Financial market overview

Want to Know When the Fed Cuts Rates? Watch the Consumers

2024.02.05 09:10

The chance of rate of interest cuts has many market members pondering whether or not 2024 will carry a bull marketplace for treasured metals.

has held up fairly nicely regardless of the Fed’s tightening cycle, gaining 13% in 2023.

XAU/USD-Daily Chart

Source: Kitco

The Federal Reserve’s present interest-rate pause, due to efficiently decreasing inflation, and subsequent pivot to lowering rates of interest, possible in mid-2024, is sweet information for commodities.

Lower charges will trigger the  to fall and commodity costs to rise. When constructive actual rates of interest, which favor bond traders, flip detrimental, it’s going to particularly have an effect on gold costs to the upside.

I’ve been proper in my prediction that the Fed would pause in June, 2023, and hike a few times extra earlier than the finish of the 12 months.

I’ve additionally voiced my opinion that we’ll get a comfortable touchdown with no recession, with the necessary proviso that the Fed pauses its rate-hiking cycle, which it has already accomplished.

Remarkably, the Federal Reserve has raised rates of interest excessive sufficient to reverse the inflation price, at one level at a 40-year excessive, with out inflicting a extreme downturn. And it’s accomplished it in an especially quick period of time.

The key questions now are: When does the Fed lower charges, and as importantly, why would it not lower charges? If the Fed drops rates of interest, what’s going to it imply for treasured metals?

Fortunately, we’ve already had a dry run that gave us a solution to the final query.

Many traders in December positioned a guess on bullion after they figured the Fed was planning to decrease rates of interest in 2024. Spot gold hit a brand new record-high $2,135 an oz. on Dec. 3.

We’ve seen how delicate the market is to financial coverage.

Just the suggestion of coming price cuts pushed gold to lofty heights. The Fed’s messaging additionally induced bond yields and the greenback to fall. The benchmark slipped from 5% in November to 3.9% round Christmas-time. The DXY dropped from 106.88 on Nov. 23 to 101.71, a discount of 5%.

It seems gold’s record-high was solely short-term. Within every week, it fell underneath $2,000.

Meanwhile, the market’s response to statements that the Fed just isn’t going to pivot as early as everybody thought (as early as March) strengthened the greenback and bond yields. In truth it’s stunning to see gold buying and selling principally above $2,000 to this point this 12 months, since the treasured metallic often strikes in the other way as these two variables.

I personally consider the Fed will lower rates of interest, however not till it sees some deterioration in the jobs market and significantly, a drop-off in client spending. I’m sticking to my prediction of three quarter-point price lower in 2024, which might take the federal funds price from 5.5% down to 4.75%.

Now to the first two questions: When will the Fed lower charges and why? (or why not?)

Let’s begin with the statement that the US client makes up 70% of the economic system (customers additionally signify 70% of the world economic system), so the Federal Reserve screens client spending intently to see whether or not it’s rising or falling.

Of course the Fed can be involved about the well being of the economic system — measured principally by the inventory market — and its twin mandates of maintaining inflation inside its 2% goal, and the economic system close to full employment.

On Friday, Jan. 26, the launch of the private consumption expenditures (PCE) value index strengthened the argument that the Fed will cut back charges later this 12 months. Core PCE (i.e., stripping out meals and power) is the Fed’s most well-liked inflation gauge.

On a six-month annualized foundation, core PCE was beneath the Fed’s 2% goal in December for a second straight month, at 1.9%. On an annualized foundation core PCE was 2.9%. Even if we take the latter determine, inflation seems to be coming down to the Fed’s 2% goal.

So, with inflation just about overwhelmed, does that imply it’s time to lower rates of interest? Per week in the past, the analysts appeared to assume so.

“Evidence continues to pile up that the Fed has met its inflation goal, which will make it harder for officials to hold off on cutting rates until midyear,” Bloomberg quoted an economist with LH Meyer/Monetary Policy Analytics.

