FOMC in Focus: Why Fed Decisions Matter for Inflation, Currencies, and Gold

This article was written by Terence Hove, Senior Financial Markets Strategist at Exness.

At next week's FOMC meeting (July 29 – 30, 2025), the U.S. Federal Reserve is widely expected to hold its benchmark interest rate steady at 4.25% – 4.50%. This pause reflects a cautious stance amid persistent inflation and resilient economic data, with the Fed opting to monitor incoming indicators before making its next move.

Although the June policy projections still point to two potential rate cuts of 25 basis points each before year-end, there is little expectation of any cut being announced in July. With no new economic projections due until September, attention will center on the Fed’s policy statement and Chair Powell’s press conference, where markets will look for forward guidance and the Fed’s tone on inflation, employment, and financial stability.

This moment highlights the broader significance of the FOMC and how its decisions cascade through financial markets shaping interest rates, currency exchange dynamics, inflation trajectories, and the price of gold.

Why the FOMC matters

The Federal Open Market Committee (FOMC) is the monetary policy arm of the U.S. Federal Reserve, and its influence extends far beyond domestic boundaries.

Sets U.S. Monetary Policy: The FOMC controls the federal funds rate, a key benchmark that determines the cost of borrowing throughout the economy.

Manages Growth and Stability: By adjusting rates, the Fed can either stimulate demand during slowdowns or cool overheating during inflationary periods—helping meet its dual mandate of stable prices and maximum employment.

Impacts Global Markets: Given the centrality of the U.S. dollar and Treasury markets, FOMC decisions affect global capital flows, emerging market currencies, and central bank actions across the world.

The Interplay: Interest Rates, Inflation, and Currency Exchange

Interest Rates and Inflation

Higher Rates = Lower Inflation:Raising rates makes credit more expensive, slowing spending and investment, which helps bring down inflation.

Lower Rates = More Growth (and Risk of Inflation):Cutting rates encourages borrowing and demand, but if inflation is not contained, this can lead to overheating and price pressures.

The Fed’s Goal:A long-run target of 2% inflation is designed to promote sustainable economic growth and protect purchasing power.

Interest rates and the US dollar

Higher Rates Attract Capital: Rising U.S. interest rates make dollar-denominated assets more attractive, boosting demand for the dollar and causing its exchange rate to appreciate.

Lower Rates = Dollar Weakness: Lower yields can prompt capital outflows, weakening the dollar, which affects trade and investment patterns.

Trade and Inflation Link: A stronger dollar can help dampen inflation by making imports cheaper, while a weaker dollar may lead to imported inflation by increasing the cost of foreign goods.

Exchange rates and inflation

Currency Depreciation = Higher Import Prices: A falling dollar means goods from abroad cost more, raising domestic inflation.

Stronger Dollar = Disinflationary Effect: A rising dollar can ease inflationary pressures, especially for import-reliant sectors.

Gold, interest rates, and inflation

Gold acts as both a store of value and a hedge against inflation, making its price sensitive to shifts in interest rates and inflation expectations.

Gold and interest rates

No Yield = Higher Opportunity Cost:Gold doesn’t pay interest, so when rates rise, yield-bearing assets become more appealing, often putting downward pressure on gold.

Low or Negative Real Rates = Gold Appeal: When inflation-adjusted interest rates (real rates) are low or negative, the opportunity cost of holding gold falls, supporting its price.

Gold and inflation

Inflation Hedge: When inflation rises and erodes the value of fiat currencies, gold becomes a safe haven for preserving wealth.

Investor Rotation: In high-inflation periods, investors tend to rotate from cash or fixed-income assets into gold to protect portfolio value.

Real Interest Rates: The Key Link Between Policy and Gold

The most critical variable for gold is the real interest rate—the nominal rate minus inflation. Gold tends to perform best when real yields are negative, a situation that reduces the appeal of interest-bearing assets.

Watching the Fed Means Watching the World

The July 2025 FOMC meeting, while not expected to bring a rate change, is critical for understanding the Fed’s future trajectory and its broader market impact.

The Fed’s interest rate decisions shape inflation, employment, currency strength, and global capital flows. These same decisions ripple into gold markets, with real interest rates and inflation expectations acting as key drivers of gold demand.

As the Fed reiterates its data-dependent approach, investors will watch inflation, labor, and growth data closely to anticipate the timing and magnitude of the expected rate cuts later in 2025.In this landscape, understanding the interdependence of Fed policy, inflation, exchange rates, and gold isn’t just useful it’s essential for navigating today’s financial markets.

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Source: TUKO.co.ke