Spot gold prices hit record highs on Wednesday as recent comments from Federal Reserve officials boosted bets on a September rate cut in the United States. Earlier, spot gold rose 0.3%, reaching a high of $2,473 an ounce. According to CME Fed Watch, the market fully digested the Fed's expectation of a rate cut of at least 25 basis points at the September meeting. Fed Chairman Powell said on Monday that recent inflation data "has provided some confidence" that the pace of price increases is returning to the Fed's target in a sustainable way, a remark that suggests that a rate cut may not be too far away. Fed Governor Kugler also expressed cautious optimism on Tuesday that inflation is returning to the Fed's 2% target level.
A growing number of Wall Street economists are warning that the Federal Reserve waited too long to reverse course after raising interest rates to their highest level in two decades.
Disappointing inflation data over the past three months, coupled with slowing U.S. economic growth and rising unemployment, have even prompted calls for the Fed to cut interest rates at its upcoming policy meeting in two weeks, though that seems unlikely. Fed Chairman Jerome Powell said at an event in Washington on Monday that he would not give any guidance on the timing of a rate cut, while most of his colleagues on the policy-setting Federal Open Market Committee (FOMC) still do not seem to see the need to act with urgency.
Some prominent figures, including Goldman Sachs chief economist Jan Hatzius, Queens’ College president Mohamed El-Erian and Renaissance Macro Research’s Neil Dutta, believe the risks of waiting are growing.
"We believe a rate cut should have taken place as early as the July 30-31 meeting," Hatzius said in a note published Monday. "If the case for a rate cut was clear, why wait another seven weeks?"
The FOMC is widely expected to hold its benchmark interest rate steady for an eighth straight time at its July meeting, marking a year in which the FOMC has maintained its current target range of 5.25% to 5.5%. Investors are betting on at least two more rate cuts by the end of 2024, starting in September, according to futures data.
Powell said Monday that recent inflation readings "do provide some confidence" that inflation is moving back toward the Fed's 2% target and that policymakers are now focused on the Fed's twin mandates of maximum employment and price stability. But he also said more evidence is needed before starting to cut rates.
The argument for easing policy now is that interest rate adjustments take time, perhaps a year or more, to have an impact on the economy, so policymakers need to preemptively avoid a downturn. Monetary policy guidelines like the widely followed Taylor Rule suggest that interest rates should already be around 4%, or more than a percentage point below current effective rates, Hatzius said.
Calls for a rate cut in July have been growing over the past week and a half as two important monthly reports on employment and inflation are released. Although the unemployment rate remains relatively low at 4.1%, it has moved higher each month over the past three months. The rise in the unemployment rate from its lowest point of 3.4% in early 2023 has raised concerns about the risk of a recession.
Meanwhile, inflation was muted in the second quarter after unexpectedly rising in the first three months of 2024. The so-called core consumer price index, which excludes food and energy costs, rose just 0.1% in June, the smallest monthly gain since August 2021. Rent inflation in particular saw a long-awaited moderation, a trend that is expected to continue.
“Waiting too long risks leading to a higher peak in unemployment with little additional return in terms of inflation,” said Drew Matus, chief market strategist at MetLife Investment Management.
Since the latest inflation data was released on July 11, Chicago Fed President Goolsbee and San Francisco Fed President Mary Daly have stressed that the Fed is close to the confidence it needs to cut interest rates. But some are wary of acting too early. When they last met in June, officials released forecasts showing four thought there should be no rate cuts this year, seven expected one cut and eight thought there would be two cuts.
“The July rate cut was simply a more abrupt move than the FOMC would have preferred,” said Julia Coronado, founder of MacroPolicy Perspectives LLC. “Waiting one more meeting before moving forward is more about the management of the committee and getting more data.”
Instead, the July FOMC is likely to tweak its statement to highlight improving inflation data, and Powell is likely to use his speech at the central bank’s annual symposium in Jackson Hole, Wyoming, in late August to signal September action.
The reason to wait is that the decline in inflation has been bumpy, judging by the first-quarter reading. Hawks on the FOMC worry that any pickup in inflation could trigger a rise in inflation expectations, making it harder to reach the 2% inflation target.
“There’s every reason to wait until the September meeting,” said Michael Pugliese, senior economist at Wells Fargo.
The article is forwarded from: Jinshi Data