Inflation Data Gives Green Light for Fed Rate Cut

The Federal Reserve finally got what it was waiting for.

Inflation appears to be under control and trending lower. It’s been a long wait for not only the Fed, but for millions of Americans who have been battered by the double whammy of high inflation and high interest rates. That has put big ticket purchases like homes, cars and other items out of reach and on hold for many consumers.

In July, the Consumer Price Index slowed to 2.9%, from 3.0% a year ago, marking the first time the annual inflation rate dipped below 3.0% since March 2021.

Translation? The inflation report gives the Fed the green light to start cutting interest rates at its September meeting. While inflation still stands above the Fed’s target at 2%, many economists say the Fed has enough evidence that progress is being made toward its target rate.

Traders on Wall Street are locked and loaded, expecting a rate cut at the Fed’s next meeting on September 18. Indeed odds for a 25 basis point rate cut stand at 72.5%, according to CME Group Fed Watch. Meanwhile, odds for a 50 bp rate cut total 27.5%.

Given the current set-up, financial markets would be very disappointed if the Fed fails to pull the trigger and starts to lower its benchmark interest rate from a 23-year high.

What about gold?

Investors have been piling into gold since the start of the year amid safe-haven buying and also on expectations for Fed rate cuts. The precious metal is up nearly 19% year-to-date. Gold is trading just below its all-time record high set in July at $2,469.70—with major banks targeting additional gains in the months ahead toward targets at $2,500 and $2,600.

The start of the Fed rate cutting cycle is expected to support another up leg in the gold market, with prices historically climbing for nearly 21 months following the beginning of a rate-cutting cycle.

The Bottom Line.

Rate cuts are on the horizon. The uptrend in gold is strong, with higher prices seen ahead. That means today’s gold prices offer long-term precious metals investors an opportunity to lock in what could seem like bargain prices just a couple years from now.

Consider this. A mere two years ago in the fall of 2022—the price of gold traded $1,625 an ounce. Today it trades over $2,400 an ounce. Time goes fast. Investors who strike at opportune times like today will thank themselves in the future.

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