Metals soar as market prices in chance of 50-bps cut

The upcoming week just got a lot more interesting. The FOMC meeting on Sept. 18 will decide the size of this month’s expected interest rate cut, and after Thursday’s U.S. Producers Price Index print, there’s now a looming question of what the sizing will be.

Gold and silver were propelled to new highs Thursday after traders speculated on the Federal Reserve’s seemingly caught-in-the-middle position — where the labor market is cooling, but inflationary pressures persist.

Prior to the PPI print, traders were pricing in about an 85% chance of a 25-basis-point cut compared to only a 15% chance of a more considerable 50-basis-point reduction.

By Thursday's end, the CME Fedwatch tool shows the odds are nearly evenly split between the two possibilities, with a slight 55% edge remaining with the smaller cut sizing.

Precious metals followed the fixed-income market as it scrambled to find the new baseline, propelling gold to an all-time high of $2,570 an ounce and silver past the $30 an ounce mark.

50-basis-point cut possible

Amanda Lynam, head of macro credit research at Blackrock, told Bloomberg early Friday she isn’t ruling out the Federal Reserve cutting the target interest rate by 50 basis points.

“I think the important thing we’ve emphasized, though, is the depth and the drivers of this rate-cutting cycle really matters for corporate credit sentiment,” she said. “If there is a start to the cycle that begins with a 50-basis-point cut, I think the messaging needs to very crisp around what the neutral rate is and why we’re starting with a nontraditional magnitude of cuts.”

Twenty-five basis points has long been considered the prototypical way to begin an interest rate-cutting cycle, and Lynam expressed concern that a higher reduction could frighten the markets.

“I think the market could interpret (a 50-basis-point cut) as though they are responding to some type of growth downside,” she said.

Lynam anticipates the Fed’s target rate to be 3.25% to 3.5% next year, down from its current level of 5.25% to 5.50%.