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Investors are breathing a sigh of relief as the Federal Reserve has signaled that it still plans to cut interest rates three times this year, leading the market to see renewed buying momentum.
On Wednesday, in a long-awaited move, the Federal Reserve indicated that it would leave its Fed Funds rate unchanged, ranging between 5.25% and 5.50%. However, markets were more interested in the central bank's outlook and where to see the Interest rates at the end of the year.
The central bank's updated interest rate forecast, also known as the "dot plot", shows that the committee expects the Fed Funds rate to end at 4.6% at the end of the year, unchanged from December.
The gold market was trading in relatively neutral territory prior to the announcement and jumped into positive territory on the initial reaction. Spot prices for gold last traded at $2,167.60 an ounce, up 0.77% on the day.
The gold market has rallied as markets begin to reinforce their expectations of a rate cut in June. According to the CME FedWatch Tool markets now see a more than 60% chance of a June downgrade. Prior to the announcement, this was estimated to be 50/50.
While the central bank continues to hint at rate cuts, it remains reluctant to give exact timing. The monetary policy statement sounded very optimistic about the health of the economy.
"Recent indicators suggest that economic activity is steadily expanding. Employment continues to grow strongly, and unemployment remains low. Inflation has eased over the past year but remains elevated," the central bank said in its monetary policy statement. While inflation continues to ease, the central bank says it is not yet ready to cut interest rates.
While the central bank still plans to cut rates this year, the upcoming easing could potentially be less profound than markets expect.
The updated projections show that the central bank expects interest rates to come in at 3.9% by the end of 2025, slightly higher than the 3.6% reported in December. Interest rates are expected to end around 3.1% in 2026, up from the previous forecast of 2.9%.
In addition to less deep interest rate cuts, the Federal Reserve is quite optimistic about the health of the U.S. economy. In the updated economic forecasts, the central bank expects the economy to grow by 2.1% this year, significantly higher than December's estimate of 1.4%. The economy is expected to grow by 2.0% in the next year and in 2026, respectively, up from previous estimates of 1.8% and 1.9%.
A day after the interest rate decision, it is still having a positive effect on the Gold price and the silver price. The gold price has reached a new all-time high and the silver price has finally passed €750 per kilogram. For the precious metals investor, this development is a new indicator in favor of precious metals. This, together with geopolitical turmoil and high levels of public debt, can create an environment in which gold can be used to its full potential.
