Fed and QT projections in the spotlight of financial markets. Will the change in real rates affect record gold prices?

Today at 19 p.m. we will learn the decision FOMC on interest rates in the US along with the latest macroeconomic projections, and at 19:30 p.m. the press conference of Committee Chairman Jerome Powell will begin.

The Fed will not change rates, but how will the projections change?

Fed should not change interest rates today, which does not mean that today's meeting will be boring. First of all, the market will want to know the latest macroeconomic projections, which will include potential future paths for US GDP, the unemployment rate, inflation and, ultimately, as a result of all these factors, projections for interest rates.

A lot has changed since December. The U.S. unemployment rate rose to 3,9%, the highest level since October 2023 and earlier than January 2022. Meanwhile, a broad measure of the unemployment rate, the U-6 rate, rose to 7,3% in February, the highest unemployment rate from December 2021

Additionally, inflation in the US is not falling as quickly as previously expected. The readings for January and February showed that the price growth rate may be decreasing slower than expected, and in addition, crude oil prices and gasoline contracts in the US have increased significantly since December. These are threat factors for further disinflation.

Will the worst mix in the FOMC projections materialize?

The worst possible mix in the projections would be for the FOMC to raise projections for the unemployment rate and for inflation. In such a case, a stalemate occurs regarding interest rates. On the one hand, the Fed must keep unemployment low, which would be helped by low rates, but on the other hand, it must keep inflation low, which in this case would be helped by higher rates. What would the Fed then choose as more important?

However, decision-makers can always say that inflation will not return, that the current increase in commodity prices is temporary, etc. and then they will adjust their policies to unemployment and economic growth forecasts. In recent projections, we have seen that for 2024, the FOMC sees the Fed effective rate at 4,6% and in 2025 at 3,6%.

Real rates are equally important. Impact on the price of gold

In addition to the level of nominal rates, what the Fed sees as real rates, in the form of the difference between the Fed rate and inflation, will also be important. According to December forecasts, there will be inflation in 2024 PCE it was to be 2,4%, and in 2025 2,1%. This gives real rates of 2,2% in 2024 and 1,5% in 2025.

The change in real rates may be important for the stock market, but also for the gold price. Over the last two decades, there has been no situation where the price of gold did not rise when real interest rates fell. The faster the fall in real rates, the theoretically more favorable the situation for the gold price; the slower it is, the less. However, recent history has yet to see a fall in real rates and a fall in gold prices.

What's next for QT?

That's why today's forecasts may be so important for many asset classes, but the market will also be waiting for comments on QT, i.e. the reduction of the balance sheet total of the US Federal Reserve. Currently, the Fed is conducting a QT of 95 billion per month. There is a lot of talk that when reverse repo goes to zero, the Fed will change its balance sheet reduction policy to alleviate the liquidity shock in the financial sector. Therefore, the first steps or announcements may take place earlier.

There is still over USD 400 billion on reverse repo, and the pace of reduction has slowed down. If the Fed announces a QT reduction today, e.g. from June, it may mean an attempt to provide a soft landing for the markets in the second half of the year. These will probably be topics worth paying special attention to today.