With America’s annual inflation falling to a 3-year low, the Fed is looking more likely than ever to begin cutting rates. Since the beginning of the pandemic in 2020, the Fed has been aggressively raising rates in the hope of stemming spiralling inflation.
The conflict between Russia and Ukraine and recent global tensions also added to inflation worries, as the rising prices of oil, food and energy remain elevated.
So, with the Fed signalling that a Federal Reserve Rate Cut is imminent, how will this affect the market, and what can we expect from the central bank in the future?
Will Gold & Stocks be Affected?
With the haven status that gold brings, it is no surprise that the yellow metal has been hitting record after record recently. This has weighed heavily on the dollar, as the economic landscape has been highly volatile in recent sessions. Job numbers and unemployment figures have missed expectations, leading to a worry that a recession is around the corner.
Added to that, rates in the US have a more significant influence than most, and because gold is traded in dollars, interest rates have a more significant impact on gold prices.
Lower rates make borrowing money easier, encouraging more spending and investment boosting stock prices. It encourages expansion and hiring due to the low cost of borrowing, which, overall, creates a cycle in which economic productivity increases.
But now that inflation is seemingly under control, most analysts are convinced that the Fed can delay no longer.
Why has the Fed Delayed?
With other major central banks already amending their monetary policies, you could say the Fed is lagging. Since the ECB and the Bank of Canada, amongst others, have already started cutting, there is now more pressure on the Fed to begin.
After hitting a peak at 9.1% in 2022, inflation is well on its way to the Fed’s 2% target. But, with a highly soft NFP report recently, even top officials from the FOMC have warned that the central bank needs to cut its key interest rate before the job market weakens further.
Fed officials have indicated a willingness to ease, though they have been cautious not to confirm a specific time nor to speculate about the pace at which cuts might occur. If we look back to when rates were being raised aggressively, it was a 75-basis point hike every time at one point.
Most probably, this won’t be the case when the cutting begins, as a quarter percentage point reduction at the Fed’s next scheduled meeting is more than likely. This dismisses the predictions of more aggressive cuts of 50-100 basis points.
What Else Might Shake up the Market?
There is also a US presidential election approaching in a few months, as Donald Trump is looking to serve another term in the White House.
Markets might not become extremely volatile if there is another Trump presidency, as traders know what to expect from his previous term. During his term as President, he implemented tariffs, especially against China. But another economic fight with the world’s second-largest economy is probably not something the Fed needs right now.
Trump’s plan to impose universal tariffs on imports would likely benefit companies that mostly do business in the US. In addition, his intention to move on with fossil fuel production will majorly benefit companies like ExxonMobil and Chevron.
The next President will likely engage in fiscal stimulus policies to help boost the economy. However, their tax incentives and spending will most likely be a lot different from what we have seen in the past.
So, with all this taken into account, the run-up until the end of 2024 should be a volatile one, influenced by the ongoing discussions about the Federal Reserve Rate Cut.
