US Fed Meeting 2024: Fed keeps interest rates steady as Powell says ‘path forward is still uncertain’

US Treasury yields slid Wednesday morning on signs of slowing labor costs and a weaker than expected reading of private payrolls as investors awaited the closely-watched Federal Reserve interest rate decision.

US labor costs rose less than expected in the fourth quarter, leading to the smallest annual increase in two years, the Labor Department said. Private payrolls, meanwhile, increased by 107,000 jobs last month, the ADP National Employment Report showed on Wednesday.

In China, demand for gold jewelery is likely to remain stable, as consumers have sought to preserve value in the safe-haven asset against a weakening currency and an increasingly uncertain economic outlook, Bloomberg reported. Still, the WGC expects a slowdown in the the country’s growth — a scenario that could limit households’ budgets for purchasing bars and coins, as well as jewellery.

According to the Conference Board, a business research firm, consumer confidence increased for the third consecutive month in January, reaching its highest level in two years.

Meanwhile, consumer spending remained high in December, indicating that Americans are not yet pulling back, as per the monthly Personal Consumption Expenditures (PCE) report, which was issued Friday. Meanwhile, American consumers have kept accruing debt in recent months, although this may not be a major issue just yet.

As attention shifts to the Fed's meeting, gold prices rose to a two-week high on Tuesday, backed by a weaker dollar and lower Treasury yields, Reuters reported.

"Gold prices are rising in the domestic and international market as there is a strong buzz about the US central bank announcing a rate cut schedule in 2024. After the better-than-expected US economic data in recent weeks, the market has a strong belief that it is opportune for the US Federal Reserve to start interest rate cut from March 2024 or from May 2024," said Anuj Gupta, Head — Commodity & Currency at HDFC Securities.

The outcome of the Federal Reserve's policy meeting will have a big impact on the direction of gold prices during the next week. If the Fed maintains its hawkish stance in light of positive economic statistics, the adverse trend in gold prices may continue. However, any signs of a dovish pivot could result in a bullish turnaround in gold.

While the Fed has made it apparent that it is independent of Washington politics, some experts believe that the timing and extent of interest rate decreases may have a political impact.

Earlier, Senator Elizabeth Warren along with her three Democratic colleagues wrote to Powell, requesting the Fed to lower interest rates to assist reduce housing costs. Senate Banking Committee Chair Sherrod Brown, who is up for re-election, responded with a similar letter.

US President Joe Biden's effort for a second term would not be impacted by lower borrowing prices as many voters and his challenger and Republican frontrunner Donald Trump criticise him for the high cost of living.

A recent Gallup poll revealed that over 27% of Americans believe the economy is good or excellent, an increase from 22% in December. Despite this, roughly 45 percent of respondents ranked the economy as poor.

The survey showed inflation is a major concern for many Americans as six out of ten adults reported that recent price rises have caused financial difficulty for their household.

The Fed had repeatedly raised the interest rate in an effort to control inflation, but inflation has slowed in recent months, and rates have remained steady. According to a December report, inflation climbed to 3.4%, which was higher than the Fed's target of 2%.

The first 2024 inflation report will be announced on February 13, when the Bureau of Labor Statistics releases statistics for January prices.

As economists expect inflation to remain low this year, Oxford Economics has predicted that prices will rise at a 2.4% annual rate in 2024 before falling to 2.2% in 2025.

Approximately 50% of economists polled by FactSet predict the Fed will make its first 2024 cut at its March 19-20 meeting. FactSet shows around nine out of ten economists predict the central bank will cut interest rates during its meeting on April 30-May 1.

“It really is about how hard they push back against the potential for cuts as soon as March, or if they don’t push back,” said Sarah House, senior economist at Wells Fargo, in an interview to CNN.

“We’ll be looking at their emphasis on how restrictive policy is, any concerns around the labor market and how the [Fed] is viewing the risks to inflation’s outlook,” the economist added.

