Gold trading reminder: Powell's "risk management" interest rate cut caused the gold price to "flash crash" nearly 1% from the high of $3,700
2025-09-18 07:05:39
On Wednesday afternoon (September 17th), the Federal Reserve delivered its scheduled 25 basis point interest rate cut, unexpectedly triggering significant volatility in the gold market. Spot gold prices quickly retreated from their intraday record high of $3,707.35, closing down 0.8%, or nearly 1%, at $3,659.79 per ounce. This reversal of momentum stemmed from comments by Federal Reserve Chairman Jerome Powell, which were interpreted by the market as signaling uncertainty and prompting investors to take profits. Gold, a traditional safe-haven asset, has risen 39% year-to-date and over 6% this month. However, Powell's "meeting-by-meeting" approach has bulls questioning whether it's time to exit the market.
The Fed's recent rate cut wasn't a surprise to the market; it was a direct response to a weakening labor market. After three rate cuts through 2024, Fed policy had been stagnant. However, in recent weeks, a series of economic data, including an unexpected decline in US single-family home construction and future building permits in August, have exposed underlying labor market concerns. The glut of unsold new homes, the failure of falling mortgage rates to boost the housing market, coupled with slowing hiring and the potential for layoffs, have alarmed policymakers.
Powell stated bluntly at the press conference, "The labor market is softening, and we don't want it to continue to weaken." He emphasized that employment risks in the short term tend to be downward, and although inflation risks are upward, they are not as severe as before.
The decision was passed overwhelmingly, including with the support of most Fed officials appointed by President Trump, with only new governor Milan dissenting, advocating for a more aggressive 50 basis point rate cut. While isolated, Milan's dissenting voice reflected the divisions within the Fed: doves like Waller and Bowman pushed for a more consistent pace of rate cuts, while moderates like Cook insisted on a gradual approach.
The Fed's "dot plot" forecast shows that the remaining two meetings this year will each cut interest rates by 25 basis points, bringing the policy interest rate range to 4.00%-4.25%. This is more dovish than the expectations in June and implies an easing of stagflation risks.
The latest economic forecast projects a median inflation rate of 3% by year-end, above the 2% target but unchanged from the previous quarter. The unemployment rate is expected to remain stable at 4.5%, and economic growth is expected to edge up from 1.4% to 1.6%. The Federal Reserve has gradually come to accept that the impact of Trump's tariffs on inflation is only temporary, prioritizing mitigating weak growth and rising unemployment. This has created a more favorable environment for non-interest-bearing assets like gold.
Powell's speech triggered the gold price pullback. He characterized the rate cut as a "risk management" measure and reiterated that the Fed would make decisions "meeting by meeting," with no rush to act. While this statement continued the dovish tone, it also injected a hint of uncertainty, giving the market a hint that the Fed might slow the pace of rate cuts.
Independent metal trader Tai Wong accurately captured this subtle change: "The Federal Reserve has released uncertainty signals, triggering some completely understandable profit-taking." In an environment of falling interest rates, the opportunity cost of gold is lower and it is generally more attractive, but Powell's caution has made investors worry about whether the interest rate cut cycle will be as strong as expected.
Gold prices retreated from an intraday high of $3,707.35 to close at $3,659.79. While this month's gain remains over 6%, signs of a correction are emerging. Wong believes this "healthy trend" will help digest previous gains and avoid excessive bubbles. Unless the price falls below the major technical support level of $3,550, the short-term uptrend will remain intact.
The Federal Reserve's FedWatch tool indicates a near-90% probability of a 25 basis point rate cut in October, but Powell's meeting-by-meeting approach has caused the market to fine-tune its expectations for the number of rate cuts for the entire year, from two to a more conservative path. This has not only cooled bullish sentiment for gold but also compounded pressure from the Trump administration: the president has repeatedly called for significant rate cuts, even attempting to fire Governor Cook, but the Fed's gradual response has avoided the risk of a sharp policy shift.
The Fed's rate cuts quickly rippled through the US dollar and Treasury markets, indirectly amplifying pressure on gold. The US dollar index initially dipped on Wednesday before rising, closing at 97.00, up 0.4%. The exchange rate against the euro briefly dipped to a four-year low before reversing course. Powell's speech provided support for the dollar, as the "meet-by-meeting decision" suggested the Fed would not overly ease, alleviating market concerns about a prolonged decline in the dollar.
Blair Shwedo, head of investment-grade sales at Bank of America, noted that risk assets and Treasuries are locking in expectations of two more Federal Reserve rate cuts this year, but the bleak global economic growth narrative (e.g., the Canadian dollar weakened 0.2% after the Bank of Canada's synchronized rate cut) has kept the US dollar relatively strong. Juan Perez, head of trading at Monex USA, added that the US dollar won't necessarily fall completely because "the overall global growth narrative is not positive, and not every other country is performing particularly well."
At the same time, U.S. Treasury yields fluctuated higher, with the 10-year Treasury yield rebounding from its intraday low and rising 6 basis points to 4.091% in late trading, hitting a nearly one-week high, up about 1.5%.
