Gold slips on a hawkish hold by Fed and US-China trade talks

·       Fed may be in wait & watch mode amid Trump tariff uncertainty (on & off) and may cut rates in July/September and December’25 (cumulative 50 bps)

·       Fed has to asses actual tariffs and their potential impact on the US economy; Fed is waiting for tariff clarity including that on China

·       Wall Street Futures gained on progress of US-China formal trade talks and partial relief for AI Chip exports (Nvidia boost)

·       Trump may announce a formal preliminary trade deal/MOU with the UK and India by Thursday/Friday

On Wednesday, May 7, 2025, apart from the ongoing Trump trade & tariff war tantrum, some market focus was on the FOMC meeting, the Fed’s policy decisions, and Chair Powell’s pressers. On Wednesday, as expected, the Fed holds all of its key policy rates unanimously. Fed kept unchanged target range for the Federal Fund's Rate (FFR-interbank rate-SOFR) to 4.38%% % (median of 4.50-4.25%); primary credit rate (repo rate) 4.50%; IOER (reverse repo rate) 4.40%; overnight repurchase (ONRP) agreement rate (ON RP) 4.50% and ONRRP (Overnight Reverse Repurchase Agreement Rate) to 4.25%. The Fed also kept the pace of QT for USTs at 5B/M.

The US Federal Reserve (Fed) holds all key rates for a third consecutive meeting in May 2025. FOMC policymakers adopt a wait & watch approach amid concerns that President Trump’s tariffs could drive up inflation and slow economic growth. Fed noted that uncertainty about the economic outlook has increased further and that the risks of higher unemployment and higher inflation have risen. The central bank can afford to be patient, monitoring incoming data and adopting a wait-and-see approach.

The Fed also said that although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace. During the post-meeting press conference, Fed Chair Powell said that it's too early to determine whether inflation or unemployment will emerge as the greater concern, and the Fed does not need to rush into adjusting interest rates. Powell also pointed out Trump’s July 9 deadline for reciprocal tariffs or trade deals and virtually clarified that the Fed may not rush into rate cuts on June 18 or July 30; the Fed may wait for September 17 to evaluate Trump’s implemented tariffs and their potential impact on inflation and employment. Thus, it may be termed as a hawkish hold by the Fed in May’25.

Full text of Fed’s statement: May 7, 2025

Federal Reserve issues FOMC statement

“Although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook has increased further. The Committee is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen.

In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities, agency debt, and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures, inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Susan M. Collins; Lisa D. Cook; Austan D. Goolsbee; Philip N. Jefferson; Neel Kashkari; Adriana D. Kugler; Alberto G. Musalem; and Christopher J. Waller. Neel Kashkari voted as an alternate member at this meeting.”

Implementation Note issued May 7, 2025: Decisions Regarding Monetary Policy Implementation

“The Federal Reserve has made the following decisions to implement the monetary policy stance announced by the Federal Open Market Committee in its statement on May 7, 2025:

·       The Board of Governors of the Federal Reserve System voted unanimously to maintain the interest rate paid on reserve balances at 4.4 percent, effective May 8, 2025.

As part of its policy decision, the Federal Open Market Committee voted to direct the Open Market Desk at the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account by the following domestic policy directive:

Effective May 8, 2025, the Federal Open Market Committee directs the Desk to:

·       Undertake open market operations as necessary to maintain the federal funds rate in a target range of 4-1/4 to 4‑1/2 percent.

·       Conduct standing overnight repurchase agreement operations with a minimum bid rate of 4.5 percent and with an aggregate operation limit of $500 billion.

·       Conduct standing overnight reverse repurchase agreement operations at an offering rate of 4.25 percent and with a per‑counterparty limit of $160 billion per day.

·       Roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing in each calendar month that exceeds a cap of $5 billion per month. Redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap.

·       Reinvest the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage‑backed securities (MBS) received in each calendar month that exceeds a cap of $35 billion per month into Treasury securities to roughly match the maturity composition of Treasury securities outstanding.

·       Allow modest deviations from stated amounts for reinvestments, if needed for operational reasons.

·       In a related action, the Board of Governors of the Federal Reserve System voted unanimously to approve the establishment of the primary credit rate at the existing level of 4.5 percent.

