Markets Question Fed's Inflation Resolve After July FOMC Meeting

Federal Reserve Chairman Kevin Warsh continues to project a tough stance on inflation, repeatedly pledging to restore price stability and keep inflation anchored at the central bank's longstanding 2% target. Yet according to Mike Maharrey in this week's Money Metals Midweek Memo, markets are increasingly judging the Fed by its actions rather than its words—and the verdict so far is skeptical.

Invoking the adage "less talk and more action," Maharrey contends that although Warsh has delivered forceful public statements about fighting inflation, the Federal Reserve has not taken any meaningful policy steps to back those promises. That disconnect, he argues, is starting to shape bond market behavior and could ultimately bolster the case for holding precious metals.

Fed Holds Rates Steady Amid Committee Dissent

The Federal Open Market Committee (FOMC) concluded its July meeting by keeping the federal funds rate unchanged at 3.50% to 3.75%. While the decision was widely expected, the meeting—the second under Chairman Warsh—produced the first notable public split within the committee.

Three policymakers—Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie Logan—voted in favor of a 25-basis-point rate hike. Triple dissents at FOMC meetings are uncommon, and the willingness of three regional Fed presidents to publicly break with the chairman on the need for tighter policy underscores the depth of disagreement over whether current rates are sufficient to bring inflation to heel. The remaining nine members supported holding rates steady. Warsh described the internal debate as a "good family fight," stressing open discussion over forced unanimity.

Despite the divided vote, Maharrey argues the practical result was unchanged: the Fed talked aggressively about inflation without actually tightening monetary policy.

A New Communication Strategy Leaves Markets Guessing

One of Warsh's sharpest departures from predecessor Jerome Powell is his rejection of extensive forward guidance. Under Powell, markets generally had a clear sense of the Fed's intentions before each policy meeting. That clarity reflected more than a decade of institutional practice—forward guidance had become a cornerstone of Fed policy since the 2008 financial crisis, when the federal funds rate was cut to near zero and officials needed alternative levers to shape financial conditions beyond rate moves alone. Warsh has deliberately abandoned that approach, trimming official FOMC statements from more than 300 words under Powell to roughly 130 words, on the principle that policymakers should present facts rather than forecasts.

Maharrey observes that while reduced guidance may give the Fed more flexibility, it also injects greater uncertainty. Investors inevitably try to anticipate future policy moves, and when official communication is sparse, markets tend to become more volatile as participants fill in the gaps themselves.

Some economists have already pushed back against the new style. Capital Economics argued that Warsh's intentionally vague responses have made forecasting future Fed actions even more difficult.

Tough Inflation Talk Without Corresponding Policy Action

At his press conference, Warsh repeatedly pledged that the Federal Reserve would restore price stability, declaring, "We will deliver price stability," while acknowledging the process would take time and calling the July meeting only "the beginning of the story."

Maharrey counters that these assurances ring hollow because the Fed has not raised interest rates at all during Warsh's tenure. He draws a contrast with former Chairman Paul Volcker, who famously pushed interest rates to nearly 20% in 1980 to break entrenched inflation. Volcker's sustained tightening, which defined his chairmanship from 1979 to 1987, ultimately broke the back of double-digit inflation but also contributed to back-to-back recessions in the early 1980s—a trade-off that continues to frame debates over how aggressively central banks should combat inflation. Against that historical benchmark, Maharrey argues, Warsh's inflation-fighting credentials remain untested, as no comparable policy action has accompanied the rhetoric.

Bond Markets Signal Growing Skepticism

Some of the strongest evidence that investors doubt the Fed's resolve emerged in the Treasury market after the July meeting. Rather than declining, longer-term Treasury yields rose. The 10-year Treasury yield climbed 5 basis points to 4.657%, while the 30-year Treasury yield jumped 9 basis points to 5.193%.

Maharrey reads this move as a signal that investors increasingly believe the Fed is done raising rates even though inflation risks remain elevated. Reuters characterized the shift as reflecting expectations for persistent inflation rather than additional Fed tightening.

Former Federal Reserve economist Nathan Sheets, now Global Chief Economist at Citi, argued that markets are effectively casting a vote of no confidence in the Fed's inflation strategy. According to Sheets, Warsh has identified the inflation problem without offering a credible roadmap to solve it—while also facing political pressure from the White House, which has favored lower interest rates.

Balance Sheet Expansion Sends Mixed Signals

Maharrey highlights another contradiction in the Fed's posture. While officials speak forcefully about controlling inflation, the Federal Reserve has continued expanding its balance sheet through bond purchases—effectively conducting quantitative easing. Quantitative easing was first used on a large scale during the 2008 financial crisis as an unconventional tool to stabilize markets when conventional rate cuts had been exhausted, and its deployment during periods of elevated inflation risks creates an inherent tension with tightening objectives. He argues these purchases help prop up Treasury markets at a time when demand for U.S. government debt has weakened and federal borrowing keeps expanding by hundreds of billions of dollars each month.

Buying government bonds while simultaneously claiming to wage war on inflation, Maharrey says, sends conflicting signals and further erodes the Fed's credibility.

Could the Fed Redefine Inflation?

Another concern raised in the episode centers on how the Federal Reserve measures inflation itself. Historically, the Fed has targeted 2% core Personal Consumption Expenditures (PCE) inflation. During his confirmation process, Warsh expressed interest in trimmed averages, which exclude both the highest and lowest price changes to smooth inflation readings. The Dallas Fed already publishes a trimmed-mean PCE measure, providing an existing model of the approach Warsh has cited with interest.

Although Warsh stated that PCE remains the Fed's preferred gauge for now, he also indicated that task forces reviewing Fed strategy could recommend changes after January. Maharrey warns that altering the methodology rather than actually lowering inflation would amount to moving the goalposts, enabling policymakers to claim success without materially reducing inflation.

Implications for Gold and Silver

Maharrey believes precious metals have traded sideways for several months largely because investors expected the Fed to keep interest rates higher for longer. Gold has found support around $4,000 per ounce and recently rebounded toward $4,200 amid optimism over the Strait of Hormuz reopening and weaker-than-expected employment data.

If markets continue to lose confidence in the Fed's willingness or ability to control inflation, Maharrey argues, the environment could turn increasingly favorable for gold and silver through expectations of higher inflation, a potentially weaker U.S. dollar, and eventual monetary easing should economic conditions deteriorate.

Why Real Interest Rates Matter

A central element of Maharrey's analysis involves real interest rates—nominal yields minus inflation. Using current figures, he notes that with the federal funds rate at 3.5% and CPI inflation also at 3.5%, the real policy rate stands at effectively 0%. Should inflation rise even modestly, real interest rates would turn negative despite positive nominal yields.

Because gold generates no yield, critics often contend that higher interest rates are bearish for precious metals. Maharrey counters that what truly matters is purchasing power. If inflation erodes all of an investor's nominal return, the opportunity cost of holding gold becomes far less significant.

Inflation Metrics and the Case for Sound Money

The episode closes with a discussion of inflation measurement. Maharrey explains the distinction between the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) index, noting that the Fed prefers PCE because of methodological differences that generally yield lower inflation readings.

He argues that neither index captures inflation in its classical sense, which he defines as expansion of the money supply rather than rising consumer prices alone. Pointing to continued growth in the M2 money supply, Maharrey maintains that monetary inflation is ongoing—and that even achieving the Fed's stated 2% target still implies a steady erosion of purchasing power over time. He concludes that investors should consider holding physical gold and silver as long-term stores of value that cannot be devalued through monetary expansion.