For months, investors have been told that persistent inflation could force the Federal Reserve to raise interest rates again.

Some major Wall Street firms went considerably further. In June, Bank of America projected three additional quarter-point rate hikes in 2026, while Deutsche Bank forecast two. The argument was straightforward: inflation remained too high, economic activity appeared resilient, and the new Federal Reserve leadership seemed determined to restore price stability.

But a remarkable amount has changed in just a few weeks.

The labor market has weakened dramatically. The Treasury has announced that the federal government needs to borrow significantly more money than previously expected. And, in an extraordinary development, the U.S. Treasury recently joined Japan in intervening in the currency market to support the Japanese yen.

At the same time, gold has surged more than 7% in one week.

I don't believe these events are unrelated.

The question investors should now be asking is:

Can the Federal Reserve realistically continue raising interest rates without creating even greater problems elsewhere in the financial system?

The jobs market just changed the conversation

The latest employment report was startling.

The U.S. economy lost 23,000 jobs in July, compared with economists' expectations for approximately 80,000 new jobs. June's already-soft employment number was subsequently revised downward to only about 20,000 jobs.

The Financial Times reported that revisions to May and June together eliminated another 103,000 previously reported jobs.

That follows June's initial report showing only 57,000 new jobs, according to the Bureau of Labor Statistics.

This matters enormously for monetary policy.

The Federal Reserve has two major mandates: price stability and maximum employment. Raising interest rates can suppress inflation by slowing borrowing, spending and investment, but the same mechanism can weaken hiring and economic growth. The Federal Reserve itself explains that changes in its policy rate ultimately affect employment, economic output and prices.

When employment was strong, the Fed had more room to fight inflation aggressively.

That room may now be shrinking.

After Friday's employment report, traders cut the probability of a September rate hike to below 50%. Reuters reported that the weak jobs number caused markets to substantially reduce expectations for additional tightening.

In other words, the market itself is beginning to question the same thing:

How aggressively can the Fed raise rates into a weakening labor market?

Then there is the government's borrowing problem

At almost exactly the same time, another important development emerged.

The U.S. Treasury increased its estimate for federal borrowing during the third quarter to $739 billion.

That's $68 billion more than Treasury projected only a few months earlier. Adjusting for the higher starting cash balance, Reuters reported that the increase was effectively about $87 billion.

And Treasury currently expects another $628 billion of borrowing in the fourth quarter.

Think about what that means.

The federal government needs to sell an enormous amount of Treasury securities into the market precisely when long-term borrowing costs are already elevated.

Higher interest rates make newly issued government debt more expensive to service.

This does not mean the Federal Reserve is legally prevented from raising rates. The Fed is independent of Treasury financing decisions.

But economically, it creates an increasingly uncomfortable situation:

The government needs enormous amounts of new capital at the same time the central bank is contemplating making that capital more expensive.

That tension should not be ignored.

The yen intervention may be the most revealing development of all

Then something highly unusual happened.

The United States joined Japan in intervening to support the Japanese yen, the first coordinated U.S.-Japan currency intervention of this magnitude in decades. Reuters described it as a historic joint intervention.

On the surface, this looks like Washington helping an important ally stabilize its currency.

But the Financial Times raised a much more important question.

What if the intervention was partly about protecting the United States itself?

In an analysis titled “The US bares its financial weak spot,” the FT argued that the episode exposed America's dependence on continued foreign demand for U.S. government debt. Japan is a major Treasury holder, and extreme pressure on the yen creates the possibility that Japanese institutions could repatriate capital or sell Treasuries.

Another FT analysis characterized the intervention even more directly as “US self-preservation.” It noted that Japan could otherwise support its currency through measures that might involve selling Treasury assets or raising domestic interest rates, either of which could place additional pressure on U.S. bond markets.

That is an extraordinary situation.

The United States is preparing to borrow hundreds of billions of dollars.

At the same time, Washington clearly has an interest in preventing one of America's most important foreign Treasury investors from becoming a destabilizing seller.

And simultaneously, the Federal Reserve is debating whether to raise the cost of money even further.

Those three issues are interconnected.

And then gold exploded higher

This brings us to gold.

Gold rose more than 7% during the week, its strongest weekly performance in roughly seven months. On Friday alone, spot gold rose about 2.3% to $4,336 per ounce after the employment report sharply reduced expectations for a Fed rate hike.

