Fed Hits Pause Button on Rate Cuts. Gold Starts January Strong

Just nine days after President Trump was sworn in as our nation’s new president, the Federal Reserve held interest rates steady at 4.25- 4.50%. Inflation remains above the Centrals bank’s target and there is widespread uncertainty on how the new administration’s policies will impact the economy and financial markets.

This uncertainty likely played into the Fed’s decision to stand pat. Today’s decision from the Fed comes after three consecutive interest rate cuts in 2024.

For now, Fed chairman Jerome Powell side-stepped President Trump’s demand that the central bank lower interest rates, which the president announced to global business leaders last week at the World Economic Forum in Davos, Switzerland.

Gold Hits 3 Month High in Late January

In the markets, gold came out of the starting gates in January, trading virtually straight up from the $2,628 area in late December to above the $2,775 level in late January, marking a three-month high for the precious metal. The stock market plunged this week on worries of overvalued technology stocks. This triggered concerns that the AI-fueled stock market bubble could be ready to pop.

Inflation Remains above the Fed’s 2% Target 

Economic data released since the December Fed meeting reveals that economic growth appears to be expanding at a strong 3% pace and the labor market remains solid, but progress on moving inflation back down to the Fed’s 3% target has stalled.

Looking back, consumer prices increased 2.9% in 2024, an improvement from 4.1% in 2023. However, progress bringing inflation back to its target at 2.0% has run into challenges as American’s are now concerned that tariffs could raise the price on imported goods.

Wall Street gets its next look at inflation on Friday, when the government releases the January personal consumption expenditures price index (PCE), which is widely known as the Fed’s preferred inflation gauge.

Batten down the hatches with gold 

The new year is setting up to be a volatile one for the stock market, while the outlook for gold is glittering. After gaining almost 30% last year, January’s strong start for gold signals another big year for the precious metal, with analysts widely targeting the $3,000 an ounce level as the next big upside target.

If you haven’t already, now is the optimal time to increase your allocation to gold to hedge your portfolio against losses in the stock market. If the stock market plunges, your portfolio invested in equities shrinks, while the portion of your portfolio invested in gold grows. Questions? Blanchard is here to help.

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