Fed Key Points- The Federal Reserve’s FOMC left interest rates unchanged in the 5.25-5.50% range, as expected
- The median FOMC member now expects 3 interest rate cuts in 2024 and 4 more in 2025.
- The US dollar is selling off and gold is rallying in the initial reaction to the FOMC meeting.
Fed Interest Rate Decision
The Federal Reserve’s FOMC left interest rates unchanged in the 5.25-5.50% range, as expected. There were no changes to the central bank’s plans for its balance sheet.
Fed Monetary Policy Statement
After leaving its monetary policy statement essentially unchanged over the past couple of meetings, were hoping for more clarity and updates today’s statement. The two tweaks were small but potentially consequential:
- The central bank acknowledged that growth “has slowed” since Q3 and that inflation “has eased over the past year”
- The “forward guidance” on future policy was updated to “In determining the extent of any additional policy firming that may be appropriate”
Source: Federal Reserve, StoneX
While the economic update merely recognizes changes that have already occurred, it provides a justification to add in a hint that 2022-2023 rate hike cycle is well and truly over.
Fed Summary of Economic Projections (SEP)
The US central bank also updated its economic projections in today’s meetings. Relative to the last forecasts in September, the Fed made the following changes for this year and 2024:
- 2023 GDP: 2.6% vs 2.1% in Sept. // 2024 GDP: 1.4% vs 1.5% in Sept.
- 2023 PCE inflation: 2.8% vs 3.3% in Sept. // 2024 PCE inflation: 2.4% vs 2.5% in Sept.
- 2023 PCE core inflation: 3.2% vs 3.7% in Sept. // 2024 PCE core inflation: 2.4% vs 2.6% in Sept.
The unemployment forecasts were left unchanged at 3.8% and 4.1% respectively. On balance, the Fed expects incrementally slower growth and inflation next year than it did in September.
As it often does, the infamous “Dot Plot” of future interest rate forecasts is the part of the release that shook up markets. The median FOMC member now expects to cut interest rates by 75bps in 2024 and another 100bps in 2025 from current levels:
Source: Federal Reserve
Though the central bank’s forecasts haven’t necessarily been strong (even when it comes to its own actions!), the dot plot’s dovish shift validates the market’s pricing for aggressive interest rate cuts next year.
Fed Chairman Powell’s Press Conference
Fed Chairman Powell is still winding down his comments as we go to press, but so far, he’s continuing to endorse the dovish message of his peers.
Highlights from the press conference follow:
- FED'S POWELL: WE'RE WELL INTO RESTRICTIVE TERRITORY.
- GIVEN HOW FAR WE'VE COME AND GIVEN UNCERTAINTIES, WE ARE PROCEEDING CAREFULLY.
- THE FULL EFFECTS OF TIGHTENING ARE LIKELY NOT YET FELT.
- GROWTH IN ECONOMIC ACTIVITY HAS SLOWED SUBSTANTIALLY.
THE LABOR MARKET REMAINS TIGHT, BUT IS COMING INTO BETTER BALANCE.
WE EXPECT THE LABOR MARKET EASING TO CONTINUE. - WHILE WE BELIEVE OUR POLICY RATE IS LIKELY AT OUR NEAR ITS PEAK FOR THIS CYCLE, WE HAVE BEEN SURPRISED IN THE PAST.
- POLICYMAKERS DON'T WANT TO TAKE POSSIBILITY OF FURTHER HIKES OFF THE TABLE.
- WE ADDED THE WORD "ANY" TO SHOW THAT WE THOUGHT WE LIKELY AT OR NEAR PEAK FOR RATES.
- WE ARE STILL FOCUSED ON THE QUESTION OF WHETHER RATES ARE HIGH ENOUGH.
- IT IS NOT LIKELY WE WILL HIKE FURTHER.
- POLICYMAKERS ARE THINKING AND TALKING ABOUT WHEN IT WILL BE APPROPRIATE TO CUT RATES.
- THIS IS THE YEAR WHEN DISTORTIONS FROM THE PANDEMIC ARE UNWOUND.
- EXPECTATION WOULD BE THAT REAL RATES ARE DECLINING AS WE MOVE FORWARD.
- POLICYMAKERS ARE THINKING WE HAVE DONE ENOUGH., and the previous all-time high at $2075.
- ABOVE-TREND GROWTH COULD ULTIMATELY MEAN THAT WE NEED TO HIKE AGAIN.
Taking into account Powell’s comments, the monetary policy statement, and the Summary of Economic Projections, it appears clear that the next change to interest rates will be a rate cut, and the question now is when exactly the Fed’s easing cycle will begin.
Markets reacted to the dovish slant of the statement and SEP by increasing bets on interest rate cuts, pushing the US dollar and yields lower while driving stocks and gold up. So far, Powell has done little but further endorse that dovish interpretation, extending those intraday trends.
Gold Technical Analysis – XAU/USD Hourly Chart
Source: TradingView, StoneX
As the hourly chart of gold shows, the yellow metal is breaking out of this week’s sideways range to regain the $2,000 handle. Moving forward, the next near-term level of resistance at $2040, the top of last week’s consolidation range, and the previous all-time high at $2075. As long as gold remains above $2,000, the short-term bias will be for a continued bounce.
Watch for future updates as Fed Chairman Powell’s press conference develops.