Gold, US stocks slip on less dovish FOMC minutes & Fed talks

·         Fed may cut only 50 bps in 2025 amid stalled core disinflation, stable labor market, and potential Trump 2.0 policy tantrum

On early Wednesday, US Stock Futures stumbled on a CNN report indicating US President-Elect Trump may be planning to declare a national economic emergency (on national security grounds) to provide legal justification for an imposition of universal additional tariffs on allies and adversaries. The declaration would allow Trump to construct a new tariff program by using the International Economic Emergency Powers Act, which unilaterally authorizes a president to manage imports during a national emergency. The latest report may be contrary to another report by WAPO a few days ago indicating a less hawkish tariffs strategy by Team Trump, in which Trump 2.0 additional tariffs may be applicable only on US merchandise imports, which are deemed to be critical for national security.

Anyway, these tariff reports may be a part of the floating balloon strategy by Team Trump 2.0 to test the market as well as stakeholders’ reactions. The market and also Fed are awaiting official policies from the Trump admin not only for tariffs & trade but also for immigration & deportations, all of which have a direct/indirect impact on price stability/inflation and also the labor market/employment situation of the country.

But there is no doubt that Trump 2.0 will ensure no monopoly of the Fed to influence the market in a monotonous way by talking only about rates/monetary policies. As we have seen during Trump 1.0, Trump 2.0 is again influencing market moves with mere tweets/truths randomly or even unconfirmed reports about tariffs and other policies. But Trump has to officially unveil his bellicose policies from tariffs, immigration, and tax/fiscal policies and implement those policies. Thus, during 2025-29, we should get a vibrant financial market due to Trump’s bellicose comments/policies apart from the Fed’s never-ending jawboning, and in that sense; volatility may be a great opportunity for short-term trading/investing.

Dec’24 FOMC minutes show Fed Hints at Moderating Pace of Rate Cuts.

On Wednesday, Dec’24 FOMC minutes show Fed is quite concerned about Trump's uncertain & bellicose policies, which could fuel inflation, and slow rate cuts going forward. Fed officials expressed concern over the inflationary impacts of President-elect Trump's trade and immigration policies. Without mentioning Trump's name, Fed officials commented in several parts of the document on the impact of future policies, highlighting the risk of a rise in inflation, as the core figure "had not come down as much as expected in 2024 and the effects of trade policy changes could be larger than the staff had assumed.

"The uncertainty surrounding these policies was cited as a factor in reducing the federal funds rate by 25 basis points while signaling a slower pace of cuts in 2025. While inflation has eased from 2022 peaks, Fed officials noted the process is moving slower than anticipated, with core inflation at 2.8% in November.

Almost all Fed officials judged that upside risks to the inflation outlook had increased, due to recent stronger-than-expected readings on inflation and the likely effects of potential changes in trade and immigration policy. Participants projected that inflation would continue moving toward 2% but acknowledged that the process could take longer than previously expected. Several members expressed concerns that the disinflationary process might have temporarily stalled or flagged the risk of further delays.

Also, officials noted that the Fed was at or near the point where it would be appropriate to slow the pace of policy easing. Many participants also suggested that a variety of factors underlined the need for a careful approach to monetary policy decisions over coming quarters.

Relevant texts of Dec’24 FOMC Minutes:

Staff Economic Outlook

“The staff projection at the December meeting was for economic conditions to stay solid. Given the elevated uncertainty regarding specifics about the scope and timing of potential changes to trade, immigration, fiscal, and regulatory policies and their potential effects on the economy, the staff highlighted the difficulty of selecting and assessing the importance of such factors for the baseline projection and featured several alternative scenarios. After incorporating the recent data and preliminary placeholder assumptions about potential policy changes, real GDP growth was projected to be slightly slower than in the previous baseline forecast, and the unemployment rate was expected to be a bit higher but to remain near the staff's estimate of its natural rate.

In the staff's baseline projection, the inflation forecast for 2024 was slightly higher than the one prepared for the previous meeting, reflecting upside surprises in some recent data. Inflation in 2025 was expected to remain at about the same rate as in 2024, as the effects of the staff's placeholder trade policy assumptions held inflation up. Thereafter, inflation was forecast to decline to 2 percent by 2027, the same as in the projection at the November meeting.

