Gold, Wall Street recovered even after a hawkish hold by the Fed

·       A temporary glitch in the Israel-Hamas hostage deal also boosted gold

·       Fed Chair Powell sounded less hawkish and also indicated QT's end plan in the coming meetings as QT is boosting bond yields despite rate cuts

·       Fed may end QT by June’25 and cut rates 25 bps each in June and Dec’25 in the future

On Wednesday (29th Jan 25), apart from the ongoing Trump tantrum and Gaza war ceasefire/hostage deal development all focus of the market was on the FOMC meeting and the Fed’s policy decisions. As highly expected, the Fed holds all of its key policy rates. Fed kept unchanged target range for the Federal Fund's Rate (FFR-interbank rate-SOFR) to 4.38%% (median of 4.50-4.25%); primary credit rate (repo rate) +4.50%; IOER (reverse repo rate) +4.40%; overnight repurchase (ONRP) agreement rate (ON RP) +4.50% and ONRRP (Overnight Reverse Repurchase Agreement Rate) to +4.25%.

The US Fed kept the fed funds rate steady at the 4.25%-4.5% range during its January 2025 meeting, in line with market expectations and by unanimous decision. The Fed paused its rate-cutting cycle after a cumulative 100 bps rate cut in H2CY24 beginning with 50 bps in Sep’24, followed by 25 bps each in November and December’24 to stay ahead of the employment curve.

On Wednesday, Fed Chair Powell said the Fed is not in a hurry to lower interest rates, and that it had paused cuts to see further progress on disinflation. Policymakers noted that recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Additionally, the Fed acknowledged that inflation remains somewhat elevated and removed its previous reference to ongoing progress toward the 2% target. The Fed also said the economic outlook is uncertain and is attentive to the risks to both sides of its dual mandate.

Full text of Fed’s statement: January 29, 2025: Federal Reserve issues FOMC statement

“Recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.

In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Susan M. Collins; Lisa D. Cook; Austan D. Goolsbee; Philip N. Jefferson; Adriana D. Kugler; Alberto G. Musalem; Jeffrey R. Schmid; and Christopher J. Waller”

Implementation Note issued January 29, 2025: Decisions Regarding Monetary Policy Implementation

The Federal Reserve has made the following decisions to implement the monetary policy stance announced by the Federal Open Market Committee in its statement on January 29, 2025:

·       The Board of Governors of the Federal Reserve System voted unanimously to maintain the interest rate paid on reserve balances at 4.4 percent, effective January 30, 2025.

As part of its policy decision, the Federal Open Market Committee voted to direct the Open Market Desk at the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive:

Effective January 30, 2025, the Federal Open Market Committee directs the Desk to:

·       Undertake open market operations as necessary to maintain the federal funds rate in a target range of 4-1/4 to 4‑1/2 percent.

·       Conduct standing overnight repurchase agreement operations with a minimum bid rate of 4.5 percent and with an aggregate operation limit of $500 billion.

·       Conduct standing overnight reverse repurchase agreement operations at an offering rate of 4.25 percent and with a per‑counterparty limit of $160 billion per day.

·       Roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing in each calendar month that exceeds a cap of $25 billion per month.

·       Redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap.

·       Reinvest the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage‑backed securities (MBS) received in each calendar month that exceeds a cap of $35 billion per month into Treasury securities to roughly match the maturity composition of Treasury securities outstanding.

·       Allow modest deviations from stated amounts for reinvestments, if needed for operational reasons

·       Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions.

·       In a related action, the Board of Governors of the Federal Reserve System voted unanimously to approve the establishment of the primary credit rate at the existing level of 4.5 percent.

Full text of Fed Chair Powell’s opening statement: January 29, 2025

“My colleagues and I remain squarely focused on achieving our dual mandate goals of maximum employment and stable prices for the benefit of the American people. The economy is strong overall and has made significant progress toward our goals over the past two years. Labor market conditions have cooled from their formerly overheated state and remain solid. Inflation has moved much closer to our 2 percent longer-run goal, though it remains somewhat elevated.

