Fed clears path for rate cuts: Powell lifts stocks and gold to record levels

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The Federal Reserve has laid down the groundwork for potential interest rate reductions later this year, signaling a shift from the protracted phase of restrictive monetary policy that has spanned over two years.

In its March meeting, the Federal Open Market Committee (FOMC) chose to maintain rates steady at 5.25%-5.5%, aligning with investor expectations.

Fed eyes three cuts in 2024, smoother path in 2025 and 2026

The intrigue lies in the Fed's new economic projections, which hint at three rate cuts within the current year, with the mid-point of the fed funds rate expected to descend to 4.6% by year's end, echoing indications from December 2023.

However, the committee appears somehow divided on the pace of upcoming rate cuts, with 9 out of 19 members favoring a rate above 4.6% by the end of the year.

For 2025 and beyond, the Federal Reserve has signaled a more cautious approach to rate cutting than previously indicated. It now sees the fed funds rate at 3.9% in 2025, slightly up from the 3.6% forecast in December, and at 3.1% in 2026, adjusted from 2.9%.

Upward revisions to growth and core inflation

The Fed has also revised its growth estimates upward for the current year from 1.4% to 2.1%, with slight increments for 2025 and 2026.

Moreover, it has adjusted the core inflation forecast, as measured by the Personal Consumption Expenditure (PCE) index, to 2.6% for 2024, up from 2.4%, a move perceived by market participants as a greater tolerance towards higher inflation.

Investors eye June as the start of the Fed cutting cycle

During the post-meeting press conference, Powell reassured that “it is likely to cut rates at some point this year,” pending further assurance that inflation is on a steady decline towards the 2% goal.

Powell didn't seem troubled by the recent upticks in inflation, pointing out seasonal factors but emphasizing that these modest increases haven't shifted the broader disinflationary trend.

While Powell didn't confirm a June start for rate cuts, market sentiment strongly leans towards this possibility, with the CME Group FedWatch tool indicating nearly an 80% probability of such an outcome.

Expert takeaways

“Our read of the March FOMC meeting is that the Fed has fully embraced the positive supply-side narrative as significant upward revisions to growth were not complemented by significantly stronger inflation or a markedly changed median policy rate path,” Bank of America’s economist Michael Gapen wrote in a note.

Otavio Costa, macro strategist at Crescat Capital, views the potential easing of monetary policy amid persistent inflationary pressures as the “the most compelling setup to own hard assets” like commodities.

According to ING economist James Knightley, the Fed remains cautiously dovish, but with stronger revisions to growth and inflation, it may suggest a possibility of higher interest rates in the long term. ING keeps a bearish dollar outlook, which anticipates the EUR/USD reaching about 1.14/15 by the year's end, Knightley explained.

On social media platform X, Mohamed El Erian remarked that the Federal Reserve is demonstrating "a willingness to tolerate higher inflation for longer." He endorsed this strategy as "the right approach," albeit with the risk that it involves accepting a marginally increased chance of de-anchoring inflation expectations.

Market response

Investors reacted positively to the Fed's decisions and Powell's remarks, boosting confidence in the imminent likelihood of rate reductions.

The S&P 500 index achieved new record highs, surpassing the 5,200-point mark. Meanwhile, tech-heavy Nasdaq 100 rallied 1%,nearing its record peak.

Gold, often a beneficiary in anticipations of rate cuts, reached the $2,200 per ounce mark at the close of yesterday's trading, setting a new record high.