The staff continued to view the uncertainty around the baseline projection as within the range seen over the past 20 years, a period that encompassed a number of episodes during which uncertainty about the economy and federal policy changes was elevated. The staff judged that the risks around the baseline forecasts for employment and real GDP growth were balanced, as concerns about downside risks from a marked cooling in labor market conditions had eased in recent months. The risks around the inflation forecast were seen as tilted to the upside, as core inflation had not come down as much as expected in 2024 and the effects of trade policy changes could be larger than the staff had assumed.”

Participants' Views on Current Conditions and the Economic Outlook

“In conjunction with this FOMC meeting, participants submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2024 through 2027 and over the longer run. These projections were based on participants' assessments of appropriate monetary policy, including their projections of the federal funds rate. The longer-run projections represented each participant's assessment of the rate to which each variable would tend to converge under appropriate monetary policy and in the absence of further shocks to the economy. The Summary of Economic Projections was released to the public after the meeting.

In their discussion of inflation developments, participants noted that although inflation had eased substantially from its peak in 2022, it remained somewhat elevated. Participants commented that the overall pace of disinflation had slowed over 2024 and that some recent monthly price readings had been higher than anticipated.

Nevertheless, most remarked that disinflationary progress continued to be apparent across a broad range of core goods and services prices. Notably, some participants observed that in the core goods and market-based core services categories, excluding housing, prices were increasing at rates close to those seen during earlier periods of price stability. Many participants noted that the slowing in these components of inflation corroborated reports received from their business contacts that firms were more reluctant to increase prices, as consumers appeared to be more price-sensitive and were increasingly seeking discounts.

Concerning core services prices, a majority of participants remarked that increases in some components had exceeded expectations over recent months; many noted, however, that the increases were concentrated largely in non-market-based price categories and that price movements in such categories typically have not provided reliable signals about resource pressures or the future trajectory of inflation. Most participants also remarked that increases in housing services prices remained somewhat elevated, though they continued to slow gradually, as the pace of rent increases for new tenants continued to moderate and would eventually be reflected further in housing services prices.

Regarding the inflation outlook, participants expected that inflation would continue to move toward 2 percent, although they noted that recent higher-than-expected readings on inflation, and the effects of potential changes in trade and immigration policy, suggested that the process could take longer than previously anticipated.

Several observed that the disinflationary process may have stalled temporarily or noted the risk that it could. A couple of participants judged that positive sentiment in financial markets and momentum in economic activity could continue to put upward pressure on inflation. All participants judged that uncertainty about the scope, timing, and economic effects of potential changes in policies affecting foreign trade and immigration was elevated. Reflecting that uncertainty, participants took varied approaches in accounting for these effects. Several participants indicated that they incorporated placeholder assumptions to one degree or another into their projections. Other participants indicated that they did not incorporate such assumptions, and a few participants did not indicate whether they incorporated such assumptions.

Several participants remarked that insofar as recent solid increases in real GDP reflected favorable supply developments, the strength of economic activity was unlikely to be a source of upward inflation pressures. Participants cited various factors as being likely to put continuing downward pressure on inflation, including waning business pricing power, the Committee's still-restrictive monetary policy stance, and well-anchored longer-term inflation expectations.

Some participants noted that nominal wage growth had continued to move down. Further, several observed that, with supply and demand in the labor market being roughly in balance and in light of recent productivity gains, labor market conditions were unlikely to be a source of inflationary pressure shortly. However, several remarked that nominal wage growth remained slightly above the pace likely to be consistent over time with 2 percent inflation.

In their evaluation of the risks and uncertainties associated with the economic outlook, the vast majority of participants judged the risks to the attainment of the Committee's dual-mandate objectives of maximum employment and price stability to be roughly in balance. In particular, participants saw two-sided risks to achieving those goals.

