Gold Prices Plummet Following Fed Rate Cut

Gold prices experienced a significant decline after the Federal Reserve (Fed) announced a 50-basis point rate cut. Despite the reduction, the Fed projected the federal funds rate to reach 4.4% by the end of 2024, indicating a continued tightening stance.

Rate Cut and Outlook: The Fed’s decision to lower borrowing costs was driven by growing confidence in inflation’s downward trajectory. However, the central bank acknowledged uncertainties in the economic outlook.

Market Reaction:

Following the announcement, US Treasury yields rose, and the US Dollar Index dipped. Gold prices initially fluctuated but ultimately retreated, erasing earlier gains. The Fed’s Summary of Economic Projections (SEP) foresees a gradual economic slowdown and a slight increase in unemployment.

Fed Chair Jerome Powell emphasized that risks to inflation had diminished and reaffirmed the strength of the economy. He also indicated that the Fed would be cautious in normalizing monetary policy if inflation persists.

Technical Factors:

Gold prices remain volatile, with short-term sellers gaining momentum. A break below the September 13 low of $2,556 could lead to further declines. One Fed governor, Michelle Bowman, dissented from the rate cut, advocating for a smaller reduction.

The Fed expects inflation to gradually decline, reaching its target of 2% in 2026. US Building Permits and Housing Starts increased in August, suggesting continued activity in the housing market. While the Fed’s rate cut provided a temporary boost to gold prices, the central bank’s ongoing efforts to combat inflation have created a challenging environment for the precious metal.