Gold prices rose above $4,300 per ounce after the Federal Reserve cut rates by 25 basis points. Fed Chairman Powell mentioned that more easing might be on the way due to issues in the labor market and tariffs. Although the rate cut was expected, not all Fed members agreed on the decision.

Debate Over Rate Cuts

Two regional Fed presidents were against the rate cut, while Governor Miran called for a larger cut of 50 basis points. Powell pointed out that labor market conditions are deteriorating, which could lead to further cuts. He also claimed that tariffs are a temporary factor driving inflation higher. Even though inflation expectations remain stable, there are signs that the Fed could pause rate cuts in January. Future cuts may still happen, particularly after Powell’s successor takes office in May. Trump’s economic advisor, Hassett, who supports aggressive rate cuts, is a strong candidate for the Fed chair position. The 25 basis point cut has boosted gold prices, and Powell’s hints about more easing will likely maintain this support. A similar situation occurred in 2019, when initial cuts indicated a shift towards a more dovish stance, benefiting non-yielding assets. Derivative traders should consider buying long gold futures or call options on gold ETFs to take advantage of this trend. While the future appears positive for gold, Powell’s suggestion of a possible pause in January creates some short-term uncertainty. The upcoming leadership change at the Fed in May, reminiscent of when Powell replaced Yellen in 2018, could also lead to market volatility. Therefore, buying VIX call options or using other volatility products might be a wise strategy in the first quarter of 2026.

Equity Market Impact

The outlook for equities is more complicated. While lower rates can help, worries about a weaker labor market loom. The November jobs report showed only a modest increase of 95,000 payrolls, supporting Powell’s cautious outlook and potentially limiting major market gains. Traders may prefer rate-sensitive sectors through options but should tread carefully with cyclical stocks linked to economic strength. The Fed’s dovish stance suggests a weaker US dollar compared to other major currencies. The market is responding, with CME’s FedWatch tool indicating nearly a 70% chance of another rate cut by the March meeting. This environment encourages short positions on the dollar index or bullish strategies on pairs like EUR/USD using futures and options. Powell’s explanation for the recent 3.8% CPI reading, attributing it to tariffs, gives the Fed room to overlook inflation and prioritize the labor market. This strengthens expectations for lower yields going forward, making long positions in Treasury futures a smart choice. However, with dissent within the Fed, traders should keep a close eye on upcoming inflation data for any surprises. Create your live VT Markets account and start trading now.

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