In late August, Federal Reserve Chair Jerome Powell made a forceful statement at the Jackson Hole global central banking conference: "The time for policy adjustments has arrived." This remark led to widespread speculation that the Federal Reserve might begin cutting interest rates in September. As the cornerstone of global asset pricing, a shift in the Federal Reserve's policy rate will undoubtedly have profound effects on global capital flows and the performance of major asset classes.

Recent U.S. nonfarm payroll data has been revised downward consecutively, showing that the number of new jobs created was below expectations. Data for June and July were significantly downgraded, with the unemployment rate falling to 4.2%. Market speculation about the extent of the Federal Reserve's rate cut continues, leading to fluctuations in U.S. Treasury yields and the dollar index. Analysts believe that despite a weak labor market, attention must still be paid to future CPI data and economic trends.

Currently, futures market pricing shows a 66% probability of a 25 basis point rate cut on September 18 and a 34% probability of a 50 basis point cut. Analysts suggest that if CPI data meets expectations, it will reinforce the expectation of a 25 basis point cut, while any cooler-than-expected data will increase investors' bets on a 50 basis point cut.

Stephen Stanley, Chief U.S. Economist at Santander Bank, commented: “The employment report was weak but not disastrous. On Friday, Williams and Waller did not provide clear guidance on whether a 25 basis point cut (instead of 50 basis points on September 18) was imminent, but their relatively mild assessment of the economy strongly suggests that a 25 basis point cut is reasonable.”

Market Reactions

The Federal Reserve's rate cut decision has significant varying impacts on different asset classes. Assets with strong monetary properties, like gold, are directly affected, while the impact on industrial commodities and the stock market is relatively milder.

In the second half of 2024, with pressures from slowing U.S. consumer growth and declining residential investment, the U.S. economic growth is expected to remain weak. However, current economic data does not clearly indicate a recession. If the U.S. labor and housing markets manage to recover in an orderly manner, there is a higher likelihood that the Federal Reserve will implement a preemptive rate cut in September. In this context, international commodity prices are expected to be dragged down in the short term due to a weakening U.S. economy, but they are likely to stabilize and recover as the economy gradually improves.

Outlook for the Gold Market

Examining the relationship between rate cuts and gold prices, in the past nine rate-cut cycles, international gold prices rose five times and fell four times. However, considering that crisis-driven rate cuts since the 21st century have often been used in conjunction with quantitative easing (QE) policies, and that there is a time lag in the introduction of different easing policies, incorporating the entire easing cycle significantly increases the probability and magnitude of gold price increases.

Currently, the market broadly expects the Federal Reserve to cut rates by 25 basis points at the September FOMC meeting, so the impact on gold prices may be limited. However, if the rate cut exceeds 25 basis points, it could provide short-term support for gold prices due to the difference between expectations and reality. As for the post-first-rate-cut gold price trend, it will depend on the U.S. economic fundamentals and the Federal Reserve's subsequent policy actions. If the economy achieves a “soft landing” as expected after the rate cut, it might be relatively unfavorable for gold prices. Conversely, if the rate cut fails to prevent an economic “hard landing,” the Federal Reserve might increase the rate cut size to boost market confidence. In this case, a larger, prolonged, and faster rate cut cycle will benefit gold prices more.

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