The Fed Futures market has priced in a 90 percent probability of a 25-basis point cut, to 1.5 to 1.75 percent. What will be more important than the all but certain cut will be the Fed’s future indication. The economic data remains strong while trade tensions and Brexit are still up in the air. The combination makes the outlook for the Fed somewhat uncertain.
Fed Chair Powell’s Comments
Federal Reserve Chairman Jerome Powell has maintained that the cuts are a mid-cycle adjustment rather than the start of a downward path for rates. Powell also explains that the Fed’s purchasing of bonds is not renewed quantitative easing. He explains that the purchases are intended to alleviate a shortage of bank reserves.
What the Meeting Should Entail
The most important data from the meeting may be how many members vote against cutting rates. Bill Merz, head of fixed income research for U.S. Bank Wealth Management explains that “Trailing economic data is strong enough to justify an end to the mini-cycle of rate cuts but market signals like the flat yield curve and anemic inflation expectations indicate additional easing is necessary.” Gary Pzegeo, head of fixed income at CIBC Private Wealth Management says that “weaker manufacturing data and increased risk to the outlook make the case for a 25-basis point insurance cut.”
Gold has been relatively steady around the $1500 spot level, plus or minus $20, for the past three weeks.
Trade talks, Brexit negotiations and the upcoming rate decision have caused some fluctuation but has not caused any breakout moves. This rate decision is virtually certain at this point as the Fed doesn’t like to surprise the market. With that in mind the most important news from the Fed will be how they address the state of the economy. If the Fed continues the story that the economy is doing fine and the cuts were insurance cuts, then we could see the Fed pause for a couple meetings and reassess from there.
Gold will most likely sell off if we see the probability of future rate cuts decrease. Keep an eye on the dissenting votes and the presser following the decision, those will be the catalyst for market moves.