The Fed chose inflation
The Fed left rates unchanged. I read that as choosing inflation. The Fed said inflation was a choice, then made that choice. When the Fed picks inflation, holders of 30-year Treasury bonds sell them and buy gold. Both happened: Treasuries fell, gold rose.
Not hiking is bad for the bond market. It shows the Fed does not have zero tolerance for inflation. The Fed did not have the guts to raise short-term rates. Oil is on a roller coaster, another reason the Fed should have hiked.
Bond yields hit a 20-year high
The 30-year Treasury yield reached 5.22% on the day, the highest in about 20 years, higher than anything since before the 2008 financial crisis. It is a new high. The 10-year yield reached 4.69, just short of 4.7, and could clear it by tomorrow.
The drop in bonds pulled down the stock market. Once you see that the Fed is just talk, that is a big loss of confidence, especially for bonds. When bonds lose confidence, stocks follow.
The stock action
Before the announcement, the Dow was down 700-800 points at its lows. When no hike came, the market rallied: the Dow at best cut its loss to 300-400 points down, and the Nasdaq flipped positive. Then the bond market rolled over and sold off, dragging stocks back. The market closed on the lows.
Final numbers: Dow down 2.2%, about 1,100 points. S&P down 1.5%. Nasdaq down 1.7%. The Nasdaq 100 (the triple Qs) down over 2% on the day and over 3% on the week. I warned on Saturday that AI-related stocks would see a bigger pullback as air came out of that bubble, and that happened. After hours, Meta is down about 10% after missing earnings. Microsoft beat and is up a couple of percent. Chip stocks got hit hard: Sandisk fell 30% in the first three days of the week (Monday through Wednesday), cutting it in half, though it is still up on the year.
Gold held, silver held
Gold was down 20 or 30 dollars before the decision. It rallied about half an hour before, up 15 or so, then climbed as high as up $80 while Warsch spoke at the press conference. It gave back half the rally but never went negative and never dropped below 4,000, closing up about $40 at roughly 4,070. Silver was up a buck and change, fell back to unchanged, then closed up about 50 cents at 57.50.
Gold traders fear rising yields because they think higher rates hurt gold. They are wrong. Higher bond yields are not automatically bad for gold. It depends on why yields are rising. If yields rise because bond investors are losing faith in the Fed and worry inflation will run higher, because the Fed is too timid to hike or slow money supply growth, that is bullish for gold. Loss of confidence in the Fed and fear of higher inflation are the exact reasons to buy gold. They are the same reasons to sell Treasuries. The smart move after today is to sell Treasuries and buy gold, and some of that clearly happened.
Gold has not lost its shine
Some people question whether gold has lost its role as a safe haven, store of value, or inflation hedge. That is nonsense. All they look at is gold hitting 5,500 and falling to 4,000. Who cares that it touched 5,500? It is at 4,000. Where was it a couple of years ago, 10, 20, 25 years ago? Gold has lost nothing. Gold is the last safe haven standing.
The real problem is that many people never had real confidence in gold because they never understood it, and they trusted the Fed more because they did not understand the Fed either. More people will start to grasp the Fed's trap.
The dollar weakened too
The dollar index slipped back below 101 to 100.84. Rising long-term rates did not help the dollar, which is another bad sign, a loss of confidence. A falling dollar together with falling bonds is an ugly combination for anyone leaning on traditional safe assets.
Oil on a roller coaster
Oil was over $90 a barrel Saturday. It dropped Monday after Trump de-escalated: on Sunday he said the U.S. would not bomb Iran after all because "they're playing nice," then a day later reversed and said he had to bomb them. Oil rose today, back around 84 and a half, still trending higher, which is problematic and one more reason the Fed should have hiked.
Consumer confidence and the trade deficit
Consumer confidence unexpectedly dropped to a five-year low in certain aspects, at 90.8, despite claims of a strong economy from both Trump and the Fed. The Fed may not want to hike because it knows the economy is far more fragile than it pretends. It would not look resilient if the Fed actually fought inflation with rate hikes.
The June merchandise trade deficit was 101.5 billion, down from 105.8 billion the prior month and better than expected, but still above 100 billion. Imports fell 2.6% on the month, which helped, but exports also fell 1.8%. A chart compared the 18 months before Trump with the 18 months since: the goods trade deficit was 1 trillion 738 billion 784 million before the tariffs and 1 trillion 801 billion 377 million with them. The deficit is bigger with the tariffs. It is impossible to know where it would sit without tariffs, but the tariffs did not improve the trade balance, it still rose, and Americans paid the tariffs on top of higher import costs. The tariffs are a complete failure any way you look at them.
The Fed's trap
Markets are now reacting to the gap between the Fed's words and its actions, and the Fed is losing credibility. Warsh is now getting a credibility problem after markets gave him some. The idea he would be an inflation hawk, a tough-on-inflation Paul Volcker, was always nonsense. It cannot happen politically given the fundamentals. There is so much debt and the whole economy is such a massive bubble that doing what Volcker did would create conditions far worse than the inflation threat itself. So the Fed will do nothing.
We are damned if they do and damned if they don't. If the Fed does not hike, markets crash. If it hikes, they crash even more. The Fed cannot look at the sell-off from not hiking and conclude it must hike, because hiking would be worse. Either way, markets go down, because the Fed cannot keep sending mixed signals and burning its credibility. There should be a huge rally in gold, a big drop in the dollar, more decline in bonds, and this should spill into an overvalued stock market that needs to come down. Talk is all the Fed has left, and talk no longer works.
