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market analysis
The war eases, the Fed returns to the C position, and the gold narrative restarts
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Hello everyone, today XM Forex will bring you "[XM Foreign Exchange Decision Analysis]: The war has eased, the Fed's C position has returned, and the gold narrative has restarted." Hope this helps you! The original content is as follows:
With the geopolitical conflict in the Middle East expected to subside and the AI investment boom intertwined with economic uncertainty, the Federal Reserve's policy trends have once again become the core anchor for global investors.
The logic of its interest rate decision-making, its indirect impact on the AI industry, and the asset allocation ideas derived from it, together constitute the core trading framework of the current market.
Federal Reserve Interest Rate Policy: Delaying easing while waiting and watching, definitely not turning to tightening
Faced with the surge in energy prices caused by the situation in the Strait of Hormuz (Brent crude oil has increased by 55% since March, approaching US$113 per barrel), the Federal Reserve has clearly sent a policy signal of "mainly waiting and watching, delaying interest rate cuts."
Federal Reserve Chairman Powell emphasized on Monday that the current policy is "in an appropriate state" and inflation expectations "remain well anchored." The central bank usually downplays supply-side shocks such as soaring oil prices. After all, there is a time lag in the transmission of monetary policy. By the time the tightening effect is apparent, energy shocks have often subsided, which may cause unnecessary suppression of the economy.
New York Federal Reserve Bank President John Williams also added that policy is "well prepared" to deal with the short-term inflationary pressure and economic suppression risks brought about by rising energy prices.
This stance means that the Fed's easing tendency has not been reversed, but has only been delayed due to geopolitical risks. Market expectations have shifted from the previous possibility of an interest rate hike in December to an interest rate cut of about 3 basis points at the last meeting in 2026;
Although the timing of the rate cut has been significantly delayed, there is still room for a 50 basis point rate cut by the end of the year.
CoreThe reason is that the current macro environment is significantly different from that in 2022: economic growth is slowing, the labor market is weakening, policy interest rates are close to neutral levels, and high inflation is more due to supply shocks rather than overheating demand. Simple increases in energy prices may instead suppress consumption, ultimately pushing the Federal Reserve to continue easing.
However, it is worth noting that the Federal Reserve’s interest rate regulation is facing the challenge of the failure of traditional signals. Former Federal Reserve official Peter R. Fisher pointed out that the effectiveness of the Phillips Curve has declined significantly, the reference value of the unemployment rate is no longer what it used to be, and income and wealth inequality have greatly reduced the effectiveness of interest rate tools in regulating inflation - 60% of consumption is concentrated in the top 20% of high-income groups who are not subject to credit costs, which means that raising interest rates has a very limited inhibitory effect on overall demand and a very limited degree of control over inflation.
In addition, the market signaling function of long-term interest rates has also been distorted by the quantitative easing policy (the Fed's previous expansion of its balance sheet to purchase bonds resulted in long-term Treasury bond yields being lower than the actual situation). In the future, the Fed needs to gradually withdraw its intervention in long-term interest rates without causing market turmoil, which further limits the flexibility of its policy adjustments (that is, the Fed does not dare to progress too fast in shrinking its balance sheet, for fear that the bond market will push up long-term interest rates due to fewer buyers and trigger a collapse of the equity market).
The Federal Reserve’s attitude toward AI: limited macro impact, wary of market imbalance risks
The Federal Reserve has not directly issued special policies for the AI industry, but judging from its monetary policy logic and market observations, AI is currently not a core consideration in interest rate decisions, and the industry’s own imbalance risks have entered the vision of regulators and policymakers.
The Bank of America report clearly points out that AI’s impact on the macroeconomy is gradual. Although it can contribute about 0.4 percentage points to U.S. GDP growth in the short term, its impact on monetary policy is still relatively limited xmaccount.compared to factors such as the labor market, fiscal policy, and energy prices.
The inflationary effect of AI is currently relatively weak, mainly reflected in the increase in energy demand brought about by the construction of data centers and the wealth effect generated by the rise in the stock market, but these pressures have not yet reached the level of forcing the Federal Reserve to adjust its policy stance.
However, relevant people from the Federal Reserve and market experts have warned about the imbalance of investment in the AI industry.
Former SEC Chairman Gary Gensler emphasized that AI infrastructure capital expenditures have reached US$400 billion in 2025 and are expected to climb to a range of US$500 billion to US$600 billion in 2026. During the same period, generative A I's direct revenue is only about 50 billion US dollars. This supply and demand imbalance of "heavy investment and light return" will inevitably be corrected through market mechanisms, and the downside risk is significantly higher than the upside potential. Historical experience shows that after the craze subsides, it is often accompanied by industry consolidation and valuation reconstruction.
Fisher also added that the large-scale fixed cost expansion of AI xmaccount.companies can easily lead to supply chain disorders and quality control problems, and investors need to carefully evaluate the capital recovery cycle.
What deserves more attention is that the policy is uncertainSex has led to over-concentration of capital in government-supported areas such as AI and local manufacturing, which may restrict overall productivity improvement in the next three to five years. This structural imbalance will also indirectly affect the economic growth and inflation fundamentals on which the Fed's policy depends.
The above content is all about "[XM Foreign Exchange Decision Analysis]: The war eases, the Fed returns to C position, and the gold narrative restarts". It is carefully xmaccount.compiled and edited by the editor of XM Foreign Exchange. I hope it will be helpful to your trading! Thanks for the support!
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