Gold jumps after Fed rate cut, XAU/USD extends gains on dovish guidance
- Gold initially dropped but rebounded as traders viewed the Fed’s stance as dovish.
- Federal Reserve lowers rates to 3.50%–3.75%, hinting at only one more cut next year.
- Policymakers project neutral rates at 3% beyond 2028, signaling long-term caution.
Gold (XAU/USD) prices rise during the North American session after the Federal Reserve decided to cut rates as expected. At the time of writing XAU/USD trades volatile, between $4,190-$4,220 posting losses of over 0.25%.
Federal Reserve’s rate cut sparks volatility, sending gold prices to daily highs
On Wednesday, the Fed cut rates to 3.50%-3.75% as expected and kept the door open for just one rate cut. The Federal Open Market Committee (FOMC) vote split was 9-3, with Governor Miran voting for a 50 bps, while Jeffrey Schmid and Austan Goolsbee voted to hold rates unchanged.
The Summary of Economic Projections (SEP) revealed the “dot-plot” which showed that most members hinted that the fed funds rates for the next year would be at around 3.4%, implying that policymakers could cut 25 bps next year. For the longer term beyond 2028, Fed policymakers see neutral rates at around 3%.
Highlights of the monetary policy statement
In the statement the Fed mentioned “Job gains have slowed this year, and the unemployment rate has edged up through September. More recent indicators are consistent with these developments. Inflation has moved up since earlier in the year and remains somewhat elevated.”
They added that “The Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment rose in recent months.”
Gold price reaction - Hourly chart
Initially, XAU/USD headed south but as the decision was perceived as dovish, Gold began to rally, printing a daily high of $4,219. Ahead traders will eye the Fed Chair Jerome Powell press conference.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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