The Federal Reserve is likely to raise the federal funds rate by no more than 75 basis points at this week’s FOMC meeting, although markets had expected a 100 basis point hike after last week’s consumer rate. Index (CPI) report, according to Adrian Day, Adrian Day’s head of asset management and portfolio manager at Euro Pacific Gold Fund.
A 100 basis point hike today would not only be unlikely, but also disastrous for markets, Day told David Lane, a Kitco news anchor at the Precious Metals Summit in Beaver Creek.
“I don’t think they need 100 basis points,” Day said. “I think the market is expecting 75 and the Fed is usually very good at telegraphing.”
Day added that there is no chance of a lift below 75 basis points.
“One thing we know for sure,” he said, “if it wasn’t 75, it would be 100. It wouldn’t be 50.”
More importantly, a larger-than-expected rise would “collapse” gold and stock prices.
“I think 75 is baked in, so if you get 75, gold is unlikely to go down and stocks are unlikely to go down further, and I mean go down more on this news. 100 would be different. If they had 100 [basis-point hike] “I think gold is collapsing again,” he said.
Today’s comments come as the headline CPI for August fell slightly on a year-over-year basis to 8.3%. Core CPI, which excludes food and energy, rose to 6.3% from 5.9% in July.
Right after the release of the CPI last week, the FedWatch tool, which tracks rate hike odds by volume, saw the chances of a rate hike increase by 100 basis points to more than 30%. As of 10:30 AM ET on Wednesday, the breakdown stands at 82% for 75 basis points and just 18% for 100 basis points.
The price of gold was unchanged on Wednesday morning ahead of the FOMC decision later in the afternoon.
Stocks are up a bit, with the S&P 500 up 0.5% as of 10:30 AM ET.
US unemployment rose 0.2% last month to 3.7%. Although there was a slight increase during the summer, it was still at historical lows.
Day said the unemployment rate was low in the past at the start of a recession before it rose, so a low unemployment rate is not in itself an indicator of a healthy economy.
“If you take a quick glimpse and look at the unemployment rate, yes, it is very strong [Treasury Secretary] Janet Yellen and [Fed Chair] Jerome Powell will say. I would say two things. Number one, the work engagement rate, until the last report, was very low. The labor force participation rate is declining and it is low, all other things being equal, which makes the unemployment rate low as well. If you look at every recession going back to the 1960s, the unemployment rate was at its lowest point before the recession. A low unemployment rate doesn’t mean we won’t have a low recession.”
On consumer sentiment, Day noted a drop in optimism as the University of Michigan Consumer Sentiment Index continues to decline throughout the summer. It is now below 2008 lows, and is at the lowest level since the data was reported in the 1970s.
While retail sales increased 0.3% last month, Day said this actually indicates a decline in the volume of consumer purchases.
“When retail sales are flat and only slightly up, when prices go up by 10%, that means volume, volume of people, goes down,” he said.
Day said the Fed will keep raising rates in this economic slowdown, but will pause and pivot before causing a “serious recession.”
For more information on today’s long-term gold price forecast and inflation outlook, watch the video above.
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