The reversal and confirmation of interest rate cut expectations presents a good opportunity for gold.
2026-05-20 20:11:41
On May 15, 2026, Kevin Warsh officially succeeded Jerome Powell as the 17th Chairman of the Federal Reserve. After Powell's term as chairman ended, he remained on the Federal Reserve Board of Governors to continue serving.
Warsh's inauguration vote was clearly partisan, with only a few bipartisan members voting in favor, making him the Federal Reserve Chairman with the weakest majority in recent history. Having served as a Federal Reserve Governor and personally experienced the 2008 financial crisis management, he possesses solid policy experience and Wall Street expertise, making the implementation of his new policies highly anticipated by the market.
Walsh, who was previously expected by the president to implement interest rate cuts, instead led to a greater than 50% probability of a rate hike by the end of 2027 after taking office. At the same time, the president immediately relaxed his demands for interest rate cuts after the Fed chairman took office. What exactly happened?
The current US economy is in a very difficult situation, with inflationary pressures remaining high. April's CPI and PPI data both exceeded expectations, and geopolitical conflicts have pushed up oil prices, further reinforcing price stickiness.
Market expectations for interest rate cuts continue to cool, long-term US Treasury yields continue to rise, and funds no longer have expectations for further easing.
In addition, Trump has repeatedly put pressure on the Federal Reserve to cut interest rates quickly and significantly, demonstrating a high level of political intervention.
Trump made the above statement in a media interview, which took place against a rather unusual backdrop—just days earlier, Trump had publicly exerted strong pressure, saying he would be "disappointed" if Walsh did not immediately cut interest rates after taking office .
Now, with Warsh's inauguration day approaching, Trump's rhetoric has noticeably softened.
When asked whether Warsh would cut interest rates (although the market currently leans more towards a rate hike), Trump replied, "I'm going to let him do what he wants. He's a very talented person, he'll do a great job, he'll get things done."
Analysts believe that Trump's change of attitude is based on practical considerations. In the same interview, he admitted that rising inflation related to the conflict with Iran has complicated the prospect of a US interest rate cut.
Trump bluntly stated, "You simply can't see these numbers until the conflict is over," referring to the impact of rising oil prices related to the Iran conflict on inflation. This statement effectively suggests that even if he wanted to continue pressuring for interest rate cuts, the current high inflation environment wouldn't allow it.
Faced with persistently high inflation and strong demands for interest rate cuts, the new Federal Reserve chairman is caught in a dilemma.
Currently, US stock valuations are at the second highest level in history, with the Shiller price-to-earnings ratio far exceeding the century average and only lower than the peak of the dot-com bubble.
Looking back at historical trends, when valuations are in a high range, if there are actions such as interest rate hikes, the market is likely to experience a significant decline, and the overall market risk will rise sharply.
However, in addition to the influence of traditional inflation, this high-interest-rate environment has a new narrative: the high capital expenditure of technology companies has led the market to bet on rising interest rates in advance. As the demand for money has increased, the price of money has naturally become more expensive, so the interest rate, which reflects the price of money, has risen, and the neutral interest rate, R, will also move upward.
Powell had previously stated that US stock valuations were too high. Now, with a shift in monetary policy imminent, whether highly valued tech stocks can coexist with expensive interest rates is a key point to watch.
There are sharply contrasting policy views within the Federal Reserve regarding the trajectory of the AI industry.
Warsh: AI has deflationary properties, which can support interest rate cuts. He believes that artificial intelligence will greatly improve social productivity and the long-term productivity dividend can offset the short-term inflation brought about by early infrastructure investment, opening up room for the Federal Reserve to cut interest rates. However, he was hawkish in his early tenure and his policy stance was obviously contradictory.
Goolsby: AI is driving inflation and harbors the risk of stagflation. Another group of officials hold the opposite view: the market is rushing to invest in the AI field in advance, and huge capital expenditures are driving up the costs of raw materials, computing power and labor, which can easily lead to economic overheating. A hasty interest rate cut will exacerbate inflation, while a continuous interest rate hike will drag down the economy, and the risk of stagflation is gradually becoming apparent.
Compared to Powell's transparent, moderate approach and the early release of policy signals, Warsh had a clear direction for reform.
First, vigorously advance the balance sheet reduction process, continuously reduce holdings of long-term US Treasury bonds and mortgage-backed securities, and tighten excess liquidity in the market;
Secondly, the Fed reduced its forward guidance and stopped trying to soothe market sentiment. Finally, the Fed weakened its role in rescuing the market and gradually withdrew from active market intervention. The effectiveness of the Fed's put option was greatly reduced, and the market no longer relied on the central bank to support it.
However, there is currently a significant division of opinions within the FOMC, and the implementation of the new policy faces considerable resistance, with many uncertainties surrounding the pace of its implementation.
Trump's shift has disrupted the market consensus that a new chairman must cut interest rates. At the same time, the fact that Treasury yields did not continue to rise after receiving this news may indicate that this wave has paused or reached a short-term high. Gold and equity assets should have a chance to rebound here.
Meanwhile, the objective reality of high inflation data limits the rapid decline in interest rates, and a prolonged high-interest-rate environment is not conducive to long-term investment products such as gold and equity assets. However, since AI-related companies in the equity sector benefit from increased capital expenditures, their valuations can be boosted, so there may still be room for growth. This is because the rise in government bond yields indirectly confirms the logic of high capital expenditures in the technology sector.
