Gold prices went up after the Federal Reserve decided to lower interest rates to 3.50%-3.75%. At first, gold prices dropped, but then they recovered as traders saw the Fed’s approach as supportive. The planned rate cut fits the Federal Open Market Committee’s (FOMC) careful outlook, which only predicts one more rate cut in 2026. The vote on the rate cut within the FOMC was divided, with a 9-3 split. Governor Miran supported a 50 basis point cut, while Jeffrey Schmid and Austan Goolsbee wanted to keep rates steady. The Summary of Economic Projections (SEP) suggests that fed funds rates might drop to around 3.4% next year, with a possible 25 basis point cut expected. The Federal Reserve noted a slowdown in job growth and a small increase in unemployment through September. Inflation is still above the Fed’s 2% target, which affects their rate decisions. Policymakers see long-term neutral rates at about 3% after 2028, showing a cautious approach to the economy. The Federal Reserve, which shapes US monetary policy, adjusts interest rates to promote price stability and full employment. They meet eight times a year to evaluate economic conditions and decide on policy. In times of financial crisis, they may use Quantitative Easing to boost credit flow, unlike Quantitative Tightening, which helps strengthen the US Dollar. The rate cut to 3.50%-3.75% is a key factor, but the Fed’s guidance about only one more cut next year signals caution. This dovish stance may weaken the US Dollar and benefit non-yielding assets like gold. However, the 9-3 vote adds uncertainty, indicating we should brace for ongoing market fluctuations in the weeks ahead. With gold surpassing $4,200, we might consider taking long positions with call options to capture potential gains. This situation is similar to late 2023 when expectations of a Fed shift led gold prices to reach previous highs. Given the volatility, using defined-risk option spreads may be smarter than holding futures outright. This dovish approach should also weaken the US Dollar Index (DXY). According to the CME FedWatch Tool, the market anticipates at least two rate cuts by the end of 2026, which is more aggressive than the Fed’s forecast. This difference could lead to further dollar weakness, making short positions on the dollar more appealing. The Fed highlighted that “downside risks to employment rose,” which matches the latest economic reports. The most recent data shows the unemployment rate has risen to 4.3%, the highest level in over two years, confirming a cooling labor market. This economic slowdown supports the argument for lower rates and a positive sentiment for equities, but we should stay vigilant.

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