Gold and Silver Pull Back as Rate Cut Odds Climb

 

Gold and Silver Pull Back as Rate Cut Odds Climb

(Bullion News Network) –  The spot price of gold pulled back marginally on Monday, losing just over $6 per troy ounce to begin the trading week. Silver prices moved similarly, with the precious metal dropping by nearly $0.30 per troy ounce. The price action favored gold, driving the gold-silver ratio over half a point higher to more than 87:1. Monday’s price movement in both markets appears to be a moderate consolidation following a run on Friday. Last week, Federal Reserve Chair Jerome Powell spoke to economists at the annual Jackson Hole symposium. During his keynote speech, Powell seemed to signal that the Fed is ready to begin cutting interest rates. Calling the economy a “challenging situation,” Powell highlighted two factors, inflation remaining above the longstanding 2% target and a seemingly weakening labor market, as the core difficulty the Fed faces in charting a path forward.

These two factors, heightened inflation and a weakening labor market, pose a unique challenge for the Federal Reserve. Cutting interest rates can be a tool for the Fed to inject life into a cooling labor market, as lower borrowing costs for businesses and consumers can lead to more consumer spending and incentivize business owners to hire new employees. On the other hand, cutting rates often leads to more inflation, since the heightened consumer demand driven by lower borrowing rates can outpace supplies, resulting in higher prices for consumers. As such, Powell believes that the Fed’s dual mandate of keeping prices stable and employment high may be in tension. This isn’t the first time Powell has voiced such a concern. Speaking to reporters in a press conference after the Fed’s May meeting, Powell had this to say:

We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension. If that were to occur, we would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close. For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance.

Now, it appears that Powell and the rest of the FOMC may be willing to adjust course and begin cutting interest rates. Compared to 2024’s Jackson Hole speech, which came on the heels of falling inflation rates and a cooling labor market, Powell’s hints at a rate cut seem less ironclad. The Federal Reserve is prepared to “proceed carefully,” Powell said, but the evolving economic landscape “may warrant adjusting our policy stance.” Powell isn’t willing to give any sort of guarantee, though. Instead, the economist told his audience that the trajectory of the economy poses a unique challenge for economic policymakers.

Risks to inflation are tilted to the upside, and risks to employment are to the downside – a challenging situation.

Markets surged on Powell’s remarks, and analysts believe that a rate cut at the Fed’s September 17th meeting seems likely. CME FedWatch now projects an 84.3% probability that the FOMC will vote to cut interest rates by 25 basis points. This projection is up from 82.7% last week and 61.9% one month ago. The annual Jackson Hole symposium was notably more tense than usual, some sources report. A larger security force was present than in previous years, and one protestor was removed by security forces after attempting to confront Lisa Cook, a Federal Reserve Governor who was asked to resign over mortgage fraud allegations by President Donald Trump. 

Fed analysts and markets will have access to more inflation data on Friday with the release of the July Personal Consumption Expenditures (PCE) index. This report could have a major impact on the Fed’s plans heading into September. A significant drop in inflation could all but guarantee that the FOMC votes to cut rates next month, while an uptick in prices could have the opposite effect. Forecasters believe that the PCE is likely to drop 0.1% from 0.3% in June to 0.2% in July, with the year-over-year core PCE jumping 0.1% from 2.8% to 2.9%. 

Gold and silver ended Monday down, with the price action favoring gold. The gold-silver ratio closed up by less than one point.