Fed’s 2025 Rate Cuts and Market Impact

Written by: Rania Gule, Senior Market Analyst at XS.com

The price of gold (XAU/USD) has experienced notable fluctuations recently, with a slight recovery today, Thursday, after it broke through the neckline of the double top pattern at $2613, returning to the $2600 levels that it successfully broke through yesterday, following the hawkish statements from the U.S. Federal Reserve.

This slight increase in gold prices reflects shifts in investor sentiment towards safe-haven assets amid ongoing geopolitical risks and concerns about trade wars. From my perspective, this recovery indicates that gold continues to attract significant interest from investors who see it as a store of value amid economic uncertainty. However, at the same time, it is affected by strong U.S. monetary policies, which weaken its strength in the short term.

The Federal Reserve, in its recent statements, has pointed out that inflation risks remain elevated, and economic forecasts suggest a limited interest rate cut shortly. This hawkish monetary policy has pushed yields on U.S. Treasury bonds to their highest levels since May, strengthening the dollar and putting pressure on gold, which is a non-yielding asset. In my opinion, this is likely to continue exerting pressure on gold in the near term, especially with rising bond yields, which are a crucial factor in determining the attractiveness of gold as a store of value. Additionally, the strength of the U.S. dollar supports the demand for yield-bearing assets, which weakens gold’s appeal as markets seek better returns.

Regarding U.S. economic data, attention is now focused on the final reading of third-quarter GDP, as well as unemployment claims data, which will be released today. These data points are expected to help gauge the momentum of the U.S. economy and its impact on the U.S. dollar and gold. However, the most important factor for markets will be the Personal Consumption Expenditures (PCE) index, which is the Federal Reserve’s preferred measure of inflation. If the data shows a slowdown in inflation, I believe it will have a positive effect on gold, as it will reduce pressure on the dollar and give gold a chance to make modest gains, although overall expectations do not suggest a drastic shift in Fed policy at the moment.

On the other hand, Federal Reserve Chairman Jerome Powell indicated that the central bank may adopt a more cautious approach regarding future policy adjustments, noting that current measures are less restrictive. He also confirmed that inflation risks remain tilted to the upside, which partly explains the changes in market movements.

These statements indicate that the Fed will continue its hawkish monetary policy in the coming period. Therefore, I see this as a negative factor for gold in the near term, as the high interest rate continues to pressure non-yielding assets like gold. Ultimately, if the Fed continues its hawkish stance, it is likely that pressure on gold prices will persist in the face of dollar movements.

In light of these statements, the price of gold sharply declined yesterday, as traders viewed the Fed’s decision to cut interest rates by 25 basis points as a hawkish stance. While the cut may be limited, expectations suggest that the Fed will continue implementing a relatively hawkish policy over the next two years, with only two rate cuts expected in 2025. This strengthens the dollar and adds pressure on gold. In my view, markets have already priced in future Fed expectations, making gold vulnerable to further volatility in the short term until any significant shift in Fed policy occurs.

Markets had anticipated that 2025 would see further monetary easing by the Federal Reserve, but a rate cut of about 100 basis points over the next two years is not a large enough move to significantly affect the markets in the near term.

Expectations also suggest that inflation will remain under control in the coming years, with estimates for the core Personal Consumption Expenditures index reaching 2.5% in 2025. This reflects a gradual decline in inflation but still requires careful management. Therefore, I believe that gold will continue to be influenced by expectations related to inflation and Fed policies. As inflation slows, gold may find some support from investors seeking safer investments.

In the end, gold remains in a state of high anticipation regarding what will happen in the coming months, as its price is highly dependent on the balance between the effects of Fed monetary policies, economic expectations, and data related to inflation and growth. While the Fed continues to emphasize tightening interest rates, markets will remain alert for any potential signs of inflation slowdown, which could modestly support gold prices. However, I believe that, given the continued strength of the dollar and rising yields on U.S. Treasury bonds, gold will remain vulnerable to significant challenges in the short term.