The gold market is struggling as the Federal Reserve cuts interest rates following the final monetary policy meeting of 2024 and suggests a slower path in its easing cycle through 2025.
As expected, the U.S. central bank lowered the Fed Funds rate to a range of 4.25% to 4.50%.
The central bank reiterated its stance that the economic outlook remains uncertain and that risks to both sides of its dual mandate are growing.
“Recent indicators suggest that economic activity has continued to expand at a solid pace. Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee’s 2 percent objective but remains somewhat elevated,” the central bank said in its monetary policy statement.
In this environment, the updated Summary of Economic Projections shows the estimates of the Fed Funds rate, also known as the dot plot, moving slightly higher in 2025. The Federal Reserve projects interest rates to fall to 3.9% by the end of the year, suggesting only two rate cuts next year, down from the September estimate of 3.4%.
“The median expectation now points to the Committee delivering just two 25bp cuts in 2025, compared to the 100bp of easing penciled in during the prior ‘dots’ back in September, hinting strongly that the journey back toward a more neutral policy stance will be a slower one next year,” said Michael Brown, Senior Research Analyst at Pepperstone, in a note.
Estimates for 2026 were also revised higher to 3.4%, up from the previous forecast of 2.9%. The U.S. central bank now sees long-term rates around 3%, up slightly from the 2.9% forecasted in September.
The gold market has not responded well to what many analysts were expecting to be a hawkish rate cut. Spot gold last traded at $2,619.90 an ounce, down 1% on the day.
The updated projections show that the central bank remains optimistic about the health of the economy, even as inflation remains stubbornly elevated.
The central bank increased its GDP forecasts, now expecting the economy to expand by 2.1% in 2025, up from the previous estimate of 2.0%. Economic growth is expected to remain steady at 2.0% in 2026, unchanged from September, and by 2027, GDP is projected to grow by 1.9%, down from the prior estimate of 2.0%.
The Federal Reserve also expects the U.S. labor market to remain healthy, with the unemployment rate rising only slightly to 4.3% in 2025, down from the previous estimate of 4.4%. The central bank forecasts the unemployment rate to hold at 4.3% for the next three years.
An interesting surprise in the updated economic outlook is the Federal Reserve’s estimates for inflation.
The central bank expects core PCE inflation to rise to 2.5% in 2025, up from the previous estimate of 2.2%. Core inflation is expected to increase to 2.2% in 2026, up from the prior forecast of 2.0%. Consumer prices are not expected to hit the Fed’s 2.0% target until 2027, unchanged from the previous estimate.
Headline inflation is also expected to be higher this year and next before cooling in 2026. The central bank projects inflation to rise by 2.5% next year, up from the prior estimate of 2.4%. Inflation is forecast to climb to 2.1% in 2026, up from the 2.0% projected in March. Headline inflation is expected to reach 2.0% in 2027, unchanged from the previous projection.
