Odds of 25-basis-point September hike rise from 57% to 63%

Deutsche Bank holds forecast for two hikes in September and December

Gold tumbles as much as 1.2% intraday; biggest single-day drop since June on Friday

Kevin Warsh, chair of the US Federal Reserve. [Reuters]
Kevin Warsh, chair of the US Federal Reserve. [Reuters]

Markets are now pricing in better than a 60% chance of a September interest rate hike after Federal Reserve Chair Kevin Warsh delivered hawkish remarks at the Jackson Hole symposium. The prospect of tighter monetary policy is also weighing on gold prices, which had surged sharply in recent weeks.

CME FedWatch data showed Monday that traders put the probability of a 25-basis-point hike at the Fed's September FOMC meeting at 63% as of Sunday night — up from 57% on Friday, a gain of 6 percentage points in just two days.

Warsh's Jackson Hole comments drove the shift in rate expectations. His emphasis on curbing inflation and his signal of a continued tightening bias prompted markets to rapidly reprice the likelihood of further Fed rate increases.

Deutsche Bank maintained its forecast that the Fed will raise its benchmark interest rate twice — by 25 basis points each time, for a total of 50 basis points — at its September and December meetings.

Gold tumbled on the hawkish pivot. The price of gold fell 0.7% Monday to $4,422.75 per ounce, and at one point during trading dropped as much as 1.2%, briefly touching the $4,400 level.

On Friday, gold had plunged more than 3% in a single session — its steepest one-day decline since early June. As a non-interest-bearing asset, gold tends to lose relative investment appeal when interest rates rise.

Despite the recent pullback, gold has still gained about 10% in August, putting it on track for its strongest monthly performance since January.

The rally had been driven largely by what markets call the "debasement trade." After the US Treasury announced an expansion of its government bond buyback program, concerns about rising government debt and potential currency devaluation spurred renewed buying of physical assets such as gold.

The prospect of Fed tightening, however, appears to be putting the brakes on that momentum.

Rajeev De Mello, a portfolio manager at GAMA Asset Management, said the hawkish turn "came as a surprise to investors" and forecast that gold could fall further in the near term, potentially to between $4,200 and $4,300 per ounce.

Attention is now turning to the September FOMC meeting. If the Fed does move to raise rates, the ripple effects are expected to extend well beyond gold — reshaping capital flows across US government bonds, the dollar and global financial markets more broadly.


sjy@heraldcorp.com