Why the Dow Jones Hit a Record High Ahead of the Fed Meeting?

Markets are awaiting the highly anticipated meeting of the Fed this Wednesday that is considered the last Fed meeting in 2025, where it's likely for the interest rate to be cut for the third consecutive time this year, reaching 3.75% - 4%. According to CME’s FedWatch tool, interest rate cut probability rose to 87% following the release of key economic data like the slowing labor market and a declining Core PCE Index to 2.8%

Financial markets reacted to these updates, with the Dow Jones Index rising 0.5% last week, closing at its highest weekly level near 48,000. The S&P 500 Index also rose, closing near 6,870, increasing by 0.3%. The Nasdaq also closed at its highest weekly level of 25,700, rising as much as 1%.

The important question is, do these increases reflect market expectations of a rate cut this week? Or are they a prelude to further rallies? Especially as many reports indicate a possible bubble in the market due to AI, while others see it as unlikely.

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How Rate-Cut Expectations Are Shaping Gold, Silver, and the US Dollar?

The optimism for a rate cut lowered the demand for the US dollar by 0.5%. Similarly, gold also fell by 0.5%. However, the continued weakening of the US dollar makes precious metals like gold all the more attractive. That is why gold is currently moving sideways as markets wait for clearer guidance on upcoming monetary policy. However, silver continued its upward trajectory, closing at a new weekly high, rising 3.3% to a record of 58.3 USD per ounce.

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How Powell’s Guidance amid Fed’s Meeting Could Shape the Dollar, Stocks, and Metals

If this week’s Fed meeting plays out as expected, markets are expected to witness volatile times  before it stabilizes back again. Remember the golden rule: Traders have varying beliefs and ways to interpret news; that’s why prices can never move exactly as numbers predict.

Markets expect the following from Fed Chair Jerome Powell’s speech after the meeting:

  • From previous meetings, we expect the Fed Chair to leave options open and leave the final word for future economic data, especially now that October’s labor market and inflation data are still to be released after the long government closure. He will also need to make sure inflation is heading toward the Fed’s target rate of 2%.
  • Analysts expect Powell also to use terminology that paints uncertainty around interest rate projections, which might affect the US dollar positively and stocks, metals and other currencies negatively. On the flip side, if he signals coming interest cuts next year, the US dollar might see some damage, and stocks and metals will see some uptick.

It’s crucial to keep in mind that the US government is pressuring the Fed to cut rates further and faster. The central bank has cut rates by 1 basis point in 2024 to 4.25% - 4.50% and by 0.5 a basis point this past year. You need to take into consideration the following points:

  • The Fed warns that a reckless rate cut might cause inflation to stick.
  • The interest rate needed for inflation to reach the 2% target is still unclear.
  • There are still no clear signs of inflation stabilizing at lower rates.

At last, this Fed’s final meeting is very important for markets, and with the limited number of trading sessions left, we might see some new peaks made.