Remarks by Fed officials results in U.S. dollar surge and a strong drop in gold

Recent comments by multiple officials of the Federal Reserve have forced overly optimistic analysts and market participants to have a more realistic viewpoint of the timing and depth of interest rate cuts this year.

In a speech today at the Brookings Institution, one of the Fed’s twelve voting members, Governor Christopher Waller, reinforced what Chairman Powell said at his press conference in December. His statements spoke to counter the overly optimistic anticipation by many market participants saying that while interest rate cuts are likely this year, the central bank can take its time relaxing monetary policy.

“As long as inflation doesn’t rebound and stay elevated, I believe the [Federal Open Market Committee] will be able to lower the target range for the federal funds rate this year.” He addressed the fact during previous cycles the FOMC cut rates quickly and often by large amounts adding that, “I see no reason to move as quickly or rapidly as in the past”.

“When the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully.”

The hawks and doves of the Federal Reserve speak

Governor Waller's speech comes after multiple Federal Reserve officials addressed the timing and number of rate cuts the Fed will implement this year. New York Fed President John Williams last Wednesday expressed that he only sees rate cuts occurring when the Fed is confident inflation is substantially moving back to its 2% target. 

Last week, Cleveland Fed President Loretta Mester told Bloomberg TV that the idea of a rate cut in March is probably too early. Richmond Fed President Tom Barkin said he is still looking for conviction that inflation is on track to reach the Fed’s 2% goal, and Chicago Fred President Austan Goolsbee said more data is necessary before rate cuts can begin.

Collectively, these statements along with equally guarded remarks by ECB officials reinforce the idea that a March rate cut is unlikely. Expectations for rate cuts this year by the Fed remain consistent with Chairman Powell’s comments that the Fed will cut rates by 75 basis points and begin these cuts probably by the end of the second quarter. However, market participants had been overly optimistic that the rate cuts by the Fed could begin earlier and be deeper than the narrative presented by Chairman Powell in December. 

These comments resulted in the dollar trading to a one-month high and gold plunging by over a full percent. The dollar gapped higher today with the index opening at 102.833 after closing yesterday at 102.589 and is currently fixed up 0.75% at 103.348.

As of 5:35 PM ET gold futures basis the most active February contract is down $20 or 0.97% and fixed at $2031.60. This is only a slight recovery from today’s low of $2027.60. The most active March silver contract declined by 1.05% and is currently fixed at $23.085.

Wishing you as always good trading,