Ellen Hazen, chief market strategist at FLPutnam Investment Management, explained that the Fed's prioritization of the labor market over rising inflation paves the way for easing policy. However, the reversal in yields following Powell's speech reflects the market's weighing of downside risks to employment. The yield curve's spread between two-year and 10-year bonds widened to +52.3 basis points, suggesting stabilizing economic expectations. The break-even yield on 10-year Treasury notes (TIPS) was 2.383%, reflecting market expectations of an average inflation rate of approximately 2.4% over the next 10 years. These developments have raised the opportunity cost of holding gold, prompting investors to lock in profits and driving gold prices back down.
Institutional views are injecting confidence into gold's long-term optimism. Deutsche Bank boldly raised its gold price forecast for next year to $4,000 per ounce, up from $3,700 previously, citing continued support for safe-haven demand from low interest rates and geopolitical uncertainty. KPMG warned that if the Federal Reserve continues its current policy into next year, it could lead to overstimulation. However, Mitsubishi UFJ viewed this decision as its most dovish yet, adding another rate cut to the dot plot while acknowledging that employment is below expectations. However, it did not enter a "rate cut sprint" but rather restarted the process. "Bond King" Gundlach praised the 25 basis point rate cut as a correct decision and saw the greatest opportunity for a lower dollar, which is positive for gold. Fitch further clarified that the Federal Reserve is fully committed to supporting the labor market and will enter a "decisive and aggressive rate cut cycle" in 2025, prioritizing growth and employment, even if higher inflation is tolerated in the short term. Some institutions have stated that the expected soft landing of the economy is beneficial to the credit market and indirectly benefits gold as a hedge.
While optimistic, these voices do raise concerns about short-term risks. While stagflation concerns have eased, if employment data continues to weaken, the Fed may accelerate rate cuts. Conversely, if inflation rebounds, policy leeway will be limited. Gold's 39% annual gain has already absorbed a significant amount of positive news, and a correction or consolidation is part of the digestion process.
While the Federal Reserve's "risk management" rate cuts have triggered a short-term pullback in gold prices, the long-term logic of low interest rates and a job-first policy will inject stronger upward momentum into gold. From profit-taking at the $3,700 high to a potential test of $3,550 support, gold's bull run is far from over. Investors should remain vigilant, monitor signals from the October meeting, and seize risk-averse opportunities amid uncertainty.
On this trading day, investors need to pay attention to the market's further interpretation of the Federal Reserve's interest rate decision, the Bank of England's interest rate decision and changes in the number of initial jobless claims in the United States, and pay attention to the press conference held by US President Trump after his meeting with British Prime Minister Starmer.
(Spot gold daily chart, source: Yihuitong)
At 07:04 Beijing time, spot gold was trading at $3664.23 per ounce.
The Fed's "dovish" signal of rate cuts: employment concerns outweigh inflationary pressures
The Fed's recent rate cut wasn't a surprise to the market; it was a direct response to a weakening labor market. After three rate cuts through 2024, Fed policy had been stagnant. However, in recent weeks, a series of economic data, including an unexpected decline in US single-family home construction and future building permits in August, have exposed underlying labor market concerns. The glut of unsold new homes, the failure of falling mortgage rates to boost the housing market, coupled with slowing hiring and the potential for layoffs, have alarmed policymakers.
Powell stated bluntly at the press conference, "The labor market is softening, and we don't want it to continue to weaken." He emphasized that employment risks in the short term tend to be downward, and although inflation risks are upward, they are not as severe as before.
The decision was passed overwhelmingly, including with the support of most Fed officials appointed by President Trump, with only new governor Milan dissenting, advocating for a more aggressive 50 basis point rate cut. While isolated, Milan's dissenting voice reflected the divisions within the Fed: doves like Waller and Bowman pushed for a more consistent pace of rate cuts, while moderates like Cook insisted on a gradual approach.
The Fed's "dot plot" forecast shows that the remaining two meetings this year will each cut interest rates by 25 basis points, bringing the policy interest rate range to 4.00%-4.25%. This is more dovish than the expectations in June and implies an easing of stagflation risks.
The latest economic forecast projects a median inflation rate of 3% by year-end, above the 2% target but unchanged from the previous quarter. The unemployment rate is expected to remain stable at 4.5%, and economic growth is expected to edge up from 1.4% to 1.6%. The Federal Reserve has gradually come to accept that the impact of Trump's tariffs on inflation is only temporary, prioritizing mitigating weak growth and rising unemployment. This has created a more favorable environment for non-interest-bearing assets like gold.
The "double-edged sword" effect of Powell's speech: uncertainty triggers profit-taking in gold
Powell's speech triggered the gold price pullback. He characterized the rate cut as a "risk management" measure and reiterated that the Fed would make decisions "meeting by meeting," with no rush to act. While this statement continued the dovish tone, it also injected a hint of uncertainty, giving the market a hint that the Fed might slow the pace of rate cuts.