This information will be updated as appropriate to reflect decisions of the Federal Open Market Committee or the Board of Governors regarding details of the Federal Reserve's operational tools and approach used to implement monetary policy.”

Full text of Fed Chair Powell’s opening statement: May 7, 2025

“My colleagues and I remain squarely focused on achieving our dual mandate goals of maximum employment and stable prices for the benefit of the American people. Despite heightened uncertainty, the economy is still in a solid position. The unemployment rate remains low, and the labor market is at or near maximum employment. Inflation has come down a great deal but has been running somewhat above our 2 percent longer-run objective. In support of our goals, today the Federal Open Market Committee decided to leave our policy interest rate unchanged.

The risks of higher unemployment and higher inflation appear to have risen, and we believe that the current stance of monetary policy leaves us well-positioned to respond in a timely way to potential economic developments. I will have more to say about monetary policy after briefly reviewing economic developments.

Following growth of 2.5 percent last year, GDP was reported to have edged down in the first quarter, reflecting swings in net exports that were likely driven by businesses bringing in imports ahead of potential tariffs. This unusual swing complicated the GDP measurement last quarter. Private domestic final purchases, or PDFP, which excludes net exports, inventory investment, and government spending, grew at a solid 3 percent rate in the first quarter, the same as last year’s pace. Within PDFP, growth of consumer spending moderated while investment in equipment and intangibles rebounded from weakness in the fourth quarter.

Surveys of households and businesses, however, report a sharp decline in sentiment and elevated uncertainty about the economic outlook, largely reflecting trade policy concerns. It remains to be seen how these developments might affect future spending and investment.

In the labor market, conditions have remained solid. Payroll job gains averaged 155 thousand per month over the past three months. The unemployment rate, at 4.2 percent, remains low and has stayed in a narrow range for the past year. Wage growth has continued to moderate while still outpacing inflation. Overall, a wide set of indicators suggests that conditions in the labor market are broadly in balance and consistent with maximum employment. The labor market is not a source of significant inflationary pressures.

Inflation has eased significantly from its highs in mid-2022 but remains somewhat elevated relative to our 2 percent longer-run goal. Total PCE prices rose 2.3 percent over the 12 months ending in March; excluding the volatile food and energy categories, core PCE prices rose 2.6 percent. Near-term measures of inflation expectations have moved up, as reflected in both market- and survey-based measures. Survey respondents, including consumers, businesses, and professional forecasters, point to tariffs as the driving factor. Beyond the next year or so, however, most measures of longer-term expectations remain consistent with our 2 percent inflation goal.

Our monetary policy actions are guided by our dual mandate to promote maximum employment and stable prices for the American people. At today’s meeting, the Committee decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent and to continue reducing the size of our balance sheet.

The new Administration is in the process of implementing substantial policy changes in four distinct areas: trade, immigration, fiscal policy, and regulation. The tariff increases announced so far have been significantly larger than anticipated. All of these policies are still evolving, however, and their effects on the economy remain highly uncertain. As economic conditions evolve, we will continue to determine the appropriate stance of monetary policy based on the incoming data, the outlook, and the balance of risks.

If the large increases in tariffs that have been announced are sustained, they are likely to generate a rise in inflation, a slowdown in economic growth, and an increase in unemployment. The effects on inflation could be short-lived, reflecting a one-time shift in the price level. It is also possible that the inflationary effects could instead be more persistent. Avoiding that outcome will depend on the size of the tariff effects, on how long it takes for them to pass through fully into prices, and, ultimately, on keeping longer-term inflation expectations well anchored.

Our obligation is to keep longer-term inflation expectations well anchored and to prevent a one-time increase in the price level from becoming an ongoing inflation problem. As we act to meet that obligation, we will balance our maximum employment and price-stability mandates, keeping in mind that, without price stability, we cannot achieve the long periods of strong labor market conditions that benefit all Americans.

We may find ourselves in a challenging scenario in which our dual-mandate goals are in tension. If that were to occur, we would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close. For the time being, we are well-positioned to wait for greater clarity before considering any adjustments to our policy stance.

