Facing A Hawkish Fed: Can Silver's Supply Deficit Override Potentially Higher Rates?

As the US Federal Reserve prepares to announce its interest rate decision on Wednesday, the global bullion market finds itself locked in a macro tug-of-war: can silver's six-year physical supply deficit withstand the weight of potentially higher borrowing costs?

Market expectations via the CME FedWatch tool currently project a 90% likelihood that the Federal Open Market Committee will announce an interest rate hike on Wednesday. The anticipated move underscores a hawkish shift under Fed Chair Kevin Warsh, who has reiterated that all options are on the table to tame the inflation.

While higher interest rates typically raise the opportunity cost of holding non-yielding precious metals, market participants are questioning whether severe physical shortages across green industrial sectors can offset monetary headwinds.

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"A hawkish dot plot is a real headwind for gold and silver," said Max Baecker, President of American Hartford Gold, in an emailed interaction with NDTV Profit. "Higher rates raise the opportunity cost of holding a non-yielding asset, that part of the logic holds. But rates are one input, not the only one."

The Six-Year Physical Squeeze

The underlying thesis for silver remains grounded in physical market fundamentals. The commodity is currently navigating its sixth consecutive year of a global supply deficit, driven by sustained industrial consumption in solar photovoltaic panels, electric vehicles, and advanced semiconductors. The deficit for 2026, according to the Silver Institute, is seen at 46.3 million ounces.

The metal is currently trading at about $63 an ounce, down nearly by half as compared to its early-2026 peak of $121.7.

Baecker emphasised that while interest rate hikes heavily influence paper trading and speculative flows, physical industrial demand operates on a separate track.

"Higher rates tend to hurt the investment demand for silver more than the physical, industrial demand. Those two respond to different things," Baecker said. "Short term, Fed expectations and China buying were the biggest levers. Longer term, industrial demand and supply deficits did more of the underlying work."

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Unwinding The 2026 Super-Rally

The upcoming Fed decision follows a turbulent period for precious metals since earlier this year. Silver mounted an aggressive super-rally late last year before peaking at the end of January 2026, fueled by retail enthusiasm and momentum trading.

Wall Street projections scrambled to keep pace during the surge, with Citi issuing a high-profile call in late January forecasting silver to reach $150 within three months. Instead, the market experienced a sharp reset, with spot prices halving in value over the following eight weeks as leveraged positions unwound.

"Silver's crash wasn't really about the story changing. It was about how quickly a crowd can pile into the same trade," Baecker said, describing the correction as a mechanical clearing of excess leverage rather than a breakdown in physical demand.

"A 300% run followed by a 50% pullback in two months tells you this was closer to a leveraged trade than a safe haven trade," he added. "When a metal that goes into solar panels starts moving like a momentum stock, it's a sign retail leverage has taken over from industrial fundamentals for a while."

Energy Shock And The Iran Conflict

Adding complexity to the Federal Reserve's policy path is the ongoing U.S.-Iran conflict, which has rattled global energy markets and pushed crude oil prices higher. The geopolitical friction has injected renewed fears of energy-driven inflation into central bank calculations.

If persistent inflation forces central banks worldwide to maintain a hawkish stance, precious metals could face prolonged headwinds from elevated real yields, even as inflation hedging interest remains active.

"If this hawkish turn is mainly a reaction to energy-driven inflation from the Iran conflict, it may prove temporary rather than a structural regime change," Baecker observed.

He noted that while Fed tightening presents a genuine reason for near-term caution, it does not negate the multi-year supply gap.

Outlook And Price Trajectories

Institutional projections for silver through 2026 and 2027 remain divided across major research desks.

HSBC maintains a conservative forecast, expecting silver prices to moderate around $70 per ounce by year-end 2026 and $65 in 2027. On the bullish end, Commerzbank projects silver reaching $90 in 2026 before climbing to $95 in 2027.

Addressing whether silver could eventually mount a 100%+ rally to hit $130, Baecker cautioned that such a move would require multiple macroeconomic catalysts to fire simultaneously.

"A move to $130 would require more than the current deficit story. It would need a weaker dollar, real Fed easing, and a resumption of retail momentum," Baecker said. "Right now the more hawkish Fed under Warsh cuts against two of those three legs."

"The setup does look more bearish than it did six months ago," he concluded. "Whether it stays that way depends a lot on whether inflation actually comes down or whether the Fed ends up hiking into a slowing economy."

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