On the 17th December, the Federal Reserve will hold its final meeting for the year.
Markets are now anticipating another rate reduction, but the Fed could reconsider their decision if economic growth exceeds expectations and inflation shows signs of resistance.
Fed officials may be reluctant to cut rates because of geopolitical uncertainties and the upcoming election for a new president. Will the Fed cut rates or will they decide to take a pause?
Economic growth defies expectations
Atlanta Fed’s GDPNow Model has forecast Q4 growth of 3.2%. This is up from 3.0% and 2.8% respectively in Q3 or Q2.
The surge in activity within the service sector is responsible for these figures, which show that the US economic situation has been strong.
S&P Global’s Flash November PMI showed the highest rise in output for services since March 2022.
This sector continues to see a strong increase in new orders, which indicates a continued growth into the end of the year.
This resilience is in stark contrast to the Federal Reserve’s efforts to relax financial conditions.
Many expect another 25 basis point reduction in December after two successive rate cuts of 75 basis points.
CME FedWatch Tool indicates a probability of 74% for this movement.
The Fed may pause if the economy continues to grow.
The rate of inflation is slowing down
The rate of inflation, which is a major concern for policymakers this year, has not fallen as steadily as it did earlier in the year.
The Consumer Price Index and Personal Consumption Expenditures Index for October showed stabilization, rather than decline.
Federal Reserve Governor Christopher Waller compared the inflation situation to a MMA match, in which “the inflation keeps slipping from our grasp.”
Although the Fed has achieved significant success, there is still much work to be done.
John Williams, President of the New York Fed, said that core inflation, which excludes volatile prices for housing, food and energy, is similar to levels between 2002-2007.
As government data is updated, it’s expected that housing costs will decrease.
The risks that inflation will remain above the Fed’s target of 2% persist.
Upcoming data may surprise
The economic data released this week could change the Fed’s strategy. The ADP Employment Change Report for November and the ISM Services PMI are both due soon, then Friday’s nonfarm pay.
As expected, 200,000 new jobs were created in November. However, October figures were affected by the hurricanes and strikes that disrupted their work.
The Fed may be under pressure to maintain rates if the GDP expectation increases based on confirmed economic acceleration.
Jerome Powell, the Fed chair’s remarks on Wednesday evening will probably provide greater clarity. Powell’s most recent public comments were more dovish that expected, and a new set of strong data could confirm this.
Gold’s decline reflects market uncertainty
Gold prices have reflected the unpredictability of the Fed. As the US dollar strengthened, prices fell by 0.6% on Monday.
After reaching a record-high in October, spot gold has settled at around $2640 an ounce.
Gold has been weighed down by the dollar rally. This was partly due to President-elect Donald Trump’s comments about BRICS countries seeking an alternative currency.
Trump’s threat to impose 100% tariffs on BRICS countries, should they adopt a single currency, has fueled fears about the US continuing its economic dominance.
Gold is still 28% above its year-to date average, despite the recent drop. This has been boosted by purchases from central banks and uncertainty in geopolitical affairs.
Analysts expect volatile trading to continue into the year’s end as markets adapt to changing Fed expectations.
Dollar under pressure from geopolitical movements
The comments of President-elect Trump have reignited the debate on dedollarization. Trump threatened BRICS countries, including Brazil, Russia India China and South Africa, with 100% tariffs if they sought alternatives to the U.S. Dollar.
The feasibility of a BRICS currency is largely dismissed by economists, citing divisions within the BRICS and other practical obstacles such as differing monetary policy.
The effort to lessen reliance on dollars reflects wider frustrations about its dominance of global finance and trade.
The IMF states that the dollar accounts for 58% global reserves of currency and 88% of all foreign exchange transactions.
However, there are still many changes to be made.
While the Chinese Yuan is only about 2% of all global reserves, it has gained traction. Central banks are diversifying their reserves to include gold and other currencies.
Market hopes are high
Recent stock market performance highlights tensions between risk and optimism.
Both the S&P 500 & Nasdaq Composite indexes have had a significant rally since October. They are both nearing levels of overboughtness.
Investor confidence is high according to indicators like Citibank’s Panic/Euphoria Model and Fear & Greed Index.
Continued rate reductions are essential to maintaining this confidence. Markets could be disappointed if upcoming data, or Powell’s remarks indicate a pause.
The current rally could be disrupted by a hawkish turn, but the market can continue to break all-time records as long as consumer confidence is high and the economy continues to thrive.
The US economy is too strong to cut rates. This post may change as new information becomes available
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