At this meeting, the Committee continued its discussions as part of our five-year review of our monetary policy framework. We focused on inflation dynamics and the implications for our monetary policy strategy. Our review includes outreach and public events involving a wide range of parties, including Fed Listens events around the country and a research conference next week. Throughout this process, we are open to new ideas and critical feedback, and we will take on board lessons from the last five years in determining our findings. We intend to wrap up the review by late summer.

The Fed has been assigned two goals for monetary policy: maximum employment and stable prices. We remain committed to supporting maximum employment, bringing inflation sustainably to our 2 percent goal, and keeping longer-term inflation expectations well anchored. Our success in delivering on these goals matters to all Americans. We understand that our actions affect communities, families, and businesses across the country. Everything we do is in service to our public mission. We at the Fed will do everything we can to achieve our maximum employment and price stability goals.”

Highlights of Fed Chair Powell’s statements/comments in the Q&A: May 7, 2025

·       The big spike in imports to beat tariffs should reverse in 2Q

·       Likely net exports to have a large positive contribution to GDP

·       It will be harder to make a clean assessment of US demand

·       Q1 consumer spending and inventories could be revised up

·       Swings in GDP data won't change things for us

·       The link between sentiment data and spending has been weak

·       This is an outsized change in sentiment, though

·       US debt is on an unsustainable path

·       Last year, when we said we would not welcome further labor market cooling, the unemployment rate had been rising, a very obvious concern about downside risks to the labor market

·       Fortunately, since then, the unemployment rate has been moving sideways

·       I can't say how much of a rise in the unemployment rate is tolerable. We need to look at both unemployment and inflation

·       If we did see significant labor market deterioration, of course, we would look to be able to support that

·       Trade discussions could change the picture materially or not

·       Depending on the way things play out, we could have rate cuts, or hold where we are

·       We will have to see where things play out

·       There are cases in which it would or wouldn't be appropriate to cut this year.

·       My gut tells me that uncertainty is extremely elevated

·       The economy is doing fine

·       Our policy is not highly restrictive

·       Businesses and households are very broadly concerned and are postponing decisions

·       We're watching extremely carefully

·       We don't see much evidence in actual data of a slowdown in the economy

·       We're not seeing a slowdown show up in actual economic data, yet

·       QE wasn’t beyond the confines of our mandate

·       We could've tapered QE earlier or faster in hindsight

·       People are worried, but the shock hasn't hit yet

·       The risks of higher unemployment and higher inflation have risen

·       Import swing complicated GDP data

·       1Q GDP fall reflected an unusual swing in trade

·       It remains to be seen how uncertainty affects future spending and investment.

·       The labor market is broadly in balance.

·       Wage growth has continued to moderate.

·       Consumers and businesses report lower sentiment in surveys

·       The labor market is consistent with maximum employment

·       Near-term inflation expectations have moved up

·       The labor market is not a source of significant inflation pressure

·       Survey respondents point to tariffs as driving inflation expectations

·       Most longer-term measures are consistent with a 2% goal

·       The administration is making substantial policy changes

·       Tariffs so far are significantly bigger than expected

·       If large increases in tariffs, as announced, are sustained, we will see higher inflation and lower employment

·       Fed may find its dual mandate goals in tension

·       Avoiding persistent inflation will depend on the size and timing of tariffs and inflation expectations.

·       If dual mandate goals are in tension, consider the distance from the goal and the time to close gaps.

·       The tariffs’ longer-term impact on inflation isn't clear yet

·       Without price stability, we cannot achieve strong labor conditions

·       We're well-positioned to wait for greater clarity before changing the policy

·       We can't say which way risks will shake out

·       Too early to know

·       Ultimately, we think the policy rate is in a good place

·       We haven't faced the question of two goals in tension in a long time. We have to keep it in our thinking now

·       We haven't faced conflicting goals in a long time

·       There are cases in which rate cuts would be appropriate this year

·       I can't confidently say I know the appropriate rate path

·       Tariffs so far are significantly bigger than expected

·       If large increases in tariffs, as announced, are sustained, we will see higher inflation and lower employment

·       Our policy is modestly restrictive

·       We don't think we need to be in a hurry

·       There is no hurry, we can be patient

·       The underlying inflation picture is good

·       The costs of waiting are fairly low

·       We'll know more as the White House negotiates tariffs with other nations

·       When things develop, we can move as quickly as appropriate

·       If we see higher inflation and higher unemployment, we won't see further progress toward our goals