Almost all participants judged that upside risks to the inflation outlook had increased. As reasons for this judgment, participants cited recent stronger-than-expected readings on inflation and the likely effects of potential changes in trade and immigration policy. Other reasons mentioned included possible disruptions in global supply chains due to geopolitical developments, a larger-than-anticipated easing in financial conditions, stronger-than-expected household spending, and more persistent shelter price increases.

A few participants remarked that, in the period ahead, it might be difficult to distinguish more persistent influences on inflation from potentially temporary ones, such as those stemming from changes in trade policy that could lead to shifts in the level of prices.

Most participants noted that risks to the achievement of the Committee's maximum-employment goal appeared to be roughly balanced, though some saw risks to the labor market as tilted to the downside. Participants pointed to various risks to economic activity and employment, including downside risks associated with weaker output growth abroad, increased financial vulnerabilities stemming from the overvaluation of risky assets, or an unexpected weakening of the labor market, and upside risks associated with increased optimism and continued strength in domestic spending as upside factors.

In their consideration of monetary policy at this meeting, participants generally noted that inflation had made progress toward the Committee's objective but remained somewhat elevated. Participants also observed that recent indicators suggested that economic activity had continued to expand at a solid pace, labor market conditions had generally eased since earlier in the year, and the unemployment rate had moved up but remained low.

The vast majority of participants viewed it as appropriate to lower the target range for the federal funds rate by 25 basis points to 4¼ to 4½ percent. They assessed that such a further lowering of the target range for the policy rate would help maintain the strength of the economy and the labor market while continuing to enable further progress on inflation. A majority of participants noted that their judgments about this meeting's appropriate policy action had been finely balanced.

Some participants stated that there was merit in keeping the target range for the federal funds rate unchanged. These participants suggested that the risk of persistently elevated inflation had increased in recent months, and several of these participants stressed the need for monetary policy to help foster financial conditions that would be consistent with inflation returning sustainably to 2 percent. Participants judged that it was appropriate to continue the process of reducing the Federal Reserve's securities holdings.

In discussing labor market developments, participants viewed recent readings on a range of indicators as consistent with an ongoing gradual easing in labor market conditions even as the unemployment rate remained low. Participants cited declines in job vacancies, the quits rate, the rate at which the unemployed were obtaining jobs, and turnover as consistent with a gradual easing in labor demand. Participants generally noted, however, that there were no signs of rapid deterioration in labor market conditions, as layoffs remained low. Participants generally judged that current labor market conditions were broadly consistent with the Committee's longer-run goal of maximum employment.

With regard to the outlook for the labor market, participants anticipated that under appropriate monetary policy, conditions in the labor market would likely remain solid. Participants generally noted that labor market indicators merited close monitoring. Several participants observed that the evaluation of underlying trends in labor market developments had continued to be challenging and that assessments of the outlook for the labor market were associated with considerable uncertainty. Some participants noted that the labor market could soften further, as the recent pace of payroll growth had been below the rate that would likely keep the unemployment rate constant, given a stable labor force participation rate.

Participants observed that economic activity had continued to expand at a solid pace and that recent data on economic activity and consumer spending in particular was, on balance, stronger than anticipated. Participants remarked that consumption had been supported by a solid labor market, rising real wages, and elevated household net worth. Several participants cautioned that low- and moderate-income households continued to experience financial strains, which could dampen their spending. A couple of participants cited continued increases in rates of delinquencies on credit card borrowing and automobile loans as signs of such strains.

With regard to the business sector, several participants noted that favorable aggregate supply developments—including increases in labor supply, business investment, and productivity—continued to support a solid expansion of business activity. A majority of participants remarked that the behavior of equity markets reflected positive sentiment on the part of investors.

Many participants also remarked that District contacts generally reported greater optimism about the economic outlook, stemming in part from an expectation of an easing in government regulations and changes in tax policies. In contrast, some participants noted that contacts reported increased uncertainty regarding potential changes in federal government policies. A couple of participants remarked that the agricultural sector continued to face significant strains stemming from low crop prices and high input costs.

