As the Fed concludes its first policy meeting of the year this week, it is almost certain to keep interest rates steady, giving itself more time to reduce inflation and assess how Trump's policies will impact the economy.
Since September of last year, the Fed has cut rates at three consecutive meetings, bringing the benchmark rate down a full percentage point, with the current target range set at 4.25% to 4.5%.
Several policymakers have indicated that after data showed the U.S. economy is solid and inflation is more persistent than expected, they anticipate a reduction in the magnitude of rate cuts this year. The Fed's preferred inflation gauge, the Personal Consumption Expenditures Price Index (PCE), will be released on Friday.
Nevertheless, given a series of surprising data releases and the uncertainty surrounding how the U.S. economy will respond to Trump's bold new policies on trade, tax, immigration, and regulation, officials are unlikely to commit to any specific interest rate path.
"They will skip a rate cut," said Gregory Daco, Chief Economist at EY. "But they want to keep as many options open as possible to further adjust the federal funds rate this year."
The Fed's interest rate decision will be announced at 3:00 AM Beijing time on Thursday in Washington, with Fed Chairman Powell holding a post-meeting press conference 30 minutes later.
Interest Rate Outlook
Fed watchers expect the Federal Open Market Committee (FOMC) to make few changes to the post-meeting statement. Daco noted that the current wording mentioning 'the extent and timing of additional adjustments' has already given policymakers the flexibility to change their approach as necessary based on economic conditions.
Powell is almost certain to be pressed by reporters on how he and his colleagues incorporate Trump's policies and proposed plans into their economic outlook. Fed officials will not release updated forecasts before the March policy meeting.
However, the minutes from the December meeting show that 'some' participants included assumptions regarding Trump's potential plans in their economic forecasts, and 'almost all participants' indicated that the upside risk to inflation has increased.
According to Daco, investors are also hoping to hear more from Powell about the so-called 'neutral interest rate,' which is the level at which the Fed neither stimulates nor restrains the economy. Over the past year, officials have been raising their estimates of the neutral rate. If many policymakers believe rates are close to this level, it not only means that the pace of future rate cuts will slow down but also that the total magnitude of cuts will decrease.
Reporters may ask Powell to clarify what conditions officials need to see before considering another rate cut, and conversely, what might compel them to consider a rate hike. Economists at Bank of America said after the notable December jobs report that they believe the Fed's next move may be to raise rates.
However, concerns have eased somewhat after last month's key consumer price gauge came in below expectations, marking the first decline in core CPI in six months. Policymakers welcomed the report but stated that they have more work to do to bring inflation down to the 2% target.
Political Pressure
Powell may be asked to respond to Trump's recent criticisms of the central bank.
"I think I understand interest rates better than they do, and I think I definitely understand interest rates better than the people who are primarily responsible for making the decisions," Trump said on January 23, clearly referring to Powell.
Powell has previously avoided or ignored Trump's comments about monetary policy, but remarks made during Trump's first week in office suggest that the Fed chairman is facing pressure from the new administration that may be greater than ever before.
Michael Feroli, Chief U.S. Economist at JPMorgan, wrote in an email last Friday: "The Fed may have to contend with Trump's attempts to influence monetary policy, whether through personnel appointments or possibly through other efforts to exert greater influence on the agency." He predicts that this week's meeting will be "the boring beginning of a tumultuous year for the Fed."
Are gold bulls feeling hopeful?
As market participants await the U.S. interest rate verdict, gold was nearly flat on Wednesday. Additionally, attention has also focused on Trump's trade policies amid new tariff threats. Trump's immigration and trade policies are seen as inflationary, potentially prompting the Fed to maintain higher rates for a longer time, which is a bad omen for non-yielding gold. However, at the same time, gold will continue to be supported by safe-haven sentiment.
If Powell and his colleagues express confidence in their anti-inflation path and acknowledge that labor market conditions will soften, the market may interpret their stance as dovish and increase bets on future rate cuts, pushing gold prices to historic highs.
Another notable scenario is that if the earnings reports from large U.S. tech companies disappoint and their performance guidance fails to convince investors, global tech stocks may face a new wave of sell-offs, and the market will adopt a 'sell everything' approach. In this case, gold prices may reverse any reactions to the Fed's policy announcements, opening up downside space.
Fxstreet analysts point out that gold's technical charts show that the 14-day Relative Strength Index (RSI) remains firmly above the midpoint, currently close to 65, which is encouraging for bulls. Additionally, last Thursday, the 50-day moving average closed above the 100-day moving average, confirming a 'golden cross' and increasing confidence in bullish potential.
In terms of upside potential, gold prices need to close above the symmetrical triangle target of $2785 or the historic high of $2790 to initiate a new upward trend, with the next upside targets being the psychological levels of $2800 and $2850.
On the downside, recent support will be found at the previous day's low of $2735. If this level is broken, bears will target $2700, where it coincides with the 21-day moving average. The last line of defense for bulls is the static support level of $2680.
Article reposted from: Jinshi Data