Warsh's inauguration vote was clearly partisan, with only a few bipartisan members voting in favor, making him the Federal Reserve Chairman with the weakest majority in recent history. Having served as a Federal Reserve Governor and personally experienced the 2008 financial crisis management, he possesses solid policy experience and Wall Street expertise, making the implementation of his new policies highly anticipated by the market.
Walsh, who was previously expected by the president to implement interest rate cuts, instead led to a greater than 50% probability of a rate hike by the end of 2027 after taking office. At the same time, the president immediately relaxed his demands for interest rate cuts after the Fed chairman took office. What exactly happened?
Internal and external pressures: Economic difficulties compounded by political pressure to cut interest rates
The current US economy is in a very difficult situation, with inflationary pressures remaining high. April's CPI and PPI data both exceeded expectations, and geopolitical conflicts have pushed up oil prices, further reinforcing price stickiness.
Market expectations for interest rate cuts continue to cool, long-term US Treasury yields continue to rise, and funds no longer have expectations for further easing.
In addition, Trump has repeatedly put pressure on the Federal Reserve to cut interest rates quickly and significantly, demonstrating a high level of political intervention.
Trump made the above statement in a media interview, which took place against a rather unusual backdrop—just days earlier, Trump had publicly exerted strong pressure, saying he would be "disappointed" if Walsh did not immediately cut interest rates after taking office .
Now, with Warsh's inauguration day approaching, Trump's rhetoric has noticeably softened.
When asked whether Warsh would cut interest rates (although the market currently leans more towards a rate hike), Trump replied, "I'm going to let him do what he wants. He's a very talented person, he'll do a great job, he'll get things done."
Analysts believe that Trump's change of attitude is based on practical considerations. In the same interview, he admitted that rising inflation related to the conflict with Iran has complicated the prospect of a US interest rate cut.
Trump bluntly stated, "You simply can't see these numbers until the conflict is over," referring to the impact of rising oil prices related to the Iran conflict on inflation. This statement effectively suggests that even if he wanted to continue pressuring for interest rate cuts, the current high inflation environment wouldn't allow it.
Faced with persistently high inflation and strong demands for interest rate cuts, the new Federal Reserve chairman is caught in a dilemma.
New Market Focus: High Valuations and High Interest Rates in US Stocks
Currently, US stock valuations are at the second highest level in history, with the Shiller price-to-earnings ratio far exceeding the century average and only lower than the peak of the dot-com bubble.
Looking back at historical trends, when valuations are in a high range, if there are actions such as interest rate hikes, the market is likely to experience a significant decline, and the overall market risk will rise sharply.
However, in addition to the influence of traditional inflation, this high-interest-rate environment has a new narrative: the high capital expenditure of technology companies has led the market to bet on rising interest rates in advance. As the demand for money has increased, the price of money has naturally become more expensive, so the interest rate, which reflects the price of money, has risen, and the neutral interest rate, R, will also move upward.
Powell had previously stated that US stock valuations were too high. Now, with a shift in monetary policy imminent, whether highly valued tech stocks can coexist with expensive interest rates is a key point to watch.
Internal Disagreements: AI Market Trends Spark Conflict Between Two Camps on Monetary Policy
There are sharply contrasting policy views within the Federal Reserve regarding the trajectory of the AI industry.
Warsh: AI has deflationary properties, which can support interest rate cuts. He believes that artificial intelligence will greatly improve social productivity and the long-term productivity dividend can offset the short-term inflation brought about by early infrastructure investment, opening up room for the Federal Reserve to cut interest rates. However, he was hawkish in his early tenure and his policy stance was obviously contradictory.
Goolsby: AI is driving inflation and harbors the risk of stagflation. Another group of officials hold the opposite view: the market is rushing to invest in the AI field in advance, and huge capital expenditures are driving up the costs of raw materials, computing power and labor, which can easily lead to economic overheating. A hasty interest rate cut will exacerbate inflation, while a continuous interest rate hike will drag down the economy, and the risk of stagflation is gradually becoming apparent.
New Governing Style: Saying Goodbye to Loose Financial Support and Weakening Market Intervention
Compared to Powell's transparent, moderate approach and the early release of policy signals, Warsh had a clear direction for reform.
First, vigorously advance the balance sheet reduction process, continuously reduce holdings of long-term US Treasury bonds and mortgage-backed securities, and tighten excess liquidity in the market;
Secondly, the Fed reduced its forward guidance and stopped trying to soothe market sentiment. Finally, the Fed weakened its role in rescuing the market and gradually withdrew from active market intervention. The effectiveness of the Fed's put option was greatly reduced, and the market no longer relied on the central bank to support it.
However, there is currently a significant division of opinions within the FOMC, and the implementation of the new policy faces considerable resistance, with many uncertainties surrounding the pace of its implementation.
Summary and Trading Reminders:
Trump's shift has disrupted the market consensus that a new chairman must cut interest rates. At the same time, the fact that Treasury yields did not continue to rise after receiving this news may indicate that this wave has paused or reached a short-term high. Gold and equity assets should have a chance to rebound here.
Meanwhile, the objective reality of high inflation data limits the rapid decline in interest rates, and a prolonged high-interest-rate environment is not conducive to long-term investment products such as gold and equity assets. However, since AI-related companies in the equity sector benefit from increased capital expenditures, their valuations can be boosted, so there may still be room for growth. This is because the rise in government bond yields indirectly confirms the logic of high capital expenditures in the technology sector.
- Risk Warning and Disclaimer
- The market involves risk, and trading may not be suitable for all investors. This article is for reference only and does not constitute personal investment advice, nor does it take into account certain users’ specific investment objectives, financial situation, or other needs. Any investment decisions made based on this information are at your own risk.