Independent metal trader Tai Wong accurately captured this subtle change: "The Federal Reserve has released uncertainty signals, triggering some completely understandable profit-taking." In an environment of falling interest rates, the opportunity cost of gold is lower and it is generally more attractive, but Powell's caution has made investors worry about whether the interest rate cut cycle will be as strong as expected.
Gold prices retreated from an intraday high of $3,707.35 to close at $3,659.79. While this month's gain remains over 6%, signs of a correction are emerging. Wong believes this "healthy trend" will help digest previous gains and avoid excessive bubbles. Unless the price falls below the major technical support level of $3,550, the short-term uptrend will remain intact.
The Federal Reserve's FedWatch tool indicates a near-90% probability of a 25 basis point rate cut in October, but Powell's meeting-by-meeting approach has caused the market to fine-tune its expectations for the number of rate cuts for the entire year, from two to a more conservative path. This has not only cooled bullish sentiment for gold but also compounded pressure from the Trump administration: the president has repeatedly called for significant rate cuts, even attempting to fire Governor Cook, but the Fed's gradual response has avoided the risk of a sharp policy shift.
The chain reaction between the US dollar and the Treasury market: the macro driver supporting the gold pullback
The Fed's rate cuts quickly rippled through the US dollar and Treasury markets, indirectly amplifying pressure on gold. The US dollar index initially dipped on Wednesday before rising, closing at 97.00, up 0.4%. The exchange rate against the euro briefly dipped to a four-year low before reversing course. Powell's speech provided support for the dollar, as the "meet-by-meeting decision" suggested the Fed would not overly ease, alleviating market concerns about a prolonged decline in the dollar.
Blair Shwedo, head of investment-grade sales at Bank of America, noted that risk assets and Treasuries are locking in expectations of two more Federal Reserve rate cuts this year, but the bleak global economic growth narrative (e.g., the Canadian dollar weakened 0.2% after the Bank of Canada's synchronized rate cut) has kept the US dollar relatively strong. Juan Perez, head of trading at Monex USA, added that the US dollar won't necessarily fall completely because "the overall global growth narrative is not positive, and not every other country is performing particularly well."
At the same time, U.S. Treasury yields fluctuated higher, with the 10-year Treasury yield rebounding from its intraday low and rising 6 basis points to 4.091% in late trading, hitting a nearly one-week high, up about 1.5%.
Ellen Hazen, chief market strategist at FLPutnam Investment Management, explained that the Fed's prioritization of the labor market over rising inflation paves the way for easing policy. However, the reversal in yields following Powell's speech reflects the market's weighing of downside risks to employment. The yield curve's spread between two-year and 10-year bonds widened to +52.3 basis points, suggesting stabilizing economic expectations. The break-even yield on 10-year Treasury notes (TIPS) was 2.383%, reflecting market expectations of an average inflation rate of approximately 2.4% over the next 10 years. These developments have raised the opportunity cost of holding gold, prompting investors to lock in profits and driving gold prices back down.
Expert forecasts and institutional views: Gold's target of $4,000 is still within reach, but be wary of short-term consolidation
Institutional views are injecting confidence into gold's long-term optimism. Deutsche Bank boldly raised its gold price forecast for next year to $4,000 per ounce, up from $3,700 previously, citing continued support for safe-haven demand from low interest rates and geopolitical uncertainty. KPMG warned that if the Federal Reserve continues its current policy into next year, it could lead to overstimulation. However, Mitsubishi UFJ viewed this decision as its most dovish yet, adding another rate cut to the dot plot while acknowledging that employment is below expectations. However, it did not enter a "rate cut sprint" but rather restarted the process. "Bond King" Gundlach praised the 25 basis point rate cut as a correct decision and saw the greatest opportunity for a lower dollar, which is positive for gold. Fitch further clarified that the Federal Reserve is fully committed to supporting the labor market and will enter a "decisive and aggressive rate cut cycle" in 2025, prioritizing growth and employment, even if higher inflation is tolerated in the short term. Some institutions have stated that the expected soft landing of the economy is beneficial to the credit market and indirectly benefits gold as a hedge.
While optimistic, these voices do raise concerns about short-term risks. While stagflation concerns have eased, if employment data continues to weaken, the Fed may accelerate rate cuts. Conversely, if inflation rebounds, policy leeway will be limited. Gold's 39% annual gain has already absorbed a significant amount of positive news, and a correction or consolidation is part of the digestion process.
While the Federal Reserve's "risk management" rate cuts have triggered a short-term pullback in gold prices, the long-term logic of low interest rates and a job-first policy will inject stronger upward momentum into gold. From profit-taking at the $3,700 high to a potential test of $3,550 support, gold's bull run is far from over. Investors should remain vigilant, monitor signals from the October meeting, and seize risk-averse opportunities amid uncertainty.
On this trading day, investors need to pay attention to the market's further interpretation of the Federal Reserve's interest rate decision, the Bank of England's interest rate decision and changes in the number of initial jobless claims in the United States, and pay attention to the press conference held by US President Trump after his meeting with British Prime Minister Starmer.
(Spot gold daily chart, source: Yihuitong)
At 07:04 Beijing time, spot gold was trading at $3664.23 per ounce.
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