The financial markets are as shocked as anyone else that Trump, against all odds, nominated a serious person to lead the Federal Reserve.
For many months, traders have been pouring cash into the dual inflation bet of gold and silver, on the expectation that Trump would succeed at pushing the Fed toward easy money. When monetary policy is loose, such as through ultra-low interest rates, the money supply rises faster than usual. When the money supply rises faster than usual, inflation picks up, and the dollar is devalued. When the dollar is devalued, the nominal prices of commodities increase. And when investors anticipate commodity prices to increase, they tend to put their money in precious metals.
That is why gold and silver are the world’s age-old inflation hedges. And they have been on a tear this year — especially silver. Before today, silver prices had more than doubled since November, jumping from around $50 per ounce to $114 at market close Thursday. The price of gold had risen by nearly 30 percent in the same period, from just above $4,000 per ounce to over $5,300.
There has been quite a bit of volatility in these two markets as they have soared, so observers should take most daily fluctuations with a grain of salt. But there’s volatility, and then there’s volatility. What happened on Friday — on the news that the markedly hawkish Kevin Warsh was being nominated as Fed chair — was something different from the regular noise: The inflation bet got deflated.
As of my writing this, gold prices have fallen nearly 9 percent in a single day of trading. Silver has fallen off a cliff, diving by almost 28 percent. Make no mistake about the message that markets are sending. They expected Trump to appoint a much looser Fed chair than this guy.
Warsh’s profile supports their about-face. He’s a credentialed, serious person whom the financial system respects — a former Fed governor for five years through the 2008 financial crisis, now a fellow at the conservative Hoover Institution. He has made a public name for himself by castigating the Fed for keeping monetary policy too loose for too long as inflation reared its head. Warsh has advocated that the central bank pare back its gargantuan balance sheet, prioritize long-term discipline over frantic emergency response, and pull back from its mission creep by abandoning concerns unrelated to price stability or employment, such as climate change and income inequality.
These are not the markings of an easy-money fanatic. Admittedly, Warsh did repudiate his longtime opposition to slashing interest rates once he learned he was up for the Fed’s top job. His newfound embrace of rate cuts is rather incoherent given his broader policy platform, but with Trump holding the keys, Warsh knows it’s the price of admission. (He also had to reverse his long-standing support for free trade, but that’s irrelevant to the role.) Better a liar than a true believer.
Fortunately, Warsh will be just one of twelve voting members on the Federal Reserve committee that sets interest rates, so additional cuts are far from a sure thing. If he fails at making money artificially cheap but succeeds at reining in the Fed’s economic adventurism, his tenure will be a good one. No wonder the inflation bettors hate him already.