Total gold demand hit a record last year and is expected to expand again in 2024 as the US Federal Reserve moves toward cutting interest rates, potentially aiding prices, according to the World Gold Council.

Overall consumption climbed by about 3% to 4,899 tons last year, supported by strong demand in the opaque over-the-counter market, as well as from sustained central-bank buying, according to the WGC’s full-year report. That’s the highest total figure in data going back to 2010. Read more here

Despite dramatically increased interest rates, the US economy and job market have remained remarkably resilient, resulting in higher rates of borrowing for consumers and businesses. The Federal Reserve hiked its benchmark interest rate 11 times from March 2022 to July 2023, reaching a 23-year high of roughly 5.4%.

The Fed expects to see the job market cool from its 2021 and 2022 red-hot levels, lowering pressure on US firms to increase salaries to attract and retain employees. While higher interest rates have hampered hiring, employment growth remains quite healthy.

The United States witnessed an unexpected surge in job openings in December, an increase from November's 8.9 million, with the number of workers leaving their jobs fell to its lowest point in over three years, most likely due to a desire for better opportunities.

As per the Associated Press report, the employers posted around 9 million jobs in December, indicating that the labor market is likely to stay resilient for the US Federal Reserve to begin decreasing interest rates in the first quarter.

Financial markets have been expecting a first rate decrease as early as March, but persistent labour market momentum may make Fed members reluctant to act before the middle of the year. Read more here

Before the announcement of the US Fed meeting, the US stocks finished on a mixed note on Tuesday.

On Tuesday, the Dow Jones Industrial Average rose 0.4 per cent to finish the day at 38,467.31. The broad-based S&P 500 slipped 0.1 per cent to 4,924.97, and the tech-rich Nasdaq Composite fell 0.8 per cent to 15,509.90.

Given the improvement in the US inflation situation, experts are hoping that the central bank would intiate rate cuts starting in May or June. The US job market and inflation situation has improved over the past few months.

"On one hand, inflation numbers continue to surprise to the downside. The Fed’s preferred gauge decelerated to 2.9 per cent in December, crossing below 3 per cent for the first time since early 2021, according to data published Friday. On the other, consumer spending continues to be surprisingly robust. It’s undoubtedly getting a boost from the downdraft in inflation, but the strength still may keep some worried that price pressures could mount once again," reported Bloomberg.

As per the figures provided by Summary of Economic Projections for 2024, GDP growth will slow from 1.5% to 1.4%, unemployment will continue at 4.1%, and personal consumption expenditures (PCE) inflation will fall from 2.5% to 2.4%. The Fed's median target rate for 2024 is currently 4.6%, down from 5.1% in June, or 0.50 basis points.

Meanwhile, Fed Chair Jerome Powell underlined that future actions would be reached on a meeting-by-meeting basis, implying that either a rate hike or a drop is possible but not guaranteed. If Powel hints at a possible rate drop in March, the US dollar will likely fall versus all significant currencies. USDJPY may fall to the 140.00-142.00 region by the end of this trading week, FX Empire reported.

More crucially, Powell's news conference could provide some hints as to how policymakers are considering when to lower interest rates, which markets and economists will undoubtedly examine meticulously. Following the latest batch of data, markets are relying on a May rate cut as the most likely conclusion.

Rate reduction might bring some comfort to households and businesses who have been incurring more for mortgages, car loans, credit card debt, and other forms of borrowing as a result of the Fed's recent rate increases.

When they last met in December, the Fed's 19 officials who decide interest-rate decisions said they planned to drop the benchmark rate three times this year. However, the timing of these rate decreases, which would result in lower borrowing rates for households and companies, remains uncertain, Associated Press reported.

Most analysts expect the first rate decrease to take place in May or June, though a cut at the Fed's March meeting is not out of the question. The timing of rate decreases will almost definitely be the primary focus of the Fed's two-day meeting, which concludes Wednesday. The Fed is almost certain to say after the meeting that it is keeping its benchmark rate unchanged at around 5.4%, where it has stayed since July, its highest point ever.