“The stage is set for the Fed to take steps toward cutting rates and tapering the pace of Quantitative Tightening (QT) in coming months. We expect the Fed to begin lowering the federal funds rate target range in March as it attempts to stick a soft landing,” Bloomberg Economics agreed.

When the Federal Open Market Committee had its common assembly this previous Tuesday-Wednesday, it voted for the fourth consecutive assembly to depart rates of interest alone, at 5.25-5.5%. CNN reported the Fed made an announcement indicating it was accomplished elevating rates of interest, by eradicating language that advised a willingness to maintain elevating charges till inflation was underneath management, i.e., nearing 2%.

But maintain on. The Fed additionally made clear it’s not prepared to begin slicing, and significantly is not going to decrease charges in March, as beforehand anticipated.

Fresh financial knowledge out Friday, Feb. 2, supplied extra data for Fed watchers like me to digest.

According to the Bureau of Labor Statistics report, the economic system added 353,000 jobs in January, and 333,000 in December. Most industries gained positions final month, with the exception of mining and extraction. The numbers doubled consensus forecasts of 176,500 new jobs.

More excellent news: unemployment remained at 3.7%, and wages grew 0.6% for the month and 4.5% 12 months over 12 months. CNN stated it’s the twenty fourth consecutive month that the US jobless price has been underneath 4%.

“The fact that the unemployment rate has been below 4% for 24 months straight for the first time since 1967 is truly remarkable,” Joe Brusuelas, chief economist and principal at RSM US, advised CNN Business.

This regardless of the undeniable fact that the Federal Reserve has hiked rates of interest 11 instances since March, 2022. We’re speaking about the greatest and quickest enhance in rates of interest in a technology.

Indeed the economic system seems to be firing on all cylinders — defying expectations that the Fed’s tight financial coverage would crash the economic system and lead to a recession.

CNN notes that January’s job good points dashed market expectations for a Fed price lower to come ahead of later, maybe as early as March, and for the central financial institution to lower as many as six instances in 2024. Investors’ chance for a March price lower dropped from 38% to underneath 20% on Friday, in accordance to the CME FedWatch Tool.

Far from collapsing, the US economic system grew 2.5% in 2023, up from 1.9% in 2022. Fourth-quarter GDP was even higher, at 3.3%.

The Associated Press notes that buyers drove development in the remaining quarter of 2023, with spending increasing at an annual 2.8%, on items like clothes, furnishings and leisure automobiles, and providers like inns and restaurant meals.

Fun truth: Taylor Swift’s Eras Tour is anticipated to generate shut to $5 billion in the United States alone.

“If Taylor Swift were an economy, she’d be bigger than 50 countries,” stated Dan Fleetwood, president of QuestionPro Research and Insights, in a Time Magazine story.

Many noticed Swift watching the Kansas City Chiefs final weekend in the NFL Conference Championship sport. According to the New York Post,

Taylor Swift has helped direct massive bucks towards the NFL — with 16% of US customers admitting the pop star influenced them to spend money on soccer in the walkup to Super Bowl LVIII, in accordance to a current survey.

The numbers imply that of 333.3 million Americans, in accordance to the newest census knowledge, some 53 million have spent cash on the sport since Swift and Kansas City Chiefs tight finish Travis Kelce first went public with their romance.

Most shelled out money for jerseys and memorabilia or on a streaming service subscription to watch NFL video games, in accordance to a research on bank card spending by on-line monetary agency LendingTree on Monday.

Retail traders are seemingly off the sidelines, with US inventory markets reaching new heights on an virtually every day foundation. The registered an all-time closing excessive of 4,958.61 factors Friday, as tech shares soared and traders digested the constructive employment report. Reuters stated all three main US inventory indexes notched their fourth consecutive weekly good points.

Manufacturing is up too: the Institute for Supply Management (ISM) stated Thursday that its January manufacturing PMI elevated to 49.1, in contrast to 47.1 in December.