In discussing the outlook for monetary policy, participants indicated that the Committee was at or near the point at which it would be appropriate to slow the pace of policy easing. They also indicated that if the data came in about as expected, with inflation continuing to move down sustainably to 2 percent and the economy remaining near maximum employment, it would be appropriate to continue to move gradually toward a more neutral stance of policy over time.

Some participants observed that, with the target range for the federal funds rate having been lowered a total of 100 basis points with this meeting's decision, the policy rate was now significantly closer to its neutral value than when the Committee commenced policy easing in September. In addition, many participants suggested that a variety of factors underlined the need for a careful approach to monetary policy decisions over coming quarters. These factors included recent elevated inflation readings, the continuing strength of spending, reduced downside risks to the outlook for the labor market and economic activity, and increased upside risks to the outlook for inflation.

A substantial majority of participants observed that, at the current juncture, with its policy stance still meaningfully restrictive, the Committee was well positioned to take time to assess the evolving outlook for economic activity and inflation, including the economy's responses to the Committee's earlier policy actions. Participants noted that monetary policy decisions were not on a preset course and were conditional on the evolution of the economy, the economic outlook, and the balance of risks.

In discussing risk-management considerations that could bear on the outlook for monetary policy, the vast majority of participants agreed that risks to achieving the Committee's employment and inflation goals remained roughly in balance. Many participants observed that the current high degree of uncertainty made it appropriate for the Committee to take a gradual approach as it moved toward a neutral policy stance.

Participants noted that although inflation was on course to return sustainably to 2 percent over the next few years and the Committee was determined to restore and maintain price stability, the likelihood that elevated inflation could be more persistent had increased.

Most participants remarked that, with the stance of monetary policy now significantly less restrictive, the Committee could take a careful approach in considering adjustments to the stance of monetary policy. Many participants noted that the Committee could hold the policy rate at a restrictive level, or ease policy more slowly if inflation remained elevated, and several remarked that policy easing could take place more rapidly if labor market conditions deteriorated, economic activity faltered, or inflation returned to 2 percent more quickly than anticipated.”

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 around +3.0% on average, while the unemployment rate remains stable at around 4.0% 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.

Despite a 50 bps projected rate cut in 2025-26, the Fed may cut 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. But the Fed also changes its narrative/goalposts quite frequently and thus its credibility is now at stake. Overall, the Fed now has to bring core inflation (PCE+CPI average) from present levels of 3.0% to 2.0% and unemployment rate from the present average around 4.0% to 3.5% by Dec’27 to declare victory for its dual mandate of minimum price stability and maximum employment.

Market Impact:

Wall Street Futures stumbled late Wednesday on less dovish FOMC minutes and fading hopes of a Fed rate cut in Mar’25. Fed may cut 25 bps each twice in June and Dec’25. Previously Wall Street Futures, Gold surged on softer than expected ADP Private job data.

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

Looking ahead, whatever the fundamental narrative, technically Dow Future (CMP: 42850) now has to sustain over 42300-42600 for any rebound to 43300/43500-43800/44000 and further 44400/44600- 45000/45500 and further 45800/46000-46200/46400 and 46800/47000-47500/48000 in the coming days; otherwise sustaining below 42250, DJ-30 may further fall to 41800/41500-40500/40400 in the coming days.

Similarly, NQ-100 Future (21350) has to sustain over 21200 for a recovery to 21500/21700-21800/22250 and further 22500/22700-23000/23300 in the coming days; otherwise, sustaining below 21150-21000, NQ-100 may further fall to 20800/20650-20450/20250 and 20000/19800-19650/19150 in the coming days.

Technically, SPX-500 (CMP: 5950), now has to sustain over 5900 for any further rally to 6000/6050-6100/6150 and 6200/63990-6350/6500 in the coming days; otherwise, sustaining below 5850, SPX-500 may further fall to 5775 and 5675/5600-5550/5500 in the coming days.

Also, technically Gold (CMP: 2630) has to sustain over 2665-2685 for a recovery to 2700-2725 and further 2735/2750-2775/2795 and 2815 in the coming days; otherwise sustaining below 2650-2640 may again fall to 2605/2600 and 2590/2565 and further fall to 2550/2500-2470/2450 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.