·       We would see a delay in getting to goals for the next year

·       But we don't know that yet, so much uncertainty over tariffs

·       I don't think we can say which way this will shake out

·       The economy is solid, and our policy is well-positioned to respond

·       We won't make progress on goals this year if tariffs stay

·       We're not in a situation where we can be preemptive

·       We need to see more data

Conclusions:

Fed/Chair Powell is confused about Trump's tariffs trajectory and thus in wait & watch mode till at least June-July to see Trump’s actual tariffs on 18 main US trading partners including China, which accounts for almost 15% of all US merchandise imports into the US and a vital supply chain for the US economy.

Although the Fed generally talks about 2.0% PCE inflation as a price stability target, in reality, it maintains 1.5% core/total PCE inflation and 2.3% core/total CPI inflation; i.e. around 1.9% average inflation (PCE+CPI) targets, US Congress has entrusted along with maximum employment 96.0-95.5% of the labor force; i.e. 4.0-3.5% headline unemployment rate. Fed needs to bring down average core inflation by around 100 bps to reach the target.

To fight a highly probable US stagflation or even recession-like economic situation amid the Trump trade war tantrum, the Fed may first close QT fully by September-December’25 and also resume the rate cut cycle for 50 bps cumulative in 2025. Fed may provide a definitive plan to end the QT in its June-September’25 meeting and close the same by September-December’25 and also cut rates by 25 bps each in September and December’25.

But if the concern of a Trumpcession intensifies further and the employment situation deteriorates meaningfully (unemployment surges over 4.5%), the Fed may also cut another 25 bps in June/Jul’25. At the present run rate and any potential impact of a moderate Trump trade war after H1CY25, the US core inflation may dip towards the 2.0% targets only by mid to late 2026.

Bottom line

Fed may not cut in June’25 amid Trump tariff uncertainty; Fed may act in July or September’25 and December’25, depending upon Trump’s implemented tariffs and overall US economic situation. But in the case of supply shock, followed by demand shock, it remains to be seen whether such Fed rate cuts help Wall Street and Main Street.

Market Impact

On Wednesday, May 7, 2025, Wall Street Futures surged in late trade despite a hawkish hold by the Fed. Wall Street was buoyed by the start of US-China formal trade talks this weekend (May 9) in Geneva (a neutral place), although Trump already threatened he will not cut China tariffs as part & parcel of his epic deal-making skill in bullying tactics, which China may not digest. China may not budge and make a trade deal at Trump’s gunpoint.

But on Wednesday, after the US spot market closed, Wall Street Futures surged on Nvidia boost as Trump may rescind global AI chip curbs. But the overall positive impact was quite brief and limited as it would be targeted, mainly for Saudi Arabia and other ME countries, as a part of Trump’s visit to those countries next week. Also, it would not apply to ‘adversary’ countries like China, Russia, North Korea, and Iran. Gold slips and USD surged on a hawkish hold by the Fed and the progress of US-China formal trade talks; Trump may also announce the 1st trade deal (MOU) with the U.K. and India later today or tomorrow.

Weekly-Technical trading levels: DJ-30, NQ-100, and Gold

Looking ahead, whatever the fundamental narrative, technically Dow Future (CMP: 41400) now has to sustain over 41800 for a further rally towards 42000/42500-43000/43500, and even 44600-45200 in the coming days; otherwise sustaining below 41700, DJ-30 may again fall to 41000/40600-4010039900 and 39700/38600-38000/37700-37300/37000 in the coming days.

Similarly, NQ-100 Future (20200) has to sustain over 20800 for a further rally to 21100/21400-21700/22000 and 22400-22600 in the coming days; otherwise, sustaining below 20750/20600-20500/20400, NQ-100 may again fall to 20000/19600-19400/19200 and 19100/18800-18600/18000-17600/16400 and 16200-15800 in the coming days.

Also, technically Gold (CMP: 3240) has to sustain over 3300 for any recovery to 3325/3375* and 3400/3425-3450/3505*, and even 3525/3555 in the coming days; otherwise sustaining below 3290-3275, Gold may again fall to 3255/3225-3200/3165* and further to 3130/3115*-3075/3015-2990/2975-2960*/2900* and 2800/2750 in the coming days.