What does the robust economic system imply for financial coverage? Well, the January BLS report signifies the job market is powerful, wages are rising, and this was mirrored in a record-high inventory market shut. I beforehand stated there was a 50-50 likelihood of the Fed slicing charges by a quarter-point in March, however these newest numbers, imo, put that likelihood at zero.

Why lower charges when the economic system is booming? If we consider every rate of interest proportion as a bullet, the Fed has 5.5 bullets in the chamber. Why fireplace one off needlessly? In climbing charges 11 instances in the previous almost two years, the group has given itself ample room to maneuver. If it solely cuts charges by a quarter-point every time, that’s 22 alternatives to decrease charges to 0% — which is the place we ended up when the Fed aggressively lower rates of interest following the onset of the COVID-19 pandemic in early 2020.

It appears we’ve got come full circle — we are actually again above 5%, the place the federal funds price was in mid-2007, simply earlier than the 2008 monetary disaster which began the now-familiar quantitative easing coverage of slashing rates of interest and injecting liquidity into the monetary system by the Fed’s buy of presidency bonds and mortgage-backed securities.

(Some assume we may have elevated charges for some time. Former Treasury Secretary Lawrence Summers on Friday warned of +3% yields on US Treasury payments by to 2030.)

Fed Funds Effective Rate

Source: FRED

In 2008, the US client had stopped spending, and the Fed wanted to change that. It did it by QE/ money-printing, and dramatically decreasing rates of interest.

The identical factor occurred when the pandemic hit. The sudden drop in client spending panicked the Fed, which went on one other QE bender, solely this time, the authorities acquired concerned by sending direct stimulus checks to Americans. Corporations obtained covid reduction too.

Not solely that, however the Fed dropped rates of interest to 0-0.25%, goosing the economic system by making borrowed cash virtually free.

These issues go in cycles and it’s solely a matter of time earlier than the wheel turns once more, again to decrease charges.

Right now, the Fed wants to see inflation stabilizing. They need to see a sustained interval of cooling inflation beneath their 2% goal earlier than decreasing borrowing prices.

To me, this implies a minimal of 5 months of continued decrease inflation.

I’ll stick with my unique projection of three quarter-point price reductions this 12 months. These are “token” cuts that might be political in nature. Remember, that is an election 12 months and the Fed, regardless of its claimed independence, has been recognized to take sides. The New York Times just lately wrote,

The Fed might have already, and unintentionally, helped Mr. Biden’s re-election prospects by holding charges regular for the again half of 2023 as inflation cooled. Continued price will increase may have slammed the breaks on financial exercise and elevated the probabilities that the economic system slipped into recession — which is one cause progressive teams, and a few Democratic senators, urged Fed officers to pause price will increase final 12 months.

Of course there are different, extra sensible causes for decreasing rates of interest, the “US public debt-to-GDP ratio is at 94% and rising by more than 5% per year, enough to double the ratio within 13 years”, and the nationwide debt now sitting at a jaw-dropping $34 trillion. Interest prices have almost doubled over the previous three years, from $345 billion in 2020 to $659 billion in 2023.


It’s laborious to say when a price lower is coming (9 out of 10 economists predict April thirtieth/May 1st assembly); there may be definitely no hurry. As far as the Fed is anxious, every thing is developing roses. Why rock the boat?

But when a price lower does come, and AOTH agrees the April/May assembly is probably going for the first quarter-point lower, the choice will, imo, be pushed by the spending habits of US customers, which keep in mind, make up 70% of the economic system. Signals may embody lowered client spending, bank card debt, mortgage and mortgage delinquencies, the next financial savings price, and wage deflation. The Fed may also in fact, be watching unemployment numbers intently.

In the meantime, I’m positioning myself for the coming rate of interest cuts, and the subsequent weakening of the US greenback, by buying the shares of junior gold and silver firms, which supply nice leverage to rising metallic costs.

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