September Hike: A Bullish Signal for Gold
Kevin Warsh's hawkish keynote at Jackson Hole on Friday sent markets scrambling to raise the likelihood of a 25 basis point hike in September.
In normal times, this would be bad news for gold and the debasement trade, but as Robin J Brooks explains, these are not normal times.
The reason Warsh had to sound hawkish is that the government's massive deficit needs to be funded at affordable interest rates. If he didn't, it could have re-ignited a bond market sell-off and forced the Treasury to announce more buybacks.
The Treasury and the Fed are working together to keep long-term yields from spiraling out of control, which Brooks calls a new 'Treasury-Fed accord'. This means that any September hike will be performative, aiming to keep financial conditions loose rather than tightening them.