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Gold investors are breathing a sigh of relief, and the market is seeing some renewed buying momentum as the Federal Reserve signals that it is still on track to lower interest rates three times this year.
In a much-anticipated move, the Federal Reserve on Wednesday announced that it would leave its Fed Funds rate unchanged in a range between 5.25 percent and 5.50 percent. However, markets were more interested in central banks’ forward guidance and where they see interest rates by the end of the year.
The central bank’s updated interest rate forecast, also known as the “dot plot,” shows the committee sees the Fed Funds rate ending the year at 4.6 percent, unchanged from December.
The gold market was trading in relatively neutral territory ahead of the announcement and jumped into positive territory in the initial reaction. Spot gold prices last traded at US$2 1673,60 an ounce, up 0,77 percent on the day.
The gold market has jumped as markets start firming their expectations of a rate cut in June. According to the CME FedWatch Tool, markets now see a more than 60 percent chance of a cut in June. Markets were pricing in a 50/50 chance ahead of the announcement.
Although the central bank continues to signal rate cuts, it remains reluctant to provide exact timing. The monetary policy statement struck a very optimistic tone regarding the health of the economy.
“Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated,” the central bank said in its monetary policy statement.
Although inflation continues to ease, the central bank said it is still not ready to reduce rates. – Kitco
“The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent,” the central bank said.
Although the central is still on track to cut rates this year, the impending easing cycle could be shallower than markets expect.
The updated projections show that the central bank expects interest rates to end 2025 at 3.9 percent , up slightly from 3.6 percent reported in December. Interest rates are expected to end in 2026 around 3.1 percent , up from the previous forecast of 2.9 percent .
Along with shallower interest rate cuts, the Federal Reserve has become fairly optimistic regarding the health of the U.S. economy. In the updated economic projections, the central bank sees the economy growing by 2.1 percent this year, significantly higher than December’s estimate of 1.4 percent . The economy is expected to grow 2.0 percent in the next year and in 2026, up from the previous estimate of 1.8 percent and 1.9 percent , respectively.
The central bank also expects the U.S. labor market to remain robust, with the unemployment rate rising this year to 4.0 percent , down from the previous estimate of 4.1 percent . The unemployment rate is expected to remain steady, rising to 4.1 percent next year and then falling back to 4.0 percent in 2026, unchanged from the previous estimate.
Looking at inflation, the central bank doesn’t expect core PCE inflation to hit the 2 percent target until 2026. Core inflation is expected to rise 2.4 percent this year, unchanged from December’s projections. Inflation is expected to rise 2.2 percent next year, up from December’s forecast of 2.1 percent .
Headline inflation is also expected to be higher this year and then cool in 2025 and 2026. The central bank sees inflation rising 2.6 percent this year, up from the previous estimate of 2.4 percent
Online Reporter