The Federal Reserve just raised interest rates from 3.75% to 4%, a quarter-point increase that was pretty much in line with what the market anticipated. The result was announced at 2 p.m. By 4 p.m., the Dow had closed down more than 600 points and gold had fallen about 1%.
Don’t read that as the best or the worst news. There’s a more important pattern unfolding at the new Federal Reserve, and it matters more than any single afternoon of prices. Here’s what happened, and what we think it means for you, for gold, and for the economy.
The Meeting
The Federal Open Market Committee voted 12-0 to raise the federal funds rate a quarter point, from a range of 3.50%-3.75% to 3.75%-4.00%. It’s the first hike since 2023, and the Fed’s dot plot points to one more before the end of the year.
It was a unanimous decision because inflation will not break in current conditions. Prices rose 0.4% in August and are up 3.4% over the past year, above the Fed’s 2% target, and rising oil prices from the Middle East are adding to it. According to the FOMC statement, “Inflation remains elevated. Today’s policy action will support a timelier return to the Committee’s 2 percent goal. The Committee will deliver price stability.”
Asked about the market’s reaction, new Fed chair Kevin Warsh said:
“We made this decision today based on our assessment of the situation, based on our assessment of the trajectory for employment, based on our judgment on the strength of the economy. Sometimes the market tries to prejudge our outcomes. I’ll observe market prices and see what they have to say. But today was our decision.”
Kevin Warsh and Forward Guidance
Kevin Warsh is one of the only Fed chairs in recent history to reject forward guidance.
Forward guidance is the approach where the Federal Reserve indicates or hints at future rate decisions, whether up, down, or holding steady, so the market can prepare for them. Warsh doesn’t think that’s a good approach. He doesn’t want to play God with the market, or lead it to do something it wouldn’t have done on its own. At his press conference, Warsh said, “I’m not in the forward guidance business.”
There are two ways to see this. Critics argue you make more informed decisions with more information, and forward guidance is information. Proponents argue the opposite: without it, the Fed is unencumbered in its decision-making. It can do what the data tells it to do, ideally without bending to outside pressure.
The Most Impactful Quotes From the Fed and Analysts
Some of the most notable quotes from Warsh and from analysts:
On the Fed’s focus, Warsh said, “Our predominant focus is on the price stability side of our mandate. The plain fact is that inflation is too high, and has been for too long.”
On the summer’s data: “This summer’s inflation readings do not tell me that underlying trends have meaningfully improved.”
Asked about the president: “I’ve got nothing for you on the discussion with the president.”
Independent metals trader Tai Wong said Warsh’s comments read as hawkish on top of a hawkish dot plot, which helps the dollar and pressures metals in the short term.
B. Riley Wealth chief market strategist Art Hogan said the 10-year Treasury yield bumping back over 5% is a massive psychological level, and that higher-for-longer inflation could become a near-term headwind for stocks.
As Rate Decisions Become More Political, the Long-Term View Is More Important Than Ever
Within hours of the decision, President Trump said interest rates should be “1% or lower” and cut fast. The White House called the hike “unfortunate.” As rate decisions get more political, it’s worth zooming out. There are three pieces to keep straight.
One: the Fed is independent, but it doesn’t work in a vacuum. It’s built to make monetary policy free of political pressure, but it still operates alongside the other branches of government, and its decisions affect all of them.
Two: the back-and-forth with the White House is constant, and Warsh is keeping it professional. He wouldn’t share what he discussed with the president. “I’ve got nothing for you on the discussion with the president,” he said, keeping the line between the central bank and the politics around it.
Three: the president and the Fed want the same thing. The president wants low rates, but he also wants a healthy economy. So does the Fed. They disagree on the path, not the destination. The destination is stable prices and a strong economy.
What This Means for You
Even though the market anticipated this hike, the Dow still closed down more than 600 points, or about 1.2%, and gold also fell about 1%. This is likely a natural reaction caused by market volatility, not an indicator that the market is going to keep falling. There has also been a lot of global macroeconomic and geopolitical turmoil over the last several months, which we’ve written about, so that inherent volatility blended with a rate hike was always likely to cause some turbulence today.
What this means for the future is where it gets interesting, and it’s why diversification and understanding how gold factors into a portfolio and the economy is so important. Here are three takeaways to remember as you see more headlines like this one:
- Gold benefits from inflation, and it’s a way to diversify against it. Inflation is the rate at which prices rise. As prices rise, gold tends to rise with them, the same way stocks and real estate do, which makes all three better than cash for weathering it.
- Cash loses that fight by design. As the Treasury and the government print more money and add to the money supply, dollars are worth less. That’s why the dollar’s purchasing power has dropped more than 90% over the last century.
- The Fed’s short-term moves and gold’s long-term case are two different things. Higher rates pressure gold now by raising the payout on cash and bonds. A growing money supply and sticky inflation support it over years.
The Bottom Line
The Federal Reserve took a historic step today in the name of combating inflation. Whether they did the right or the wrong thing remains to be seen. But a unanimous decision, backed up with data and without throwing shade at opponents or detractors, is encouraging for this new Fed chair.
So keep reading, stay in the loop, and stick to your long-term plan. Gold is tangible, and it has held its value far better than the dollar over time. A single rate decision doesn’t change that. We’ll follow up with a deeper look once we know whether the Fed delivers another hike this year.
If you’re weighing physical gold, check our daily spot prices or reach a non-commission broker at CMIGS.com.
The post The Fed Just Raised Interest Rates to 4%. Here’s What It Means for Gold and the Economy first appeared on CMI Gold & Silver.
