Gold Poised to Outshine Stocks as Fed Flags Inflation, Trade Policy Risks

Fed Cites Policy Concerns for Inflation Outlook

Federal Reserve officials expressed concerns that potential shifts in trade and immigration policies could disrupt the central bank’s efforts to curb inflation, according to minutes from the Federal Open Market Committee’s (FOMC) January 28-29 meeting released on Wednesday. The minutes underscore the Fed’s cautious approach to interest rates, as persistent price pressures and economic uncertainties complicate its inflation strategy.

Trade and Immigration Policies Could Hinder Disinflation

Officials pointed to President Donald Trump’s trade and immigration policies as potential roadblocks to reducing inflation. High tariffs and a crackdown on undocumented immigration, central to Trump’s economic agenda, may fuel higher costs for businesses and consumers. The minutes highlighted that some companies have signaled intentions to pass higher input costs from tariffs onto consumers, risking prolonged inflation above the Fed’s 2% target.

The Fed’s cautious stance on trade policy impacts is notable as Trump has floated additional 25% tariffs on autos, pharmaceuticals, and semiconductors. The economic impact of these tariffs remains uncertain, but traders are wary of increased inflation risks, particularly if businesses amplify price hikes in response.

Fed Holds Rates, Monitors Inflation Trends

At its latest meeting, the Fed opted to keep its benchmark interest rate steady between 4.25% and 4.5%, following three consecutive cuts in 2024. Officials indicated a strong preference for more concrete signs of disinflation before adjusting rates further. Market expectations, as reflected by CME data, show a broad consensus that the Fed will maintain current rates through mid-2025.

Despite mixed inflation signals, with consumer prices rising more than anticipated in January, the Fed appears committed to a measured approach. The committee emphasized the importance of evaluating the evolving outlook for economic activity, labor markets, and price stability before making any policy moves.

Quantitative Tightening in Question as Liquidity Concerns Grow

The minutes also revealed internal discussions about possibly slowing or pausing the Fed’s quantitative tightening (QT) program. Uncertainty surrounding U.S. Treasury debt management amid a borrowing cap has raised concerns about market liquidity. Fed officials acknowledged the challenge of gauging market stability and hinted at the potential for a quicker end to QT if financial conditions warrant it.

The balance sheet runoff has trimmed over $2 trillion from the Fed’s holdings since 2022, but officials remain uncertain about when to halt QT. Atlanta Fed President Raphael Bostic indicated that the central bank might be approaching appropriate reserve levels, suggesting a cautious approach moving forward.

Bearish Tone as Traders Brace for Volatility

The stock market reacted cautiously to the Fed minutes, with U.S. futures dipping on Thursday. Investors are weighing the potential inflationary effects of Trump’s tariff threats and the Fed’s cautious stance on monetary policy. Safe-haven assets like gold and the Japanese yen saw increased demand, while Treasury yields edged lower.

For traders, the Fed’s hesitation on rate cuts and the looming threat of higher tariffs signal a bearish short-term outlook. Persistent inflation risks, potential trade policy shocks, and liquidity concerns could drive volatility in equity and bond markets. Given the uncertain landscape, gold may outperform stocks as investors seek stability. Traders should remain vigilant as the Fed assesses economic data in the months ahead, balancing risk exposure with defensive assets.

More Information in our Economic Calendar.