FOMC Meeting Preview: Whether a rate cut in September depends on this! Will gold "take off"?

The Fed may hint at a rate cut in September this week, bringing it closer to lowering rates from the highest point in 20 years, but they may not provide more details.

Currently, the market generally expects that the Federal Open Market Committee (FOMC) will keep the benchmark interest rate in the range of 5.25% to 5.5% at the end of the two-day policy meeting on Thursday, which was the peak reached a year ago. Federal Reserve Chairman Powell will hold a press conference half an hour after the interest rate decision is announced.

However, the market expects that the FOMC will signal that as long as there are no major issues with the data, a rate cut in September is very likely. Policymakers may acknowledge that inflation has made progress towards the 2% target after the mild June CPI data, which is a prerequisite for a rate cut. As the unemployment rate is also rising, officials may suggest that policy should be eased as soon as possible.

Subadra Rajappa, head of U.S. rate strategy at Societe Generale, said, "I think they will change the wording in the statement to suggest a rate cut at the September meeting." She pointed out recent comments by New York Fed President Williams, who said "they are looking to get out of restrictive rates, so they can also change the wording."

The "devil" is in the details

All economists surveyed by foreign media expect that this meeting will not change the interest rate . Policymakers may emphasize in the statement the improvement in inflation prospects, and the FOMC may say there is "further progress" rather than "moderate progress" as in June.

Nick Timiraos, a Wall Street Journal reporter known as the "Fed Whisperer," earlier emphasized that seemingly insignificant changes in wording will be crucial for setting the stage for a rate cut in September, including:

The first paragraph of the statement will describe recent developments in inflation and the labor market;

The second paragraph will describe the risk balance between lowering the inflation rate to the Fed's 2% target and maintaining a strong labor market;

The third paragraph will elaborate on the key language known as forward guidance, clarifying what officials need to look for before cutting rates.

Acknowledging recent improvements in inflation and a more balanced risk language, as well as any changes to forward guidance, will set the stage for Powell's press conference. At the press conference, he can explain in detail how officials are handling the rate cut issue.

Goldman Sachs economist David Mericle expects that a key change may be a sentence in the statement, "that the Committee will not cut rates until it has greater confidence that inflation is moving sustainably toward 2%," Mericle believes the Fed will modify this statement to, "it now only needs a little more confidence to start easing monetary policy."

Anna Huang, Chief U.S. Economist at the institution, said, "The market has fully priced in a rate cut by the Fed in September, but a big question for the FOMC meeting on July 30-31 is: how clear a signal will the FOMC send out?" We believe that the communication at the July meeting will only provide a preliminary hint of a rate cut in September," Federal Reserve Chairman Powell pointed out, "If the data develops as we expect, a rate cut is possible."

Although investors believe that the probability of a rate cut this week is less than 5%, officials may at least discuss this possibility at the meeting. Many well-known figures, including former Fed Vice Chairman Blinder, Goldman Sachs Chief Economist Hatzius, and former New York Fed President Dudley, have recently advocated for a rate cut in July.

Some economists say they will focus on whether Chicago Fed President Evans will become the first dissenter in over two years. Evans is a key figure among the doves. Although he is not an FOMC voter this year, he will vote this week in place of Cleveland Fed President Mester, who retired in June.

Don't Expect Too Much?

The Fed has many ways to guide the market to understand its possible intentions without making too many commitments. This includes subtle changes in wording in statements and some "ambiguous remarks" by Powell at press conferences. However, it is worth noting that officials are not expected to show too much enthusiasm for a rate cut.

Bill English, former head of monetary affairs at the Fed and current professor at Yale University, said, "Inflation data rebounded sharply earlier this year. Last winter, we received quite high numbers. We have had several months of data. However, I think the Fed is really unsure about how inflation is and where it is heading."

English also expects the Fed to hint at taking action in September, but will not provide a detailed roadmap for specific actions.

Despite benchmark interest rates being at their highest level in 23 years, most Fed officials believe they can afford to be patient in policy as inflation slows down, but broader economic indicators continue to show strength. For example, the annualized GDP growth rate in the US for the second quarter reached 2.8%, better than expected; although the unemployment rate has risen slightly, the labor market has remained strong.

