Weekly · World Stock Push
The new chair of the Federal Reserve, Kevin Warsh, is having trouble getting the market to believe that he's serious about tamping down on inflation. The U.S. economy team at Bank of America said that the tepid response to his July 29 press conference was "a central bank inflation credibility shock." The S&P 500 ( ^GSPC -0.48% ) rose 5.5% from that date through Sept. 8, but the credibility question is being priced in the bond market rather than in stocks. The Fed had held rates steady, and Warsh refused to specify exactly what would make him vote to raise them, leading some to speculate that he might not be willing to raise them at all.
Then, during a keynote speech at Jackson Hole on Aug. 28, he called the Fed's 2% inflation target "firm" and "fixed," while also admitting that inflation was running much higher than that -- a hawkish signal delivered from someone who has resolved to give the market fewer signals in advance of policy decisions. The Fed's next decision will be announced on Sept. 16. A lot could change depending on what happens next, and there are three things in particular that investors should care about here.
Image source: The White House. At least one inflation hedge looks cheap right now The first reason to care what the Fed is about to do is that the standard inflation hedge asset, gold, is not particularly expensive, and it may be favorable to buy a little extra while it's relatively cheap. The SPDR Gold Shares ( GLD +0.91% ) , an exchange-traded fund (ETF) that is backed by spot gold , closed 18% below its Jan. 29 all-time high on Sept. 8.
If Warsh fails to regain the market's belief in the Fed's resolve in the fight against inflation, expect the price of gold to rise further. Today's Change ( 0.91 %) $ 3.63 Current Price $ 403.35 The second reason to pay attention here is that the bond market, and thus long-term borrowing costs, are already behaving as if inflation is going to continue to run higher. The interest rates on debt that most investors care about, like mortgages and corporate debt, are trending substantially higher than the federal funds rate.
The average 30-year fixed mortgage rate reached 6.7% on Sept. 3, 2026, up from 6.5% a year earlier, according to Freddie Mac . This means that the markets for those types of debt do not believe that inflation is coming down soon. What could happen if Warsh actually hikes rates?
The third reason that investors should stay on top of the Fed's credibility challenges is actually an inversion of the first two reasons. In short, an interest rate hike could be larger than expected, or occur after the market stops believing that rate hikes could possibly be on the way. In such a situation, the market would rapidly reprice to the downside.
Gold and gold ETFs would probably fall right along with everything else there, as higher real interest rates raise the cost of holding an asset that pays no income. Index S&P 500 Index Today's Change ( -0.48 %) -37.16 Index Level 7,636.36 Prediction markets are putting the odds of a September increase at near 60%. Sept. 4's better-than-anticipated payrolls report pushed those odds higher still.
So if anyone says they know how Warsh will vote on Sept. 16, understand that they don't. The best investors can do is prepare themselves for whatever the Fed could bring.
Source: The Motley Fool
