Market Participants Await Chairman Powell’s Speech on Friday

Above all, the current monetary policy of the Federal Reserve as revealed by the minutes of last month’s FOMC meeting released yesterday lacks clarity. There is no clear picture of the current path of potential rate cuts by the Federal Reserve for the remainder of the year and the first quarter of 2020. In fact, according to the minutes released yesterday by the Fed their plans to cut rates or leave rates where they are not based on any preset course but rather data driven on a month-to-month basis.

The minutes revealed that members of the Federal Reserve said, “it was important to maintain optionality in setting policy”. In regards to the 25-basis point rate cut last month the Fed said that that was a “mid cycle adjustment” suggesting that there is no preset plan for an extended series of rate cuts.

According to the CME’s FedWatch tool there is now a 6.5% probability that the Fed will not cut rates on September 18, the next FOMC meeting. As recently as one week ago, as well as one day ago this tool predicted a 0% probability that there would be no rate cut announced in September. Yesterday the forecast contained a 98.5 % probability of ¼% rate cut in September, today that dropped to only a 93 ½% probability.

Clearly information or knowledge on the future moves by the Federal Reserve lacks real clarity. While it is hoped that tomorrow’s speech by Chairman Powell will reveal future Fed actions and their current plans, it is likely that Powell will continue to thread the needle and continue to not reveal upcoming moves. He will probably focus on the fact that their approach is to maintain “optionality” and avoid any appearance of a preset course.

Given that the United States budget deficit will reach $960 billion for the 2019 fiscal year and will swell to just over $1 trillion for the 2020 fiscal year the Federal Reserve might have to enact a series of rate cuts to keep the economy from being disrupted by the big influx of debt.

As reported by CNBC, Credit Suisse managing director Zoltan Pozsa said, “Absent a technical bazooka, stresses will leave one option left: more rate cuts,” he said. Reductions in the benchmark overnight funds rate will need to be “aggressive enough to re-steepen the Treasury curve such that dealer inventories can clear and inventories don’t drive funding market stresses.”

Although gold futures have maintained solid support just above $1500 per ounce, prices have certainly weakened throughout the week. As of 4:45 PM EDT gold futures basis the most active December contract is currently fixed at $1508.10, which is a net decline of $7.60 on the day a loss of ½ a percent in value. Considering that December gold opened at approximately $1523 on Monday we have seen the precious yellow metal lose roughly $15 this week.

Wishing you as always, good trading,