Gold traders could be in for some disappointment this week as it is unlikely the Federal Reserve will cut interest rates aggressively, according to one chief economist.
Ahead of Wednesday’s monetary policy decision, market expectations remain relatively high for a 50-basis-point cut, with the CME FedWatch Tool pricing in a 27% chance. However, Bluford Putnam, managing director and chief economist of CME Group, said that investors should be careful when looking at the bond market’s aggressive forecast for rate cuts.
Putnam said growing global demand for positive bond yields could be skewing market expectations for significant monetary policy easing. He explained that the U.S. 10-year note, currently offering a yield of 2.05%, is better than the negative returns in European and Japanese bonds.
“Negative yields in Europe and Japan are magnets affecting U.S. bonds, pulling them lower,” he said. “If you buy into this argument, then you might not want to listen to the bond market all that much.”
Looking outside the bond market, Putnam said that the economic data themselves do not justify a rate cut this week. His comments came before Friday’s gross domestic product report, which showed that the U.S. economy expanded by 2.1% in the second quarter, beating economist expectations.
Weighing the two factors together, Putnam said he expects that the Federal Reserve will likely cut interest rates by 25 basis points and signal another cut in October or December. Outside of this week, markets are pricing in at least three rate cuts by December.
With the Fed expected to act less aggressively than markets are pricing in, Putnam said that gold could have peaked for the year. He added that in this environment he wouldn’t be a gold buyer.
“If we don’t get those really aggressive rate cuts, it’s difficult to see gold going higher,” he said. “If we get four rate cuts this year, then you are going to love gold, but if we get a cut in July and then maybe one more by the end of the year, then gold’s probably had its best run.”