Gold drops on Fed rate hike repricing after hawkish Warsh

Warsh offers hawkish remarks

In his Jackson Hole debut, Fed Chair Warsh provided clearer visibility into his assessment of the macroeconomic landscape and monetary stance. He said that inflation is the priority and that underlying trends have not improved. He was unequivocal that officials will have work to do unless they secure firm conviction that inflation is converging sustainably toward target. ^[1]

After creating uncertainty around the Fed's preferred measures of inflation at the last policy meeting ^[2], he now affirmed that PCE remains the fixed target. He also noted that interest rates are the Fed's "predominant tool" for achieving its mandate. Additionally, Chair Warsh said that financial conditions are not restrictive, a hawkish evolution compared to his June assessment for a "somewhat" restrictive policy setting. ^[3]

Markets boost rate hike bets

This was a more hawkish and explicit address from Chair Warsh relative to his July press conference, signalling a viable case for higher rates should inflationary pressures persist. Markets reacted with immediate velocity, driving the USDOLAR and bond yields higher while aggressively repricing policy expectations. CME's FedWatch Tool now assigns a peak probability of 59.8% to a September rate increase, while leaving room for a subsequent move before year-end. ^[4]

Three FOMC members had already dissented in favor of a hike during July's hold and "many participants" saw tightening as necessary should price pressures not subside, according to the accounts of that decision ^[5]. The inflationary pressures can persist and embolden more policymakers to shift to the rate hike camp at the next meeting.

Inflation cooled over the summer but remained sticky and well above the 2% target. Generational AI investments from hyperscalers and unprecedented semiconductors demand, ballooning security budgets and elevated oil prices keep inflation high. Headline PCE steadied at 3.7% y/y in July and core at 3.3%. The producer price index for the same period showed a 28% jump in electronic components and a 5.6% increase in government defence purchases. At the same time, gasoline prices in the US stay above $4/gallon ^[6] and crude remains elevated as Strait of Hormuz uncertainty persists. The US struck Iranian targets for the first time in weeks and Tehran responded with strikes in the region. ^[7]

Gold hurt by rate repricing, but structural tailwinds linger

The hawkish messaging from Chair Warsh and the ensuing rate repricing by markets push XAU/USD lower. As a non-yielding asset, bullion faces headwinds in a high rates - high yields environment that increases the opportunity cost while boosting the USDOLLAR and compounding gold weakness. XAU/USD slips back into bear territory (a 20% drop from its record peak) and is now at risk of a sub-EMA200 return that would shift immediate bias on the downside and make it vulnerable to new 2026 lows.

Chart source: www.tradingview.com

However, gold's technical and macro backdrop has improved substantially in recent weeks, heading towards a stellar August. The return above the EMA200 has placed it in a strong position to extend its gains and even push towards its all-time highs.

Chair Warsh may have adopted a more hawkish stance, but he did not back rate hikes outright. Crucially, he once again opposed forward guidance and reaction-function hints, which can maintain policy uncertainty. He also did not mention anything around the rising public debt and deficits.

US debt exceeded $40 trillion for the first time ever ^[8], and the government deficit soared to $432.3 billion in July, reaching the highest level in over five years ^[9]. Net interest payments accounted for 15% of spending in the first 10 months of fiscal 2026, and higher yields amid rate hike expectations can push that higher just as the Treasury tries to suppress them by increasing its bond buybacks. ^[10]

These mounting fears around the US fiscal position have revived the debasement trend, a prevalent theme and key driver of bullion's 2025 rally. Ballooning deficits, macro-geopolitical uncertainty and fresh tariffs erode confidence in the greenback, sending investors to hard assets like gold. Coupled with continued central bank buying and lingering de-dollarisation trends, the precious metal faces structural tailwinds that can lead it to a much better second half of the year.