The Fed Has Stopped Giving Directions

On Wednesday afternoon the Federal Reserve will announce its September decision — quite possibly its first change in interest rates under Kevin Warsh — and it has deliberately told markets almost nothing about it in advance. That is not an oversight. Since June the Fed’s policy statements have carried no forward guidance, the practice of signaling where rates are headed, and on August 28, at the Jackson Hole symposium, Warsh laid out why. Forward guidance, he said, became a regular practice during the financial crisis, when it was essential. “But, as with other legacies of crises past, I believe that the practice has overstayed its welcome.” In its place he offered a standard rather than a promise: the Fed must be confident that underlying inflation is moving to its objective “clearly and at sufficient speed. Otherwise, we have work to do.” And he closed with a sentence that may come to define his chairmanship: “I stand here today committed to a discipline, not to a decision.”

For markets that have spent seventeen years learning to trade the Fed’s words as closely as its actions, that is a larger change than any single rate decision. For gold, whose price this year has been set above all by the path of real interest rates, it changes how that path gets discovered — and it is worth understanding before Wednesday’s headlines arrive.

Seventeen years of being told

It is easy to forget how recent forward guidance is, and how completely markets came to rely on it. In December 2008, as it cut interest rates to effectively zero, the Fed began telling investors how long it expected to keep them there: first “for some time,” then “for an extended period,” and in 2011 until at least a specific date. From 2012 the committee published its dot plot, each official’s projection of where rates were headed. The intention was sound. If markets understood the path, policy would work faster and with fewer shocks.

Warsh’s argument is that the practice outlived the emergency that justified it. When markets take their cue from the Fed and the Fed takes its cue from market prices, he said, everyone is caught in a hall of mirrors — “more likely to be blinded to new developments” and “more likely to commit errors in policymaking.” He pointed to 2021, when guidance may have slowed the Fed’s response to rising inflation. He also rejected the obvious compromise, a published rule linking rates to the data, because “our knowledge just doesn’t extend that far.” Market participants, in his view, “should draw their own conclusions.” He has practiced what he preaches. In June he declined to submit his own projection to the dot plot, telling reporters it was not helpful in the conduct of policy — a choice we covered in his hawkish debut.

A quieter Fed, a louder calendar

The immediate consequence is that new information about policy now arrives through data rather than through speeches, and prices move accordingly. The past two weeks were a demonstration. An August jobs report far stronger than forecast — 162,000 new jobs against expectations of about 53,000 — was followed a week later by an inflation reading of 3.4 percent, and the consumer price report alone lifted the market-implied odds of a September hike from about 70 percent to about 90 percent in a day. No Fed official needed to say a word. When the committee dropped its guidance in June, economists warned that the change would bring more volatility to markets, and one analyst described Warsh as wanting to keep the element of surprise in his back pocket. So far that volatility has shown up most clearly in interest-rate markets, and in the assets that trade off them.

What it means for gold

Gold is one of those assets. For most of this year its short-term direction has been set by the real yield, and a Fed that no longer pre-announces its moves makes the expected path of real yields more sensitive to every data release. Owners should expect gold to trade more sharply around jobs and inflation reports than it did when the Fed smoothed the road in advance. The slide since late August — three straight weekly declines and a fall below $4,300 — has come largely on the back of data and oil headlines.

There are two less obvious effects, and they point in different directions.

The first concerns the kind of inflation the Fed is fighting. Warsh set his standard on underlying inflation and said that trends, not isolated data points, matter most. August’s inflation was driven heavily by energy: headline consumer prices rose 3.4 percent on the year, while core prices, which exclude food and energy, rose 2.4 percent. A Fed that tightens into an oil shock is signaling that it fears the shock seeping into expectations, and Warsh gave that fear a number when he said the responsibility for “65 months of sustained, elevated inflation sits squarely with the central bank.” His broader gauge — the share of the 199 components of the PCE price index rising faster than 3 percent, which he put at 54 percent against 32 percent in the two decades before the pandemic — is the one to watch. If the Fed succeeds in holding expectations down, one of the long-run arguments for owning gold weakens at the margin. If it fails, that argument strengthens considerably.

The second concerns independence. In June we wrote that the risk to gold’s independence premium was not a hawkish chair but a hawkish chair eventually pushed to blink. A Fed that refuses to commit in advance is, in one sense, harder to lean on: there is no promise to extract and no guidance to bend. But the Fed is not the only part of Washington acting on interest rates. In August the Treasury doubled its buybacks of long-dated bonds, a move markets read as leaning against rising long-term yields even as the Fed leaned toward higher short-term rates. When two institutions push on the same yield curve from opposite ends, the market is left to guess which will prevail, and a Fed that says less leaves more room for guessing. That uncertainty helped draw record money into gold funds in August, as we explain in Gold and the Shadow of Fiscal Dominance.

What to watch on Wednesday

We will not guess at the decision; the premise of the new regime is that nobody should be able to. But three things will matter for gold more than the rate itself.

The first is the projections. The Fed publishes a fresh set of economic projections at its September meeting, and whether Warsh again leaves his own dot off the chart will say something about how far he means to take the quieter approach. Beyond the median dot, watch where officials see inflation settling next year.

The second is the vote. July’s three dissents in favor of a hike made the committee’s hawks visible. The pattern of dissent this time, in either direction, will say more about the months ahead than any guidance could.

The third is the reasoning. Warsh has told us his standard. If the committee acts, listen for whether it frames the move around oil and headline prices, which can fade, or around the breadth of underlying inflation he emphasized at Jackson Hole, which would suggest the Fed sees more work ahead. The oil side of that story is in The Pipeline Around Hormuz Closed.

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For individual owners of gold, the practical implication is easy to state and harder to live with. Without forward guidance, nobody — not the Fed, not the banks, and not us — can reliably tell you the path of interest rates over the next six months, which makes any gold position built on a view of that path more fragile than it used to be. Positions built on reasons that hold up under either outcome are sturdier, and it helps to hold gold in a size that a volatile month will not force you to revisit. Expect sharper moves around data days; our primer on how interest rates move gold explains why. And when Thursday morning’s headlines are loud, remember what Warsh promised and what he did not: a discipline, not a decision.