Gold Surges as Fed Signals Aggressive Easing Cycle with Rate Cuts

The gold market is trading at new record highs as the Federal Reserve cuts interest rates by 50 basis points and signals that this is the start of a broader easing cycle.

Ahead of the much-anticipated decision, markets were pricing in the more aggressive 50-basis-point move. However, the Fed’s 25-basis-point cut was in line with most economists’ expectations. The Fed funds rate is now in a range between 4.75% and 5.00%.

“In light of the progress on inflation and the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/2 percentage point to 4-3/4 to 5 percent. In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks,” the Federal Reserve said in its monetary policy statement.

Along with the Federal Reserve’s move, many economists noted that its monetary policy is broader than one single adjustment. The updated economic projections, also known as the dot plots, indicate 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 new dot plot implies a 25-basis-point cut in both the November and December meetings. However, I expect Powell to highlight that he's prepared to act more aggressively if employment or the outlook deteriorates,” said Adam Button, Head of Currency Strategy at Forexlive.com.

Interest rates are expected to drop even further in 2025, with estimates at 3.4%. Long-term interest rates are expected to bottom out at 2.9%.

The gold market is experiencing renewed bullish momentum in reaction to the Federal Reserve’s latest monetary policy decision. December gold futures last traded at $2,614.30 an ounce, up nearly 1% on the day.

In a comment to Kitco News, Robert Minter, Director of Investment Strategy at abrdn, said it’s only a matter of time before gold prices push to $3,000 an ounce in this new easing cycle.

“Oktoberfest kicks off in Munich this Saturday, Sept. 21, but the FOMC kicked off the gold party early today with a 50-basis-point cut, the first in a series of cuts that implies another 50-basis-point cut by the end of 2024, 100 more in 2025, and 50 more in 2026. Historically, a rate-cutting cycle has led to higher gold demand from investors and ETF purchasers. However, this time, central bank demand is high, as is physical gold demand from China and India, the two biggest retail gold markets in the world,” he said.

Michael Brown, Senior Research Strategist at Pepperstone, described the rate cut as “over-the-top given recent economic data,” though it appears to reflect policymakers’ growing concerns about the sustainability of a “soft landing.”

However, he added that the Fed still has room to aggressively support the economy.

“Today’s FOMC announcement, on its own, is unlikely to be a game-changer for the medium-term outlook. Risk sentiment continues to hinge not on what the Fed will do, but on what policymakers can do if necessary. With rates still approximately 200 basis points above neutral, plus quantitative tightening likely to end before year’s end, the FOMC’s toolbox is full of potential support measures,” Brown said. “When coupled with the forceful ‘Fed put’ that remains in place and the desire to prevent further weakness in the labor market, investors should remain confident in taking on more risk, with any dips likely to remain shallow.”

Regarding the central bank’s updated economic projections, the committee expects relatively stable growth for the next three years as the labor market cools alongside inflation. This is the first projection for 2027.

Looking at economic growth, the central bank projects the economy to grow by 2% per year through 2027, down only slightly from the 2.1% forecast in June.

The labor market is expected to weaken slightly, with the unemployment rate rising to 4.4% this year and in 2025, up from June’s forecasts of 4.0% and 4.2%, respectively. For 2026, the Fed projects the unemployment rate to rise to 4.3%, up from the previous forecast of 4.1%. By 2027, the unemployment rate is expected to rise to 4.2%.

Inflation is also expected to cool more than previously expected through the second half of the year. The Fed now sees core inflation rising by 2.6% this year, down from June’s projection of 2.8%. In 2025, inflation is expected to rise by 2.2%, down from the previous estimate of 2.3%. Inflation is forecasted to reach the Fed’s target of 2% in both 2026 and 2027.

Meanwhile, headline inflation is expected to drop to 2.3% this year, down from June’s forecast of 2.6%. Next year, consumer prices are expected to rise by 2.1%, down from the previous estimate of 2.3%. Like core inflation, the Federal Reserve expects headline inflation to reach its target levels by 2026 and 2027.

Paul Ashworth, Chief North America Economist, described the Federal Reserve’s move as a “hawkish 50 basis point cut.”

He said that the path of rate cuts will likely be less steep than the rate cut would suggest as the economy is expected to see relatively resilient growth.

“Overall, despite the bigger opening move, unless Fed officials become more concerned about the downside risks to the labour market, it looks like we will see a more measured pace of rate cuts from now on,” Ashworth said.

This article originally appeared on Kitco News.