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Could This Week’s Fed Meeting Boost Gold and Bonds?

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  • The Fed is meeting today and tomorrow. Its policies impact assets such as equities, Treasuries, and gold.
  • Donald Trump is a vocal critic of the Fed and its chairman, Jerome Powell. While the Fed has been lowering rates, Trump wants it to cut rates more aggressively.

The Fed is scheduled to meet this week. It lowered rates by 25 basis points both in July and September, and traders think the central bank could lower rates by another 25 basis points this month. The Fed’s last two rate cuts have failed to stimulate markets. With the S&P 500 (SPY) at record highs, could the Fed play spoilsport at this week’s meeting?

Additionally, while the Fed has been cutting rates, its comments on future rate hikes have spooked markets. For instance, after the Fed’s July meeting, Powell called that month’s rate cut “a mid-cycle adjustment to policy.” He added that it was not “the beginning of a lengthy cutting cycle.”

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Jerome Powell

Trump has criticized Powell on multiple occasions, going as far as calling him an “enemy.” Trump sees the Fed’s tightening as contrary to his growth agenda and blames the Fed for slowing the US economy. However, many observers blame Trump’s trade war with China for the slowdown.

What to watch for at the Fed meeting

Whereas markets expect another 25-basis point rate cut this week, Goldman Sachs thinks it could be this cycle’s last rate cut. However, I don’t think the Fed will signal an end to rate cuts at its upcoming meeting. US economic growth is slowing and trade tensions are far from subsiding. The Fed could wait and watch economic data before reversing course on easing.

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Impact on assets: Gold and Treasuries

The Fed’s meeting and policy decisions impact equities, Treasuries, and gold. Gold prices have been strong this year amid the rate cuts, and Treasury yields have whipsawed from inversion to uninversion. Meanwhile, the iShares 20+ Year Treasury Bond ETF (TLT), iShares 7-10 Year Treasury Bond ETF (IEF), and iShares Core US Treasury Bond ETF (GOVT) have risen 14.4%, 7.9%, and 6.3% year-to-date, respectively. The SPDR Gold Trust (GLD) has risen by almost 16%.

Fed meeting: A surprise in the cards?

If the Fed sounds more amenable to future rate cuts at its meeting, gold prices could rise. Gold prices are a negatively correlated with interest rates. Similarly, Treasury ETFs could rise if the Fed is dovish on future rate hikes. The Fed surprised markets by winding down its rate hikes earlier this year. Could we be in for another surprise?

The Fed’s meeting and PMI data releases should make this week interesting. Dow Jones heavyweight Apple is also set to release its earnings this week. To learn more, read Dow Jones Index: Watch the Earnings, Fed, and PMI.

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