Gold 
“The Federal Reserve is widely expected to keep interest rates unchanged at the conclusion of its July 28-29 policy meeting. Yet, traders are still pricing in a 38% chance of an interest-rate hike as of Friday, up from 12.8% a week ago, based on the CME FedWatch tool.
The disconnect may be the new normal under Fed Chairman Kevin Warsh, who has disavowed forward guidance, or public commentary on the Fed’s economic and interest-rate outlook. Investors could pay the price in increased uncertainty and more market volatility for both stocks and bonds.
The case for keeping the federal-funds rate at its current target range of 3.50%-3.75% looks compelling. Employment conditions are decent, the economy is healthy, and the latest inflation reports showed a deceleration in price growth, notwithstanding higher oil prices. These trends collectively argue for the Fed to stay on hold, even though inflation has been running above the central bank’s 2% annual target for the past five years.
Absent forward guidance, however, it is harder for the markets to read the tea leaves correctly. The Federal Open Market Committee removed forward guidance from its June policy statement, and Warsh declined to offer clues to prospective policy at his June press conference.
The end of forward guidance implies almost by definition a greater degree of uncertainty about the Fed’s plans, says Sonal Desai, chief investment officer for Franklin Templeton Fixed Income. ”Warsh wants financial markets to focus on analyzing the economic outlook rather than Fedspeak,” she says.
Desai, a member of the Barron’s Roundtable, also notes that Warsh’s ascension has reinforced the view that this may be a more hawkish Fed than investors have seen in a while. “It is early days, but the repeated emphasis on bringing inflation down to target gives that impression,” she says.
The possibility that the Fed will raise interest rates to contain inflation has prompted investors to build more of a “risk-premium” into bond prices to compensate, says Andrew Hollenhorst, U.S. chief economist at Citi. This likely will result in more volatility in bond yields.”
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