English stated that given the inflation and economic conditions, accommodative policy is appropriate but should not be seen as a commitment to a series of accommodative policies.

The Fed will not provide an updated summary of quarterly economic forecasts at this meeting. This includes the "dot plot" of individual members' rate expectations, as well as informal forecasts for GDP, inflation, and unemployment.

For investors looking for more dovish signals from the Fed, they may have to wait until August. At that time, many Fed officials will gather at the Jackson Hole central bank symposium in Wyoming. Traditionally, the Fed Chairman will deliver a keynote policy speech at the meeting, and usually announce some "important information."

Regarding Powell's speech, he may be asked by reporters about the outlook for the September meeting, as well as the pace of easing for the remainder of this year and next. While he may welcome recent good news on inflation, he is more likely to stick to the Fed's standard language, that its policy path will "depend on the data," and the Fed is "meeting by meeting" to formulate action plans **

Powell will also be asked about his concerns about the cooling labor market and the conditions that constitute the "unexpected softness" that needs to be responded to. The current unemployment rate is 4.1%, higher than the low point of 3.4% at the beginning of 2023, and the non-farm data for July will be released on Friday.

Currently, investors expect the Fed's rate cut in September to be slightly higher than 25 basis points, indicating that they believe the rate cut may exceed the usual 25 basis points. According to federal funds futures, they also believe that rate cuts are possible in November and December. LH Meyer/Monetary Policy Analytics analyst Derek Tang said:

"Powell may be asked how the labor market can meet the standard of 'unexpected weakness', prompting them to reassess whether a quarterly rate cut of 25 basis points is sufficient."

In addition, although Powell may be asked again about the presidential election in November, he is almost certain to reiterate his standard position that politics plays no role in the Fed's interest rate decisions.

Will Gold "Soar"?

Currently, the expectation of a dovish tone in Powell and the FOMC policy statement is the main driver of the rise in gold prices. While a small part of the increase can be attributed to a slight weakening of the US dollar and geopolitical factors, the majority of the increase comes from traders' bullish sentiment towards gold, highlighting gold's enduring attractiveness as a hedge against economic uncertainty.

As market participants analyze every word of the upcoming policy statement and press conference, the gold market is at a critical juncture. The interaction between monetary policy, economic data, and market sentiment will continue to influence the price of gold.

Colin Cieszynski, Chief Market Strategist at SIA Wealth Management, said, "My thought is that if Powell appears dovish at the Fed meeting and hints at a rate cut in September, this could push the dollar lower and help gold rebound."

Phillip Streible, Chief Market Strategist at Blue Line Futures, also pointed out, "There have been more cracks in the European economy recently, which could push the ECB to cut rates in September, and the Fed is also expected to cut rates in September, which will directly support the gold market."

Dennis Gartman, founder of The Gartman Letter, remains bullish on gold as always, viewing any weakness as an opportunity for long positions. "The pullback in gold we've seen in the past two weeks has just given people a better buying opportunity. Gold has been in a bull market for a long time and is likely to remain in a bull market for the foreseeable future."

"While some short-term disappointments in gold cannot be ruled out, the trend of higher gold prices in the coming months and quarters remains intact," said Ole Hansen, Head of Commodity Strategy at Saxo Bank, in a report From a technical perspective, FXStreet analysts pointed out that gold buyers are starting to regain strength, with the 14-day Relative Strength Index (RSI) returning above 50. The price of gold closed above the 21-day Simple Moving Average (SMA) resistance on Tuesday, briefly surging to $2410.

In this context, if gold continues to break through the static resistance level of $2412, the price of gold may further rise. The next resistance is seen in the $2425-2430 range. If buying interest increases, the price of gold may retest the previous historical high of $2450.

On the other hand, the immediate support level to watch is the previous 21-day SMA, which is $2399. The next support will be near the 50-day SMA around $2360. If this level is breached, gold may return to a downtrend, potentially falling to the 100-day SMA support level of $2331. However, considering that the bulls are still enthusiastic, if gold falls to around $2350, there may be many buying opportunities at that time.