James Hyerczyk
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Gold futures spiked higher late in the session, Treasury yields fell and the U.S. Dollar plunged against a basket of major currencies after New York Federal Reserve President John Williams solidified a 25-basis point rate cut at the end of July, and may have refueled the argument for a 50-basis point rate cut with a series of dovish comments.

August Comex gold rallied to $1448.30, taking out former tops at $1441.00 and $1442.90 in the process. After trading mostly sideways for nearly a month, patient bullish traders may have finally received the bullish news they had been waiting for to resume it multi-year rally.

The benchmark 10-year U.S. Treasury note reached its highest level since July 8 as rates fell. September U.S. Dollar Index futures broke sharply and are now in a position to turn lower for the week and resume the downtrend on a break through 96.375. The major U.S. equity indexes recovered from early session weakness and are now trading higher for the session in both the cash and futures markets. .

Fed’s Williams Say “Take Swift Action”, “Keep Interest Rates Lower for Longer”

Speaking at the annual meeting of the Central Bank Research Association, New York Federal Reserve President John Williams said central bankers need to act quickly and forcefully when rates are low and economic growth is slowing.

In his speech, the prominent Fed policymaker delivered a speech discussing what should be done when central banks are near the “zero lower bound (ZLB),” or close to as low as rates can go.

“It’s better to take preventative measures than to wait for disaster to unfold,” he said. He further added rather than keep rates elevated to give central banks room to cut in the face of a crisis, the proper move is not to “keep your powder dry.”

“When the ZLB is nowhere in view, one can afford to move slowly and take a ‘wait and see’ approach to gain additional clarity about potentially adverse economic developments. But not when interest rates are in the vicinity of the ZLB,” he said in prepared remarks. “In that case, you want to do the opposite, and vaccinate against further ills. When you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress.”

Williams didn’t actually say he would vote for a rate cut, but the response by stock market investors indicates that his dovish tone means he’s leaning that way. It could also mean to some that the Fed may take the aggressive route and raise rates by a half-a-point.

Currently, the markets are pricing in a 100% chance of a 25-basis point rate cut, and a 38% probability that the Fed might cut by 50-basis points, according to the CME.

Williams finished by saying that when faced with low rates and slowing growth, the best strategy is to “take swift action” and “keep interest rates lower for longer.”

“The expectation of lower interest rates in the future lowers yields on bonds and thereby fosters more favorable financial conditions overall. This will allow the stimulus to pick up steam, support economic growth over the medium term, and allow inflation to rise,” he said.


Supports Case for 50-Basis Point Rate Cut

“Take swift action” and “keep interest rates lower for longer” may mean to some that a 25-basis point rate cut is a done deal, but to others it means “be aggressive”. Therefore, I have to conclude that the chances of a half-a-point rate cut may increase over the near-term, which could be supportive for gold prices.

This will certainly be the main topic of discussion for investors over the next two weeks. Even with pockets of the economy showing improvement like today’s Philly Fed Manufacturing report, the Fed has to decide if it wants to send a message to investors that it has the back of the economy, or play the waiting game with the data until the next meeting in September.

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