Precious Metals Retreat After Hawkish Fed Rate Cut Decision

 

Precious Metals Retreat After Hawkish Fed Rate Cut Decision

(Bullion News Network) – Precious metals retreated this morning as markets reacted to a hawkish rate cut by the Federal Reserve. Although the Fed followed market expectations and cut the federal funds rate by 25 basis points, Fed Chair Powell’s commentary suggests a more hawkish approach to easing rates heading into 2025. Gold and silver prices dropped at 2 PM ET when the rate cut was confirmed and continued to fall during Jerome Powell’s press conference at 2:30. Gold’s spot price shed nearly $60 by market close, while silver lost over $1 and crashed below the $30 support for the first time in over three months. Today’s bearish reversal drove the gold-silver ratio up by almost 1.5 points. The GSR will finish Wednesday above 87.80:1, the highest gold-silver ratio since September. 

Complicating the medium-to-long-term outlook for gold and silver is a complex set of domestic and international stressors. Ongoing wars in both the Middle East and Ukraine have motivated safe haven buying throughout the year and show few signs of slowing down at the start of 2025. In the United States, a government shutdown looms large after Republicans rejected a large spending bill proposed by Democrats in Congress. President-Elect Donald Trump will take office on January 20th of next year, and his campaign’s promises for sweeping economic reform have already injected a high degree of uncertainty into markets. 

For now, both gold and silver settle into a monthly low, with silver sinking below a key psychological support at $30/oz in the wake of an unsurprisingly hawkish rate cut from the Federal Reserve. 

Here’s What the Fed’s Hawkish Rate Cut Means For Precious Metals

The Fed delivered on another rate cut this afternoon, finalizing a total rate reduction of 100 bps throughout 2024. Speaking to reporters after the announcement, Federal Reserve Chair Jerome Powell stated that inflation has moved “much closer” to the Fed’s longstanding 2 percent target. Additionally, he said, the labor market “has cooled [but] remains solid.” The better-than-expected November labor report likely improved the FOMC’s confidence that the economy is primed for another rate cut, and Powell explained that the labor market is not currently “a source of significant inflationary pressure.” 

Powell’s prepared notes took on a hawkish tone, much as markets anticipated earlier in the week:

We know that reducing policy restraint too fast or too much could hinder progress on inflation. At the same time, reducing policy restraint too slowly or too little could unduly weaken economic activity and employment. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will assess incoming data, the evolving outlook, and the balance of risks. We are not on any preset course. 

Federal Reserve officials now anticipate only two interest rate cuts in 2025, which is half the number projected earlier in September. This rate cut is the second non-unanimous FOMC decision of the year. Beth Hammack, President of the Federal Reserve Bank of Cleveland, voted to keep interest rates unchanged at 475-500 bps. Before September’s dissenting vote on a 50 bps rate cut, the last time the FOMC’s members disagreed on a decision was in 2022, when one Committee member advocated for a 50 bps rate increase instead of the 75 point hike the Fed finalized at that meeting. 

JUST IN: The Federal Reserve cut interest rates (as expected) by a quarter point to 4.25 to 4.5%.

1 person voted against the cut.

***The big news is the Fed projects higher inflation in 2025 and only 2 interest rate cuts next year*** pic.twitter.com/mzsRh3Z6ea

— Heather Long (@byHeatherLong) December 18, 2024

The stock market reacted negatively to the news, with the Dow sliding 1,100 points in the aftermath of the hawkish tone of the FOMC’s final meeting of 2024. In the precious metals market, both gold and silver dropped directly after the Fed’s announcement and continued to dip further as Fed Chair Powell spoke to news reporters. In September, metals dipped immediately after the Fed’s 50 bps cut but later recovered, with gold claiming a fresh all-time high on the interest rate cut bullishness. For now, both gold and silver are hovering at months-long lows. 

Government Shutdown Looms Large – How Will Metals React? 

Republicans rejected a Democrat-drafted spending bill this afternoon after pressure from the incoming presidential administration, as well as X CEO Elon Musk. The move puts Congress on a tight timeline to pass a new funding bill before a deadline on Friday, December 20th. Failing to pass at least a short-term funding bill would trigger a government shutdown, something representatives on both sides of the aisle have vowed to avoid at all costs. A shutdown would be particularly damaging this month, as a shutdown could delay the delivery of key emergency funds to states still recovering from October’s natural disasters. 

Safe haven assets like gold and silver tend to thrive in times of uncertainty, and some analysts believe that a government shutdown would motivate more safe haven buying, driving prices for precious metals higher. For now, Americans await more news from their elected representatives as they race to avoid a costly – and potentially dangerous – government shutdown.