Investors Speculate On Fed Rate Cuts Next Year, Possibly As Soon As March

The Federal Reserve’s Rate Trajectory and Market Expectations

Analysts and market participants are overwhelmingly optimistic that the Federal Reserve has ended its quantitative tightening (QT) cycle, which included aggressive rate hikes. This series of QT began in March 2022. Currently, the Fed’s benchmark rate is between 5 ¼% and 5 ½%. According to the CME’s FedWatch tool, there is a 97.7% probability that the Federal Reserve will continue to maintain its current interest rate level at the December 13 FOMC meeting.

As market participants begin to look at Fed action next year, there is an 85.9% probability that the Fed will continue to maintain current rates with a 12.1% probability that they will cut rates by ¼%. However, the CME’s probability tool is forecasting that by March there is a 53.4% probability that the Fed will initiate their first rate cut by ¼% and a 6.8% probability the Fed will cut rates by ½% during the March 2023 FOMC meeting.

The probability of rate cuts by May are substantially higher, with only a 13% probability that rates will remain between 5 ¼% and 5 ½%. Overwhelmingly, this probability indicator believes that rates could be as low as 4 ½% to 4 ¾% by May, a 38.6% probability of Fed funds rates being ½% lower, and a 43.5% probability of rates being ¼% lower than current Fed funds rates.

Gold’s Rollercoaster Ride: The Federal Reserve’s Influence and Market Volatility

The optimism that the Federal Reserve will begin to unwind the rate hikes that have occurred since March 2022 has been fueling the recent gains in gold. However, the uncertainty has created extreme volatility in which we have seen gold prices spike tremendously as witnessed by last Friday’s gains as well as Monday’s spike to a new record high and subsequent selloff.

Gold ended a two-day decline today, with the most active February 2024 futures contract gaining $6.20. As of 4:36 PM EST, gold futures are currently fixed at $2043.80. Considering that gold hit an intraday high on Monday of over $2150 recent action conveys the extreme amount of volatility due to speculation and uncertainty about what the Federal Reserve will do.

That being said, the former level of major resistance in gold futures at $2000 has become a solid and major level of technical support. As long as market participants remain solidly optimistic that the Federal Reserve has pivoted from rate hikes to a cycle of maintaining the current level, coupled with the belief that rate cuts are imminent and most likely will occur during the second quarter of next year, we should see these current levels of support in gold hold.

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Wishing you as always good trading,

Gary S. Wagner