During its May 6 Federal Open Market Committee meeting, the Fed chose to take a wait-and-see approach and leave interest rates unchanged.
That decision leaves the benchmark federal funds rate parked at a range of 4.25% to 4.5%, where it has been sitting since December.
The Fed has now been standing on the economy’s sidelines for three consecutive meetings after an extended stretch of elevated interest rates and only three modest cuts towards the end of 2024.
But, notably, Fed officials continue to anticipate rates dropping to 3.9% this year, consistent with their December projection.
And “If the labor market were to weaken unexpectedly, or inflation were to fall more quickly than anticipated, we can ease policy accordingly,” Fed Chair Jerome Powell said during a news conference.
These potential rate cuts may supply a major tailwind for gold because gold tends to rise when interest rates drop as this shift often leads investors to favor gold as a stronger store of value than a dollar that yields less.
But for now, it’s a waiting game.
And it could go either way…
Atlanta Fed President Raphael Bostic told CNBC on May 19 that he’s “leaning” toward just one rate cut this year.
But renowned Wharton University economist Jeremy Siegel says, “Powell won’t cut interest rates” and expresses that he expects attacks on the Fed chair will escalate.
We’re already seeing such attacks, most prominently from President Trump, who said, “The consensus of almost everybody is that ‘the Fed should cut rates sooner, rather than later.’”
“It’s going to be awkward at this [next] meeting. The Fed doesn’t have a forecast to convey anything about the next couple meetings,” says ex-Fed official and now chief economist at BNY Investments, Vincent Reinhart.
Because the Fed finds itself caught in a sticky situation:
Ease rates too soon and inflation might persist or even rise. Cut too late and the economy may suffer.
Meanwhile, gold hit another all-time high on May 6.
That’s the 22nd record for the price of gold this year.
What’s driving the gold rally?
Anticipation of lower rates against a backdrop of rising economic and geopolitical turmoil, mixed with potentially insurmountable government debt, has investors pouring money into gold now to defend their purchasing power and get ahead of another possible rally.
And when rates finally drop, gold will have plenty of room to run even “higher for longer.”
Bank of America sees growing potential for gold to hit $4,000 an ounce by the end of the year.
Goldman Sachs analysts say there’s now a “chance of a $4,500/oz finish for 2025’.”
And JPMorgan goes even further and sees $6,000 for gold on the horizon.
Stay tuned…
Please don’t hesitate to reach out to us with any questions you may have.
May you be safe and well during these uncertain times.
Todd Sawyer, Director of Client Education
Colonial Metals Group