Gold Falls Below $4,600 as Fed Rate-Hike Odds Rise, but Inflation Remains Key

Spot gold fell 1.5% to close at $4,591 on August 26, slipping below the key $4,600 level and ending a four-session winning streak. The decline came even as the U.S. Dollar Index gained just 0.25% and the 10-year Treasury yield rose only about 2 basis points, suggesting that neither the dollar nor bond yields were the primary driver of the selloff.

Instead, markets were focused on shifting expectations for a Federal Reserve rate hike in September.

A month ago, markets were pricing in nearly a 75% chance of a September hike. By August 18, the probability implied by interest-rate futures had fallen to around 35%.

The sharp repricing reflects expectations embedded in interest-rate futures rather than direct guidance from Fed officials. In late July, the probability of a September hike was still near 75%, but it dropped to roughly 35% in less than a month.

A research report released on August 20 argued that markets may have underestimated the risk of another rate increase. It noted that recent inflation, producer-price, and labor-market data did not appear to justify such a dramatic decline in hike expectations. The report also projected a 0.28% month-over-month increase in July core PCE, warning that a reading above 0.25% could quickly revive expectations for a September hike.

The August 26 data ultimately delivered mixed signals.

Headline PCE inflation rose 3.7% year over year in July, above market expectations, while increasing 0.2% month over month. Core PCE rose 3.3% year over year, in line with expectations, and 0.2% month over month, below the 0.28% estimate cited in the earlier report.

Meanwhile, durable goods orders increased 1.1%, well above the 0.5% consensus. However, inflation-adjusted personal consumption was flat from the previous month.

The combination suggests that inflationary pressure and economic resilience remain intact, while consumer momentum is beginning to cool. Following the data, the implied probability of a September rate hike rebounded to around 42%, above the recent 35% low but still well below the previous 75% level.

Real Rates Tell a Different Story

Although renewed rate-hike expectations weighed on gold sentiment, real interest rates have not risen nearly as much.

The 10-year Treasury yield climbed to around 4.66%, up only about 2 basis points on the day. At the same time, five-year average inflation expectations rose from 2.16% on July 28 to 2.31% on August 25, an increase of roughly 15 basis points in less than a month.

That matters for gold because higher inflation expectations can offset part of the increase in nominal yields, limiting the rise in real interest rates.

As a result, the latest decline in gold appears to reflect short-term repricing of September Fed policy rather than a fundamental shift in the real-rate environment.

For golds medium- to long-term outlook, the inflation trend may ultimately matter more than volatile rate-hike probabilities.

Core PCE inflation stood at 3.3% year over year in July. After falling to 2.6% in March 2025, it later rebounded as high as 3.4% and remains well above the Federal Reserves 2% long-term target.

Core PCE has now remained above 2% for 65 consecutive months, dating back to March 2021.

For gold, the critical question is therefore not simply whether the Fed raises rates again. What matters is whether inflation can sustainably return toward 2%.

If nominal interest rates remain high while inflation also stays elevated, the upside for real interest rates could remain limited. Gold‘s opportunity cost would rise more significantly only if rates stay high while core inflation steadily declines toward the Fed’s target.

Markets are therefore trading two very different timelines: September rate-hike expectations can swing dramatically within weeks, while the underlying inflation trend has persisted for more than five years.

In the near term, gold could remain volatile as the implied probability of a September rate hike moves between roughly 30% and above 50%. Over the longer term, investors should watch whether core PCE begins to establish a sustained multi-month decline.

Key events ahead include the Jackson Hole Economic Policy Symposium from August 27 to 29, remarks from Fed Chair Warsh, and any signals regarding fiscal and monetary policy coordination.

Markets will also be watching whether September rate-hike odds rise above 50%, whether five-year inflation expectations hold near 2.31%, and whether core PCE continues to retreat from 3.3%.

For gold, the next Fed decision may drive short-term volatility, but the longer-term story still comes down to inflation.