The Federal Reserve is due to release the statement from their September meeting. What can we expect and how can it affect the gold market?

First, the Fed is expected to leave interest rates unchanged. The market probability of a rate hike this month is about 1.4 percent, according to the CME’s FedWatch tool. Given that the Fed definitely does not want to surprise investors and cause market turmoil, the U.S. central bank will not raise interest rates in September.

Second, the Fed is expected to announce the unwinding of its $4.5 trillion balance sheet. Although some analysts worry that ‘quantitative tightening’ could negatively affect the economy, the balance sheet normalization plan is widely known – so the announcement should not move the financial markets significantly. If there is any surprise, it will be on the dovish side, as the U.S. central bank will conduct normalization in a very passive and cautious way. And contrary to some expectations, the Fed’s balance sheet will not return to pre-crisis levels.

Third, the upcoming meeting includes a press conference and a fresh dot-plot. Hence, investors will focus on the Fed’s expectations regarding the future key interest rate path. As a reminder, according to June’s projections, there will be one more rate increase this year, and three rate hikes of 25 basis points in 2018 and three more in 2019. However, the market odds of a Fed hike in December are less than 60 percent. And investors do not expect another rate hike at least until August 2018 (the CME does not provide probabilities for more distant meetings). It means that if the FOMC sticks to its previous plans (or even adopts a slightly more dovish stance, which may happen), the markets will have to adjust their expectations. In other words, today’s Fed meeting offers more downside than upside potential for gold. However, gold prices declined this week in anticipation of the statement, so a relatively hawkish Fed (compared with the markets’ stance) may be already priced in to some extent.

The bottom line is that the Fed is due to release its September monetary policy statement. It is not expected to raise interest rates, but it will probably announce the unwinding of its large balance sheet. Investors will also seek clues about the future path of interest rates. We believe that the recent macroeconomic data provide the Fed with no reasons to modify significantly the forecasted rate hike pace presented in June. Given the current market dovish expectations, the unchanged Fed’s stance (or changed only slightly) could be interpreted as hawkish – which should be bearish for the gold market.