In support of our goals, today the Federal Open Market Committee decided to leave our policy interest rate unchanged and to continue to reduce our securities holdings. I will have more to say about monetary policy after briefly reviewing economic developments.

Recent indicators suggest that economic activity has continued to expand at a solid pace. For 2024 as a whole, GDP looks to have risen above 2 percent, bolstered by resilient consumer spending. Investment in equipment and intangibles appears to have slowed in the fourth quarter but was strong for the year overall. Following weakness in the middle of last year, activity in the housing sector seems to have stabilized.

In the labor market, conditions remain solid. Payroll job gains averaged 170 thousand per month over the past three months. Following earlier increases, the unemployment rate has stabilized since the middle of last year, and at 4.1 percent in December, remains low. Nominal wage growth has eased over the past year, and the jobs-to-workers gap has narrowed. Overall, a wide set of indicators suggests that conditions in the labor market are broadly in balance. The labor market is not a source of significant inflationary pressures.

Inflation has eased significantly over the past two years but remains somewhat elevated relative to our 2 percent longer-run goal. Estimates based on the Consumer Price Index and other data indicate that total PCE prices rose 2.6 percent over the 12 months ending in December and that, excluding the volatile food and energy categories, core PCE prices rose 2.8 percent. Longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets.

Our monetary policy actions are guided by our dual mandate to promote maximum employment and stable prices for the American people. We see the risks to achieving our employment and inflation goals as being roughly in balance, and we are attentive to the risks on both sides of our mandate.

Throughout our three previous meetings, we lowered our policy rate by a full percentage point from its peak. That recalibration of our policy stance was appropriate in light of the progress on inflation and the rebalancing in the labor market. With our policy stance significantly less restrictive than it had been, and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance.

At today’s meeting, the Committee decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent. We know that reducing policy restraint too fast or too much could hinder progress on inflation. At the same time, reducing policy restraint too slowly or too little could unduly weaken economic activity and employment.

In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will assess incoming data, the evolving outlook, and the balance of risks. We are not on any preset course.

As the economy evolves, we will adjust our policy stance in a manner that best promotes our maximum employment and price stability goals. If the economy remains strong and inflation does not continue to move sustainably toward 2 percent, we can maintain policy restraint for longer. If the labor market were to weaken unexpectedly or inflation was to fall more quickly than anticipated, we can ease policy accordingly. The policy is well-positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate.

As we previously announced, our five-year review of our monetary policy framework is taking place this year. At this meeting, the Committee began its discussions by reviewing the context and outcomes of our previous review that concluded in 2020, as well as the experiences of other central banks in conducting reviews. Our review will again include outreach and public events involving a wide range of parties, including Fed Listens events around the country and a research conference in May.

Throughout this process, we will be open to new ideas and critical feedback, and we will take on board lessons of the last five years in determining our findings. We intend to wrap up the review by late summer. I would note that the Committee’s 2 percent longer-run inflation goal will be retained and will not be a focus of the review.

The Fed has been assigned two goals for monetary policy—maximum employment and stable prices. We remain committed to supporting maximum employment, bringing inflation sustainably to our 2 percent goal, and keeping longer-run inflation expectations well anchored. Our success in delivering on these goals matters to all Americans. We understand that our actions affect communities, families, and businesses across the country. Everything we do is in service to our public mission. We at the Fed will do everything we can to achieve our maximum employment and price stability goals. Thank you. I look forward to your questions”.