Earlier in the week gold had already surged 4.4% in a single session to roughly $4,253, helped by falling Treasury yields, a softer dollar and changing expectations surrounding monetary policy and Middle East developments.

Reuters explicitly connected Friday's gold rally to the collapse in rate-hike expectations following the jobs report.

That relationship makes economic sense.

Gold produces no interest income. When interest rates rise, holding cash or Treasury securities becomes relatively more attractive compared with gold.

When markets believe interest rates won't rise as much as previously expected, that opportunity-cost disadvantage diminishes.

That's exactly what happened this week.

What about Iran and falling oil prices?

There is another important factor, and it shouldn't be ignored.

Expectations surrounding Iran, the Strait of Hormuz and potentially lower oil prices have also influenced markets.

Reuters reported that optimism surrounding negotiations and potentially lower oil prices helped drive Treasury yields lower and supported gold.

Lower oil prices could also reduce future inflation pressure.

Ironically, that would further weaken the argument for aggressive Fed rate hikes.

So even the geopolitical development that might initially appear bearish for gold could ultimately remove some of the inflationary justification for additional monetary tightening.

The Fed still has an inflation problem

There is an important counterargument.

Inflation remains well above the Federal Reserve's target.

June PCE inflation was running at approximately 3.7%, compared with the Fed's 2% objective. Several Fed officials therefore continue to argue that additional tightening could still be necessary.

So I am not arguing that another rate increase is impossible.

The Federal Reserve absolutely can raise rates if policymakers decide inflation presents the greater threat.

My argument is different:

The hurdle for raising rates has become substantially higher.

The Fed would now be tightening monetary policy into:

A labor market that just lost jobs
Sharply downward-revised previous employment numbers
Enormous new Treasury borrowing requirements
Already-sensitive long-term bond markets
And a global financial system in which the United States just intervened to prevent instability surrounding one of its largest Treasury-owning allies

That is a much different environment than the one that produced forecasts for multiple rate hikes just several weeks ago.

The market has already changed its mind

This isn't simply my opinion.

Before the latest employment data, investors were assigning substantially higher probabilities to another rate increase.

After the report, Reuters calculated the probability of a September hike at roughly 44%, with approximately 56% odds of no change.

And even before the latest jobs shock, a Reuters poll of 104 economists found that 78 expected the Fed to leave rates unchanged through the end of 2026.

That's particularly important when discussing the earlier three-hike forecast.

Three hikes were never the unanimous consensus. Bank of America specifically forecast 75 basis points of tightening, while other economists and institutions expected considerably less, or no hikes at all.

Today, the case for three hikes looks considerably weaker.

Gold may be pricing in the Fed's dilemma

Markets often move before a narrative becomes obvious.

That's why I find gold's action this week so interesting.

Gold isn't merely reacting to one employment number.

Investors are simultaneously processing:

Weak employment, enormous Treasury borrowing, persistent inflation, falling rate-hike expectations, yen intervention, and concerns about Treasury demand.

That creates a difficult policy equation.

If the Fed raises rates aggressively, it risks further weakening employment and increasing financial pressure throughout an economy already dealing with historically large government financing requirements.

If the Fed doesn't raise rates, inflation may remain above target and real purchasing power may continue to erode.

Neither outcome is particularly attractive.

But both outcomes potentially strengthen the strategic argument for owning an asset that does not depend upon a government's promise to repay debt.

That asset is gold.

My conclusion

I don't believe the Federal Reserve has lost the ability to raise interest rates.

I believe it is rapidly losing the freedom to raise them aggressively without consequences.

The latest employment reports dramatically weakened the labor-market justification for additional tightening.

The Treasury's unexpectedly large borrowing requirement increases the sensitivity of the financial system to higher yields.

And America's extraordinary participation in supporting the Japanese yen demonstrates just how important stable foreign demand for U.S. Treasuries has become.

Meanwhile, gold has risen more than 7% in a week as investors reassess the probability of additional Fed tightening.

Could the Fed still raise rates once? Absolutely. Could inflation force their hand? Certainly. But three rate hikes before year-end?

After everything that has happened during the past several weeks, I believe that scenario has become increasingly difficult to imagine.

And judging by the movement in gold, I don't think I'm the only one asking the question.

Important note: This article represents opinion and economic analysis and is provided for educational purposes only. It should not be construed as personalized investment advice or as a recommendation to buy or sell any financial product.

Can the Fed Really Raise Rates? Gold May Already Be Giving Us the Answer