Consumer caution intensifies amid Trump's tariff fears, with February retail sales underperforming. Business confidence weakens while gold hits record $3,045 on safe-haven demand. Fed faces tough balancing act today, with markets scaling back rate cut expectations to just two cuts for 2025. Meanwhile, Russia-Ukraine tensions persist despite ceasefire talks.

Fed in the Spotlight: Rising Risks and Policy Challenges Ahead

Amid concerns that President Donald Trump's tariff policies could cause the economy to stumble and inflation to reaccelerate, several reports released this week highlighted growing caution among both consumers and businesses.

Retail sales data released on Monday showed that sales in February rose less than expected, while previous month's figures were revised downward to reflect the largest drop since July 2021. The January report initially indicated a 0.9% monthly decline, but this was revised to a steeper 1.2% drop. In February, sales increased by just 0.2%, falling short of economists' expectations for a 0.7% rise.

Meanwhile, Control group sales, which exclude food services, auto dealerships, building materials stores, and gas stations, rose by 1% in February, reversing the previous month's decline.

Seven of the report's 13 categories saw declines. Sales growth was primarily driven by a rebound in online sales and increased spending on healthcare products, while gasoline, electronics, and apparel sales fell. The only service-sector category in the retail report---spending at restaurants and bars---experienced its sharpest drop in a year.

Given weakening consumer confidence, slowing income growth, and rising job insecurity, this report indicates that consumers are cutting back on discretionary spending---an observation echoed by industry representatives. Concerns about the economic impact of tariffs and job security are likely prompting consumers to increase their savings, adding to risks for economic growth.

Separate surveys released this week revealed a similar trend of caution among businesses. Confidence among U.S. homebuilders fell in February to its lowest level since August. Builders are worried that tariffs will drive up construction costs, potentially increasing home prices by $9,200 per unit.

Additionally, measures of potential buyer traffic have dropped to their lowest levels since 2023, underscoring heightened consumer caution. One possible reason is that consumers, anticipating tight credit conditions, are avoiding applying for loans due to fear of rejection. The New York Fed's Consumer Expectations Survey showed that the percentage of consumers refraining from loan applications because they do not expect to be approved has reached its highest level since 2013.

Meanwhile, another possible factor driving consumers' cautious stance could be growing concerns about job security. The Philadelphia Fed's latest data revealed that direct job-to-job transitions have fallen to a four-year low. The Fed considers such transitions a key measure of labor market dynamism, and the slowdown in direct transitions is viewed as a sign of deteriorating labor market health.

Most economists now believe that the likelihood of slowing growth in the first quarter has increased---even if a contraction does not occur, a slowdown in the growth rate is seen as nearly certain.

Given the current market sentiment, Fed Chair Jerome Powell faces a tough task later today in reassuring markets about the economic outlook and convincing investors that the economy remains on solid footing.

Policymakers are expected to keep interest rates unchanged at this meeting; however, they will have to take into account the rising risks to the economic outlook. Since the last projections were published in December, uncertainty has risen significantly, and the economic landscape has shifted. Many Fed watchers expect the new projections to reflect lower growth, higher unemployment, and higher inflation forecasts. However, the two rate cuts projected for 2025 in the December projections are not expected to change.

As Duhani Capital Research team, our view is that the Fed will emphasize that the economy is in a "good place" and that monetary policy is well-positioned, signaling a preference to wait for more clarity before taking action in response to rising risks.

Traders, meanwhile, have scaled back their rate cut bets as they await further guidance from the Fed on the policy path. Until a few days ago, swap traders were pricing in three-quarter-point rate cuts starting in June. However, just hours before the Fed's decision, expectations have shifted to two quarter-point cuts in the second half of the year. Economists view this as a market correction from excessive expectations.

On the flip side, Bank of America's latest survey revealed that traders have reduced their U.S. equity holdings to record-low levels, highlighting declining optimism toward U.S. markets.

The survey also showed that cash allocations have surged to their highest level since 2020, reflecting increased market caution. Amid economic and political uncertainties, traders are exhibiting a risk-averse stance and shifting towards safe-haven assets such as gold.

Gold Hits Record High at $3,045 as Risk-Off Sentiment Prevails

Gold surged past $3,045 per ounce in early Wednesday trading, marking a new all-time high and highlighting the prevailing risk-off sentiment in the market.

Traders have scaled back their Fed rate cut bets---pricing in one less quarter-point cut compared to a few days ago. Higher interest rates increase gold's opportunity cost, typically weighing on demand. However, mounting concerns over both the U.S. and global economic outlooks continue to bolster gold's safe-haven appeal, driving prices to consecutive record highs.

On the other hand, geopolitical risks remain a tailwind for gold prices. Yesterday, Russian President Vladimir Putin and U.S. President Donald Trump held a phone call to discuss a potential ceasefire in the Russia-Ukraine war. Putin rejected Trump's proposal for a 30-day ceasefire, instead agreeing only to limit attacks on Ukraine's energy infrastructure while also demanding that the U.S. halt its aid to Ukraine.

While Putin has expressed willingness to continue negotiations toward a permanent ceasefire, the conditions he has set remain difficult for Ukraine to accept. As a result, tensions in the region are unlikely to de-escalate anytime soon.

For now, traders are focused on the Fed's decision and Chair Powell's press conference later today for further clues on the policy path. To slow the bullish momentum in gold, Powell will need to convince markets that the economy remains on solid footing.