The Gulf has spent years waiting for US interest rates to come down. Last Friday, Fed Chair Kevin Warsh told the region it may have to wait a little bit longer. Joining me now is Nic Puckrin, Macro and Cross-Asset Analyst and Founder of Coin Bureau. Nic, welcome back to Wall Street to Mena.
Thanks for having me.
Warsh dodged forward guidance but markets still priced in a possible hike. What spooked them?
He could say he is not going to give forward guidance in terms of monetary policy. But at Jackson Hole he gave statements that were interpreted as hawkish — worried about inflation. He said things like financial conditions are not restrictive enough, and that inflation remains elevated. He was not too optimistic about the slowdown in inflation we saw over the summer. The markets interpreted that as a hawkish slant by the Fed and repriced accordingly. Essentially, Kevin Warsh did not give any guidance — but what he said was that the medicine was not working yet. And as a result, the markets repriced accordingly.
There was already a bond selloff before he even spoke. Justified or overreaction?
Justified. And it is important to distinguish between long-term bonds and what the Fed does with monetary policy. Long-term bonds are pricing in inflation. Higher inflation expectations drive yields higher on the long end. So long bonds were selling off because they were concerned about fiscal policy — the massive amounts of debt in the US, the massive interest bill, and what that means for the economy. And when the Treasury Secretary Scott Bessent got involved in the bond market, that also spooked people — it showed that if he is getting involved, what does it say about the real fiscal situation? Then when Warsh came out with slightly hawkish guidance, we actually saw long-term bond yields drop slightly — because their fears about the Fed not doing anything about inflation were slightly allayed. The most important thing for long-term bondholders was not about a hike coming. It was about whether the Fed was going to do anything about inflation at all.
Gulf currencies are pegged to the dollar. What does higher for longer mean here?
Any currency pegged to another currency will import the monetary policy of the country issuing that currency. So if the Fed increases its base rate, we will see the same thing here in the Gulf. But the Gulf does have a hedge — and that hedge is priced at $90, which is the price of oil right now. So some Gulf countries have a fiscal shock absorber in oil exports. If we do see increasing rates leading to a slowdown, Gulf states exporting oil have a bit of a safety cushion.
How long can higher for longer last before something forces the Fed's hand?
It is not really the Fed that is deciding — it is the markets and the fiscal situation. We have $40 trillion in debt in the US and $1.3 trillion a year in interest payments. That interest bill is larger than the entire US defence budget. So the markets are pricing that in. Things could break though — you could have a situation where employment starts slowing down and the Fed focuses more on its employment mandate. Or you could have continued volatility in long bond yields that forces the Fed to step in. Or you could have a black swan event — something like Silicon Valley Bank in 2023 or the UK bond crisis in 2022 — that forces the Fed's hand.
Does Fed uncertainty push money into Bitcoin or scare it out?
It is a bit of both. Short-term monetary policy uncertainty — where interest rates are going and what that means for liquidity — is not good for Bitcoin. When there is less liquidity in the markets, Bitcoin sells off. But on the other end, you have the long-term fiscal uncertainty I just mentioned. The question of how the US gets out of $40 trillion in debt. Are they going to grow out of it, cut spending, or potentially try to inflate it away? That last one is what the market thinks is most likely. And in that environment, you want debasement hedges. And that is gold and Bitcoin. Long-term fiscal uncertainty is good for Bitcoin. Short-term monetary policy uncertainty is bad. That is why you are seeing the spikes we have been seeing.
Last question — if the Fed actually hikes in September, what happens to money flowing into the Gulf?
Higher interest rates here as well. The currency will strengthen. That could lead to more capital inflow and investments. But it will mean non-oil sectors and export sectors could suffer because of a stronger currency. In terms of the property market — most property here is bought with cash, not mortgages, so interest rates will not impact it that much. And a stronger currency could actually mean more capital flows to real estate from external investors. So it is kind of a mixed picture.
Thank you so much for joining us today.
For being here. Thank you. Appreciate it.
