Fed’s Warsh Warns Inflation Fight Isn’t Over—Gold Tumbles 3%, Rate-Hike Odds Jump

Speaking at the annual Jackson Hole economic symposium, Warsh said inflation remains the “biggest risk” to the U.S. economy and that “we may have work to do” to bring price growth back to the Fed’s 2% target [229651][229652]. He warned that the central bank “cannot afford to declare victory prematurely” and that “a further tightening of policy may be necessary” [229805]. The remarks mark a sharp reversal from recent expectations that the Fed was nearing the end of its tightening cycle [229731][229730].

The market reaction was immediate. The yield on the 2-year Treasury note—the most sensitive to Fed policy—jumped over 10 basis points to its highest level in weeks [229805]. Investors now see roughly a 60-65% chance of a quarter-point rate hike at the next Federal Open Market Committee meeting, up from 45% a week ago [229805][229717]. The dollar strengthened against major currencies, gaining nearly 1% for the week [229807].

Gold prices tumbled more than 3% as higher rates make non-yielding bullion less attractive [230127]. U.S. stocks closed lower, with the Dow Jones Industrial Average falling roughly 0.4% and the S&P 500 and Nasdaq each dropping about 0.5% [230047].

Warsh, who is seen as a policy hawk, did not specify a timeline or size for any potential move [229730][230127]. He also argued that the central bank should adopt a more restrained, less talkative approach to policymaking, saying “a quieter central bank is a more credible one” [229651].

The next major test comes with the release of U.S. jobs data on Friday, which could either confirm or challenge Warsh’s hawkish stance [229807]. The August monthly employment report will detail job growth and unemployment, while a separate report on job openings is due Tuesday [230139]. A weakening jobs market puts the Fed in a bind, as raising rates to fight inflation could hurt hiring further, while cutting rates to boost jobs could make inflation worse [230139].