Equities jumped, then sagged, as did gold, as the seismometer of economic uncertainty played it safe following the Fed’s surprise half-per-cent cut in its Federal Funds Rate.
Like a dog that catches a car and then wonders what to do with it, rate-cut bulls who had confidently forecast a 50-point cut from the Fed looked around after getting it and wondered, ‘What happens next?’
This uncertainty grew, especially when the Fed’s so-called dot plot showed a further half-per-cent cut by the end of the year, with only two meetings left in 2024.
Gold bounced to well above $US2,600 an ounce around the Fed’s announcement but, like equities, sagged when the potential downside of a half-per-cent cut—indicating there might be bad news lurking somewhere in the economy—was finally taken on board.
Fed Chair Jay Powell made it clear there was no bad news and that the substantial cut was made to ensure no bad news would arise, especially from the labour market, as inflation decreases.
Ahead of the much-anticipated decision, markets had been pricing in the more aggressive 50-basis-point move, and gold traded as high as $US2,627 an ounce for the December futures contract on Comex.
That cut was delivered, and the metal then fell, closing the session in New York around $US2,584 an ounce. Comex silver dropped 1.8% to $US30.41 an ounce, and Comex copper dipped to $US4.27 a pound.
The rate cuts shown in the updated dot plot from the Fed are now a concern for many investors. The plot indicates that the central bank expects interest rates to fall to 4.40% by the end of the year, down from June’s estimate of 5.1%.
The dot plot could be wrong, and the Fed could wait until early next year to assess the impact of the significant rate cut on the economy, especially the jobs market—but who wants to take that risk?
The fact that many members of the Fed’s Open Market Committee foresee another half-per-cent cut in the next three months has many investors on edge—typically the kind of atmosphere where gold should thrive. But will it?