Bracing for global rate hikes

A Reuters Open Interest newsletter

Bracing for global rate hikes

By Jamie McGeever, Markets Columnist 

Wall Street fell on Thursday in highly volatile trading that saw huge swings in world stocks, bonds and oil prices, as traders began to price in global interest rate hikes to counter the inflationary pressures of the Middle East energy crisis. 

In my column today I look at the increasing likelihood that incoming Fed Chair Kevin Warsh's first interest rate move will be a hike, not the cut his boss is craving. 

I'd love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

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* The fog of war

The longer the war in the Middle East goes on, the more questions it raises. Has the Trump administration met its goals or not? Does it need help from its allies or not? Will the Strait of Hormuz re-open soon or not? Are Israel and the US communicating closely or not?

In a sign that $100 oil and financial market pressures are bearing down on Washington, U.S. Treasury Secretary Scott Bessent on Thursday said sanctions on Iranian oil may be removed. This follows a similar easing of curbs on Russian oil last week. 

* Short-term price pain, long-term macro pain

Pressure on the Fed and other central banks to raise rates to counter energy-driven inflation is mounting rapidly. But the long-term economic damage - consumer spending, wealth effects, and energy supply disruptions or even shortages - could be substantial.  

These opposing forces are being highlighted in the dramatic flattening of yield curves. The two-year U.S. yield is shooting up to 3.90%, the highest since August, shrinking the gap between the 10-year yield to just 40 bps. A policymaker's nightmare. 

* Gold melts

This should be gold's moment - war, geopolitical crisis, a global energy shock, $100 a barrel oil, and inflation pressures soaring - yet it is crumbling. It's down 8% this week, on track for its worst week since March 2020. It's down 13% this month, which would be its worst month since 2008 and second worst in more than 40 years.

What's going on? It's worth recalling the rally that culminated in gold topping $5,500/oz in January, much of which was speculative. Now that investors - retail, institutional, official - are scrambling for cash and liquidity, assets that went up most are vulnerable. None more so than gold. 

Assuming Kevin Warsh succeeds Jerome Powell as Federal Reserve chair by mid-May as planned, one of his first acts may be to preside over an interest rate hike, a true baptism of fire which would raise the ire of his boss, President Donald Trump.

With the Middle East conflict triggering a massive global energy shock, oil soaring above $100 a barrel, and pre-conflict U.S. inflation figures already flashing ‌red, it's not an outlandish scenario. Fed officials are discussing it, and financial markets are now pricing it.

This ⁠would be difficult terrain for Warsh. It would be anathema to Trump.

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