Powell’s Speech Could Break Fed Rate Cut Deadlock; Gold Traders on Alert

Divided Fed Opinions Shape Traders’ Expectations Ahead of Powell’s Speech

Federal Reserve officials remain divided on the pace and size of interest rate cuts, with traders awaiting Chair Jerome Powell’s speech today for more clarity. The contrast between the hawkish and dovish factions within the Fed is fueling uncertainty about the path of monetary policy, leading to conflicting market expectations on the next rate cut.

Recent Fed Comments

Last week, several Fed officials supported more aggressive rate cuts. Atlanta Fed President Raphael Bostic, Minneapolis Fed President Neel Kashkari, and Chicago Fed President Austan Goolsbee all backed the Fed’s recent 50-basis-point cut, citing slowing inflation and rising job market risks. These officials believe that inflation has moderated sufficiently, allowing the Fed to ease rates without rekindling inflationary pressures. As Kashkari noted, the risk has shifted towards weakening the labor market rather than runaway inflation.

On the other hand, Governor Michelle Bowman has expressed concern about moving too fast. While she agrees inflation has slowed, Bowman believes inflation remains above the Fed’s 2% target, and the September rate cut may have sent the wrong signal. She advocated for a smaller, 25-basis-point reduction, warning that too large a cut could undermine the Fed’s credibility.

Waller vs. Bowman: Diverging Views

Fed Governor Christopher Waller has emerged as one of the strongest advocates for larger cuts, recently stating that inflation is “softening much faster” than expected. This, he argues, justifies the need for more aggressive easing to prevent inflation from undershooting its target. Bowman, in contrast, worries that inflation is still near 2.5% annually and prefers a more cautious approach, suggesting that cutting rates too fast may be premature.

This divide within the Fed is making it difficult for traders to predict the Fed’s next move. The CME Group’s FedWatch tool indicates that traders are almost evenly split between expecting another 50-basis-point cut or a smaller 25-basis-point cut at the Fed’s November meeting.

Impact on Market Sentiment

With Powell scheduled to speak today, traders will closely watch for signals on how he plans to balance these conflicting viewpoints. Powell has previously emphasized data dependency, and upcoming inflation and labor market reports will likely influence the decision. Waller’s comments have led to increased bets on a larger rate cut, but Bowman’s concerns suggest that the Fed could opt for a more measured approach.

Market Outlook

Traders are likely to remain cautious until Powell’s speech provides more clarity. If Powell hints at more aggressive cuts, markets may turn bullish on bonds and stocks, anticipating easier financial conditions.

This scenario could also boost gold prices, as lower interest rates typically reduce the opportunity cost of holding non-yielding assets like gold, making it more attractive to investors.

However, if Powell echoes Bowman’s caution and signals a slower pace of cuts, gold could face downward pressure, as traders may see less urgency to hedge against inflation or economic uncertainty. For now, the outlook remains mixed, with significant uncertainty clouding the path forward.