"The Fed's Signal Flare" Ignites Gold to Hit a New High! Goldman Sachs: Still More Likely to Cut Interest Rates by 25 Basis Points
A spokesperson for the Federal Reserve hinted at the possibility of a 50 basis point rate cut, despite strong core CPI data and a decrease in the unemployment rate. The market reacted swiftly, with the probability of a rate cut soaring from 15% to 45%. Goldman Sachs analysis suggests that the Federal Reserve is more likely to cut rates by 25 basis points, indicating that a 50 basis point cut is not certain. The US dollar tested a low against the Japanese yen, while the price of gold reached a new high, causing concerns in the market about policy instability
Today, some noteworthy events occurred: despite the hotter-than-expected core CPI data announced this week, and the 0.1% decrease in the US unemployment rate announced last week, Nick Timiraos, known as the "Fed speaker" and a Wall Street Journal reporter, strongly suggested in his latest article that a 50 basis point rate cut is still under discussion.
To illustrate the Fed's viewpoint, Timiraos quoted Jon Faust, a former senior advisor to Powell, as saying, "I don't think we really need to be preemptive... but I lean towards starting with 50 basis points. I still think the FOMC has a reasonable chance of achieving this goal."
This article was published at the same time as the 30-year US Treasury bond auction, which is why many people initially did not understand how a hawkish auction could trigger a dovish market reaction. What a shocking reaction it was: the probability of a rate cut in September soared from 15% (stronger than expected after the CPI report was released) to 45% in just a few hours because the market believed Timiraos was once again speaking for the Fed and hinting at the possibility of a 50 basis point rate cut.
But not everyone believes in the Fed's dovish surrender. In a report by Paolo Schiavone, an expert in Goldman Sachs FICC (Fixed Income, Currencies, and Commodities) division, this trader wrote that although the upcoming FOMC decision will be "an uncertain one, the Fed is more likely to cut rates by 25 basis points, as this is not a well-sourced article." In contrast, Timiraos wrote, "the probability of a 50 basis point cut is higher, meaning the Fed is ready to extend the cycle. Fiscal + monetary policy + Financial Conditions Index (FCI) help growth factors counter the recession tail."
Goldman's report mentioned that an article in the Wall Street Journal unexpectedly pushed down the pricing of the Fed's September rates by 4 basis points, showing the market's vulnerability. This is why the USD/JPY tested the year's low of 141, and why gold repeatedly hit historical highs. Now, the possibility of a 50 basis point rate cut is back on the table, meaning stock and rate volatility can find buying interest. But policy instability means increased volatility in spot asset prices. Looking ahead, the message from the Fed remains that they are ready to extend the rate cut cycle at any time. This should help cyclical stocks outperform defensive stocks and commodities.
Schiavone concluded, "This means that policy volatility has not really disappeared." According to the risk preference index of the bank, "you should buy credit and sell bonds. Because based solely on risk preference, bond prices are high and credit prices are low. Stocks are also very attractive." Schiavone believes that if growth factors have bottomed out, then the best trade is for commodities to rise and bonds to fall. He then goes on to write: "Our basic macroeconomic assumptions indicate that economic growth may have bottomed out. The Fed has a lot of room to cut interest rates, which can provide downside protection for risk assets. We forecast core personal consumption expenditure for the 2026 fiscal year to be 2.6%, rent OER to be 2.2%, and labor market normalization."