Gold prices have risen over the past two days, driven by a number of factors, with the upcoming Federal Open Market Committee (FOMC) meeting being the main focus. The precious metal’s rally comes as investors anticipate the US Federal Reserve (FED) will cut interest rates for the first time since 2020.
The Fed's upcoming policy change is aimed at normalizing interest rates from 23-year highs. Fed Chairman Jerome Powell signaled the change a few weeks ago at an economic symposium in Jackson Hole, Wyoming. He said it was time to adjust the central bank's policy.
Other Fed officials echoed that view, including New York Fed President John Williams, who stressed the rationale for cutting rates, citing progress on inflation and a cooling labor market.
While a rate cut seems certain, the size remains controversial. The CME FedWatch tool shows a 69% chance of a 25 basis point cut at the FOMC meeting on September 18, and a 31% chance of a 50 basis point cut.
Regardless of the exact scale, the Fed's shift from monetary policy is supporting gold prices, as lower interest rates typically boost the appeal of non-yielding assets like gold.
The recent rally in gold prices follows a $20-an-ounce drop last Friday, which was triggered by a disappointing jobs report from the U.S. Labor Department.
The country added just 142,000 jobs in August, lower than economists’ forecasts of 160,000. Moreover, downward revisions to both June and July figures point to persistent labor force weakness, which could influence future monetary policy decisions.
Market attention now turns to the August consumer price index (CPI) report, due out today. According to MarketWatch, experts expect the report to show inflation falling to 2.6%, down from 2.9% in July. This data point could further bolster expectations for a rate cut and potentially impact gold prices.
The combination of a weak job market, falling inflation and an impending change in Fed policy has created a favorable environment for gold, which has long been seen as a hedge against economic uncertainty and inflation.
Investors and analysts will be closely watching the upcoming US CPI data and the Fed decision next week. These events are likely to shape the short-term trajectory of gold prices and provide insight into the broader economic backdrop.
As the Fed prepares to make a major policy transition, the gold market remains poised for further potential price gains, reflecting the complex interplay between economic indicators and monetary policy decisions.
