The price of gold peaked at $1,425.60 an ounce last night following the latest comments by Jerome Powell, chairman of the US Federal Reserve. Investors and analysts alike expect the Fed to cut interest rates at the end of the month, and Powell’s speech yesterday did nothing to alter that prediction.
Gold gained $32 per ounce in 12 hours yesterday, with the majority of the rise coming after Powell’s speech to the House Committee on Financial Services. Powell told the committee that the Fed’s own interest-rate team – known as the FOMC – was beginning to favour a cut to protect the American economy against “uncertainties”, which is likely to refer to the ongoing US/China trade war, other US trade tariff scenarios, and the overall global economic slowdown.
Powell Statement:
— HAP (@hap317) July 10, 2019
Gold ⬆️
Stocks ⬆️
Bonds ⬆️
Yen ⬆️
USD 💩
Investors have been pricing in a cut in the interest rate for several weeks now, but the stronger-than-expected US jobs data last Friday forced a re-evaluation from experts, who now see a 0.25% rate cut more likely than a 0.5% cut. The move would be the first rate cut for a decade, and the response has been a steady increase in demand for safe-haven assets, such as gold, Treasury bonds, and the Japanese Yen.
The rate cuts are also a positive for many others, with a silver lining of cheaper lending. The response, in anticipation, was a record day of market values for the S&P 500, Dow Jones, and the Nasdaq – all of which hit all-time high figures. The Nasdaq ended the session up 0.75% at 8,202 points, while the S&P was up at 2,993 points of 0.45%. The Dow Jones closed 76 points higher at the end of trading, hitting 26,860 points.
S&P 3,000! $SPY $SPX pic.twitter.com/t833Cl5vEW
— Jesse Cohen (@JesseCohenInv) July 10, 2019
Jerome Powell has been under significant pressure from President Trump, who was critical of the Fed’s rate rise at Christmas. The move to now cut rates slightly does validate the president’s initial claim, but investors are still concerned by the level of interference perceived.
The problem for Powell has been the relative success story of the US economy compared to the wider world. For the Fed, a cut might be a boost to the economy, but it also might signal a lack of confidence in it. The rate rise in December came with very positive economic figures, and the logic was to keep a lid on inflation as it rose. The problem was that inflation didn’t rise, so the interest rates were more of a hindrance, and now the Fed needs to undo that error.
Correcting a mistake is one thing, but journalists have been reporting that Jerome Powell may be forced out of his job as Chairman of the Reserve by Trump. When asked by Maxine Waters (Democrat) if he would quit, Powell said “Of course, I would not do that”. Waters followed up her question by asking if President Trump had the authority to dismiss Powell, to which he replied: “What I have said is the law gives me a four-year term and I fully intend to serve it.”
The Federal Open Market Committee (FOMC) will meet at the end of the month, with the announcement on interest rates due mid-August.