Highlights of FOMC policy statement: 29th Jan’25

·       US Interest Rate Decision Actual 4.5% (Forecast 4.5%, Previous 4.5%)

·       Balance sheet runoff to continue at previous pace

·       Economic activity has continued to expand at a solid pace

·       Attentive to the risks to both sides of its dual mandate

·       The vote in favor of the policy rate hold was unanimous

·       The unemployment rate has stabilized at a low level, labor market conditions remain solid; replacing the reference in the previous statement to conditions having eased

·       Risks to achieving employment and inflation goals are roughly in balance

Highlights of Fed Chair Powell’s statements/comments in the Q&A: 29th Jan’25

·       Activity in the housing sector seems to have stabilized

·       Investment in equipment (private capex) appears to have slowed

·       2024 GDP looks to have risen above 2%

·       Inflation has moved much closer to goal, somewhat elevated

·       The economy has made significant progress toward goals

·       Labor market conditions broadly balanced

·       The unemployment rate has stabilized and remains low

·       Risks to achieving goals roughly in balance

·       Total PCE rose 2.6% in 12 months to December, and core PCE rose 2.8%

·       Longer-term inflation expectations appear well-anchored

·       The labor market is not a source of further inflationary pressures

·       I'm attentive to risks on both sides of the mandate

·       I will adjust my policy stance to promote goals

·       We are not on a preset course

·       We do not need to be in a hurry to adjust the policy rate

·       The policy is well-positioned to deal with risks and uncertainties

·       I will adjust my policy stance to promote goals

·       We are not on a preset course

·       Policy framework discussions began this meeting

·       The review of the framework will wrap up by late summer

·       My assessment of policy stance has not changed

·       I have not had contact with the President

·       I can see policy is restrictive looking at last year

·       The policy is meaningfully less restrictive than before the cuts

·       We are focusing on real progress on inflation or weakness in the labor market before making further cuts

·       Our policy stance is very well-calibrated to balance the achievement of goals

·       We don't need to see a further weakening of the labor market to achieve inflation goal

·       Our policy stance is very well-calibrated to balance the achievement of goals

·       The labor market has been broadly stable

·       Our policy stance is very well-calibrated to balance the achievement of goals.

·       Fed very much waiting to see what policies are enacted

·       We just chose to shorten the sentence on inflation, the sentence on inflation was not meant to send a signal

·       Forecasts are highly uncertain

·       Right now I see things in a good place for policy, the economy

·       It's a very large economy and policies affect it at the margin

·       My assessment that rates were 'meaningfully restrictive' hasn't changed

·       I expect further progress on inflation

·       Right now, we're in a very good place

·       I am looking at the data to guide us

·       We are reviewing the details of executive orders

·       The staff looks at a range of possible outcomes, on the impact of possible policies.

·       The Fed doesn't act until seeing much more than we see now

·       I now see shelter inflation coming down pretty steadily

·       We want to see further progress on inflation and think we see the pathway for that to happen

·       There seems to be set up for further progress on inflation; we are going to want to see it

·       The Fed needs to see progress on 12-month inflation

·       I don't think we need the labor market to cool off anymore

·       Flows across borders have decreased; every reason to think that will continue, but job creation is also down; together, those could be reasons for the unemployment rate to stabilize (on the effect of Trump’s immigration/deportation policies)

·       The Fed runs a very careful budget process (On Trump’s plan to cut the Fed workforce)

·       Our eyes are telling us Fed’s restrictive policy is affecting the real economy

·       We are above everyone on the committee's estimates of long-run neutral

·       We are meaningfully above the neutral rate

·       The range of possibilities for tariffs is very, very wide

·       The footprint of trade has changed, not as concentrated in China as before

·       We don't know how tariffs will be transmitted to consumers

·       Most recent data suggests reserves are still abundant

·       We intend to reduce the balance sheet size

·       We are closely monitoring signals on reserves

·       Artificial Intelligence is a big development for the stock market, but we are focused on the macroeconomy.

·       Longer rates have gone up not because of expectations about policy or inflation.

·       The long rate increase is more a term premium story

·       AI sell-off is not a substantial, persistent change, causing financial stability issues as of now

·       The Fed is watching AI-driven equity selloff with interest

·       We don't need to wait for 2% inflation to cut rates

·       Trade policy uncertainty, if large and persistent, can start to matter; that's not something I'm seeing today

·       Asset prices are elevated by many metrics

·       We look from financial stability perspective at asset prices, leverage, and funding risk.

·       If there were a spike in layoffs, we would see unemployment go up quickly because the hiring rate is low.

·       Overall this is a good labor market.

