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Gold & Silver Prices Fall on FED Rate Cut Announcement

The Fed FOMC cut rates today by 0.25% reducing the Fed Funds Rate to 1.75% - 2%. immediately on the announcement gold and silver prices fell and so too did US stock markets though the latter recovered towards the end of trading.

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Well, before this afternoon the Fed Funds rate stood at 2% - 2.25% and the FOMC have just announced that the rate is being cut by 25 bps to a rate of 1.75% - 2%, citing business investment has “weakened” since the Fed’s last policy setting meeting in July, when it cut rates for the first time since 2008.

It added that whilst consumer spending is positive, US exports have weakened and the International trade uncertainty (aka tariff war) has caused businesses to reluctantly increase capital investment.

The FED was slightly split today in that St. Louis Fed President James Bullard voted for a 50-basis point cut but Kansas City Fed President Esther George and Boston Fed President Eric Rosengren voted for no change to the benchmark interest rate today.

It is also reported that 7 members of the FOMCs 17 participants see at least one additional cut in 2019 by some 25bps – and if this happens it will either be at its October 30th meeting or its December 11th meeting.

The FED also issued new economic projections and actually lowered expectations for where rates are headed. The FED appears confident that 2019 will see GDP growth or around 2.2% - slightly higher than Junes estimate of 2.1% and during the Press Conference after the announcement, Jerome Powell also indicated that 2020 should see similar growth to 2019 of at least 2%.

What was interesting to us, especially during the Press Conference was Powell’s repeated assertion that the FED’s objective is to achieve and sustain maximum employment and ensure stable prices.

He emphasised that the FED were concerned about geopolitical issues, slowing global growth trade policy uncertainty and the aftermath of Brexit. He also expressed concern that manufacturing was weaker and was watching closely the high level of Business sector debt relative to GDP.

On the positive front he cited that the US Economy was fundamentally strong, with positive jobs growth and growing consumer spending and inflation though currently lower than the planned 2% target, potentially slightly exceeding this in 2020.

The FED also reduced the interest it pays on Bank reserves, - the funds banks place with the FED on overnight deposit, by 30 basis points as opposed to 25 basis points – theoretically to encourage banks to lend more to customers.

The overall impression was that the US economy was in relatively good health, and although rates may come down by 25 bps if not in 2019 then it will in 2020 the outlook was so positive that they would not even consider negative interest rates but would adopt some QE type programme i.e. large scale asset purchases and forward guidance measures if necessary first – but they felt that this would be most unlikely to happen.

US markets were initially somewhat disappointed by the 0.25% cut, as just prior to the decision, the Dow stood at 27049 down 61 on the day and immediately after the announcement fell to 26958 down 152 points and at one stage fell further down by some 187 points,

Gold and silver were also unimpressed initially as gold fell from $1508 immediately to $1497 and silver from $17.91 to $17.69. That said, at the time of writing and the markets haven’t closed yet, the Dow is actually up some 36 points and gold stands at $1493 and silver at $17.72

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