Fed Cuts Rates, Causing Gold To See-Saw

Yesterday, it was already the third time this year when the Fed cut interest rates. In response, the price of gold erased earlier losses. That sounds a bit fishy. What is going on?

Fed Lowers Interest Rates by 25 Basis Points

Yesterday, the FOMC published the monetary policy statement from its latest meeting that took place on October 29-30th. In line with expectations, the U.S. central bank cut the federal funds rate by 25 basis points, for the third time in 2019 already:

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent.

Just as previous times, the decision was considered to be insurance against ongoing risks. But not all Committee members were convinced that the U.S. economy needed such insurance. Esther L. George and Eric S. Rosengren wanted to maintain the interest rates unchanged. It suggests an important internal opposition to further cuts in interest rates.

No More Cuts. For Now...

Indeed, it seems that the Fed has exhausted its potential for further interest rate cuts in the near future. This is what the U.S. central bankers signaled in the statement. In September, they wrote:

As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.

But this time, they removed the phrase "act as appropriate" to sustain the expansion, which had been used to signal further monetary easing.

The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate.

1 2
View single page >> |

If you enjoyed the above analysis and would you like to know more about the most important macroeconomic factors influencing the U.S. dollar value and the price of gold, we invite you to read the ...

more
How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.