Warsh's Hawkish Repricing Sends Shockwaves Through Markets
Kevin Warsh, a member of the Federal Reserve's Board of Governors, has sharpened the Fed's inflation stance. He emphasized again that the central bank aims to keep prices stable at an annual rate of 2% PCE inflation. Markets reacted quickly, with the 2-year Treasury yield rising by more than 10 basis points and the US dollar strengthening.
Gold prices fell by 3% in response to Warsh's comments, while CME-implied September hike odds climbed from 35% to 58%. This was not an actual rate hike announcement, but rather a hawkish repricing of the Fed's policy stance. Despite some volatility, equity markets remained relatively calm.
The market view is that if hawkish repricing persists, investors may want to watch for ultrashort Treasury defense in the iShares 0-3 Month Treasury Bond ETF (SGOV.US) and continued dollar strength in the $UUP. On the other hand, if hike expectations fade, gold demand may rise, making it a good time to consider the $SPDR Gold ETF (GLD.US) or iShares Gold Trust (IAU.US).