·       There is nothing in the data yet about the decline of immigrant labor, but hear it from businesses.

·       Uncertainty is always with us

·       The Fed will discuss employment goals again in the review

Conclusions:

Although the Fed generally talks about 2.0% PCE inflation as a price stability target, in reality, it maintains 1.5% core/total PCE inflation and 2.3% core/total CPI inflation; i.e. around 1.9% average inflation (PCE+CPI) targets, Congress has entrusted along with maximum employment 96.0-95.5% of the labor force; i.e. 4.0-3.5% headline unemployment rate. Fed will now try to bring down average core inflation from around 3.0% to 2.5% by keeping the unemployment rate at least around 4.0% by December’25 and then 2.0% core inflation and 3.5% unemployment rate by December’26 to achieve its mandate of maximum employment and price stability.

As US core inflation almost stalled in H2CY24 at around +3.3% on average, while the unemployment rate remains stable at around 4.2% along with resilient Real GDP and PDPF growths around 2.8-3.0% on average, the Fed should have paused in December to asses more data and Trump policies on inflation and employment. But the Fed cut -25 bps in Dec’24 too (after September and November) to make up for previous policy mistakes and be able to be ahead of the curve despite core disinflation almost stalled in H2CY24, while the unemployment rate remains stable around 4.0% and economic activity remains resilient.

Despite unfavorable data, and Trump policy uncertainty Fed cut on 18th December’24 to catch up with synchronized global easing and also to keep differential with ECB, which cut -100 bps in 2024. Fed may have also made a policy mistake by not cutting rates by 50 bps in H1CY24 and thus now cutting 100 bps in H1CY24 to catch up.

As per Taylor’s modified rule, considering the desired real REPO rate of +1.0%, core CPI inflation targets of +2.3%, unemployment targets of 3.5%, and real GDP growth targets of 3.0% and expected 2024 average levels, the Fed should cut REPO rate from present +4.50% to 4.00% by Dec’25. Fed may like to keep the repo rate at 4.5% against average core CPI inflation for 2024 around 3.5% for a real repo rate +1.0%, moderately restrictive, but lower than 2.0% in H1CY24, when the repo rate was 5.50% against average core CPI inflation +3.5%. Looking ahead, the Fed may like to keep the core real rate around +1.00% and cut gradually every six months till Dec’27 for a repo rate of +3.00% from +4.50% at present.

Thus the Fed cut on 18th December for a cumulative rate cut of 100 bps in 2024 to a repo rate of 4.50% against the average core CPI of 3.5% for 2024, so that the real repo rate remains around +1.00%. Fed may have made a policy mistake by not cutting from H1CY24 when 3MRA of core CPI was around +3.5% on average. Thus Fed is now cutting 50 bps extra in H2CY24 to stay ahead of the curve.

But despite a 50 bps projected rate cut in 2025-26, the Fed may cut 75-100 bps each if Trump’s immigration and tariff policies are less hawkish in reality due to moderate Musk & Co., who may ensure good relations between Trump/US with China and Russia (Putin); Musk has not only good business relation with China but also a good ‘personal/diplomatic’ relation with Putin for the last few years.

Fed front-loaded 50 bps rate cuts for 2025 in H2CY24 and thus may cut only 50 bps in 2026. But the Fed may also change its stance in the coming months and go for 100 bps rate cuts in 2025 if the US unemployment rate ticked up towards 4.5%, while core CPI inflation ticked down below +3.0%. We have to keep in mind Fed often changes its goalposts to suit its narrative/stance/rate action even after contradictory jawboning. The Fed should maintain more credibility as the Fed is the de-facto central bank of the world and controls almost all types of financial asset classes, with USD being the undisputed preferred global trade & reserve currency.

In H1CY25, the Fed may also share some concrete plans to end the QT, which may be positive for UST and negative for US bond yields, USD. Fed is now cutting rates while doing QT, which is two contra monetary policy tools. As a result, bond yields remain elevated at around 4.50% and the real economy may not be getting the full effect of a 100 bps rate cut in 2024. The market usually discounts Fed rate cuts well in advance in line with regular Fed talks and official dot plots.

