflation worse. The Fed had to decide should it keep rates steady to fight inflation or should it lower rates to try to help the weakening job market.  

“There is no risk-free path for policy as we navigate this tension between our employment and inflation goals,” Fed Chair Powell said today.  

Powell called today’s rate cut a risk-management type of move to bring monetary policy closer to a neutral stance.  

What’s Next for the Fed? 

Fed officials appear divided on the path forward for future rate cuts, especially since inflation is running above the Fed’s 2% target. Financial markets had nearly priced in another rate cut in December. Today’s Fed meeting creates uncertainty about the path going forward.  

Today’s Gold Price Offers You Opportunity 

This week, at the London Bullion Market Association’s precious metals conference in Kyoto, the outlook for gold remains upbeat, with a survey of 106 attendees projecting that gold will be trading at nearly $5,000 an ounce a year from now. 

Gold’s role as a portfolio hedge remains strong. Short-term consolidation could unfold in the market following the breathtaking gains achieved this year, which create opportunities for long-term investors to step in and buy more gold with your dollars today. As investors have known for centuries, gold’s strength lies in protecting and growing your wealth, despite inflation, economic uncertainty and stock market volatility. Act now to lock in more insurance for your wealth with a greater allocation to gold.