Spot gold breaks through 2470 to continue refreshing highs, Wall Street calls for immediate rate cuts by the Federal Reserve

The spot price of gold continued to hit historical highs on Wednesday as recent comments from Federal Reserve officials boosted bets on a rate cut in September. Earlier, spot gold rose by 0.3%, reaching as high as $2473 per ounce. According to CME's FedWatch tool, the market has fully priced in expectations of at least a 25 basis point rate cut at the Fed's September meeting. Fed Chair Powell stated on Monday that recent inflation data "to some extent bolstered confidence," indicating that the pace of price increases is returning sustainably to the Fed's target, suggesting that a rate cut may not be far off. Fed Governor Quarles also expressed a cautiously optimistic view on Tuesday, believing that inflation is returning to the Fed's 2% target level.

More and more Wall Street economists are warning that the Fed has waited too long to reverse course after raising rates to their highest level in twenty years.

Over the past three months, inflation data has been less than ideal, coupled with slowing U.S. economic growth and rising unemployment. Many are even calling for a rate cut at the policy meeting scheduled in two weeks, although this seems unlikely. Fed Chair Powell stated at an event in Washington on Monday that he would not provide any guidance on the timing of a rate cut, and most of his colleagues on the Federal Open Market Committee (FOMC) do not seem to see the need to act urgently.

Prominent figures including Goldman Sachs' Chief Economist Jan Hatzius, Queens' College Dean Mohamed El-Erian, and Neil Dutta of Renaissance Macro Research believe that the risks of waiting are increasing.

Hatzius stated in a report released on Monday, "We believe that a rate cut should have been implemented as early as the meeting on July 30-31. If the reasons for a rate cut are clear, why wait another seven weeks to implement it?"

It is widely expected that the FOMC will maintain the benchmark interest rate for the eighth consecutive time at the July meeting, marking a year since the FOMC has kept the current 5.25% to 5.5% target range. According to futures data, investors are betting on at least two rate cuts by the end of 2024, starting in September.

Powell stated on Monday that recent inflation readings "indeed bolstered confidence to some extent," indicating that the inflation rate is falling back towards the Fed's 2% target, and policymakers are now focused on the Fed's dual mandate of full employment and price stability. However, he also mentioned that more evidence is needed before starting a rate cut.

The reason for easing policy now is that rate adjustments take time and may take a year or longer to impact the economy, so policymakers need to act preemptively to avoid an economic downturn. Hatzius mentioned that monetary policy guidelines like the widely followed Taylor Rule suggest that current rates should be around 4%, or more than a percentage point lower than the current actual rate Over the past week and a half, with the release of two important monthly reports on employment and inflation, the calls for a rate cut in July have been increasing. Despite the unemployment rate remaining relatively low at 4.1%, it has been rising month by month over the past three months. The unemployment rate has increased from its low point of 3.4% at the beginning of 2023, raising concerns about the risk of an economic recession.

Meanwhile, after an unexpected rise in the first three months of 2024, inflation showed a flat performance in the second quarter. The so-called core Consumer Price Index (excluding food and energy costs) rose by only 0.1% in June, the smallest monthly increase since August 2021. In particular, rental inflation, which people have been anticipating to ease, is expected to continue this trend.

Drew Matus, Chief Market Strategist at MetLife Investment Management, said: "Waiting too long could lead to a higher peak in the unemployment rate with little additional return on inflation."

Since the latest inflation data was announced on July 11, Chicago Fed President Gülsün and San Francisco Fed President Daly have both emphasized that the Fed is close to having the confidence needed to cut rates. However, some are cautious about acting too early. At their last meeting in June, officials' forecasts showed that 4 members believed there should be no rate cut this year, 7 expected one rate cut, and 8 anticipated two rate cuts.

Julia Coronado, founder of MacroPolicy Perspectives LLC, said: "A rate cut in July would just be more abrupt than the action the FOMC is inclined to take. Waiting for one more meeting before acting is more about managing the committee and getting more data."

On the contrary, the FOMC in July may adjust its statement to emphasize the improvement in inflation data, and Powell may use his speech at the end of August at the Jackson Hole central bank symposium in Wyoming to signal action in September.

The reason for waiting is that from the readings in the first quarter, the inflation rate has been bumpy. Hawks in the FOMC are concerned that any inflation rebound could trigger an increase in inflation expectations, making it more difficult to achieve the 2% target for inflation.

Michael Pugliese, Senior Economist at Wells Fargo, said: "We have good reason to wait until the September meeting."