Thus Fed may close the QT first by June’25 at B/S size around $6.60-6.50T from present levels of around $6.89T. Fed may keep the B/S size around 22% of projected nominal GDP around $30T by 2025, which may be an ideal level for the Goldilocks nature of the US economy and may not cause another REPO/Funding market crisis as we have seen late 2019 under Trump and Powell-1.0.

Bottom line:

Fed may first close QT by June’25 and then resume the rate cut cycle for 50 bps cumulative in 2025. Fed may provide a definitive plan to end the QT in its March’25 meeting and close the same by June’25 and cut rates by 25 bps each in June and Dec’25.

Market impact:

On Wednesday, although the FOMC statement was more hawkish than expected, overall Powell's Q&A was less hawkish as Powell tried to balance the market on a Fed day. But Powell also indirectly hinted at QT's closing plan by the Fed.

The Fed leaves the repo rate unchanged at 4.5%, and the statement did not include language that inflation had made progress toward the 2% objective as it had in the December statement. Fed holds rates steady and takes a less confident view on inflation. Subsequently, traders' prices in less Fed easing this year after the FOMC statement as the Jan’25 Fed statement does not include language that inflation had made progress toward the 2% objective as it had in the Dec’24 statement. But Fed Chair Powell didn’t give any importance to it and it’s not a signal/forward guidance, just a refresh in language. Thus Wall Street Futures, USD and also Gold waved.

Gold also recovered and scaled a fresh life time high of almost $2800 on Trump’s fiscal stimulus plan, which may cause more public deficit, debt and devaluation. Trump’s policy may cause more debt and more inflation, also positive for Gold. On Thursday, Gold surged on some temporary glitch in the Hamas-Israel hostage deal.

On Wednesday, Trump wrote in Truth:

“Because Jay Powell and the Fed failed to stop the problem they created with Inflation, I will do it by unleashing American Energy production, slashing Regulation, rebalancing International Trade, and reigniting American Manufacturing, but I will do much more than stopping Inflation, I will make our Country financially, and otherwise, powerful again! The Fed has done a terrible job on Bank Regulation. Treasury is going to lead the effort to cut unnecessary Regulations and will unleash lending for all American people and businesses. If the Fed had spent less time on DEI, gender ideology, “green” energy, and fake climate change, Inflation would never have been a problem. Instead, we suffered from the worst Inflation in the History of our Country!”

Weekly-Technical trading levels: DJ-30, NQ-100, SPX-500, and Gold

Looking ahead, whatever the fundamental narrative, technically Dow Future (CMP: 42200) now has to sustain over 41800-41600 for any recovery and rally to 43000/43350-43800/45000* and 45500 in the coming days; otherwise sustaining below 41600, DJ-30 may further fall to 41200/40600-40400/40000 in the coming days.

Similarly, NQ-100 Future (20990) has to sustain over 20700-21000 for recovery and rally to 21500/21900-22250/222500 and further 22700-23000/23300 in the coming days; otherwise, sustaining below 20700, NQ-100 may further fall to 20500/20300-20100/19250 in the coming days.

Technically, SPX-500 (CMP: 5865), now has to sustain over 5950 for any further recovery/rally to 6025/6050-6150/6200 and 6350/6500 in the coming days; otherwise, sustaining below 5925-5900, SPX-500 may further fall to 5800-5775 and 5700/5600-5475 in the coming days.

Also, technically Gold (CMP: 2690) has to sustain over 2705 for a further rally to 2725 and further 2740/2750-2775/2795 and 2815 in the coming days; otherwise sustaining below 2700-2685 may again fall to 2655/2620-2605/2600 and 2595/2575-2535/2435 in the coming days (depending upon Fed rate cuts, Gaza/Ukraine war trajectory); Gold surged almost 75% in the last one year since Gaza war started back in October’23. Now it may retrace to $2500-2400 levels if Trump indeed can mediate both the Gaza and Ukraine war ceasefire by early 2025.