Silver’s Policy Tightrope: Warsh Holds Steady, BOJ Hikes, and a Supply Squeeze Persists

Fed holds rates, BOJ hikes to 1.0%; silver near $70, up 90% YoY; sixth straight supply deficit but solar copper substitution threatens demand.

Central bankers on opposite sides of the Pacific sent conflicting signals this week, leaving silver investors to read the tea leaves. In Washington, Federal Reserve chairman Kevin Warsh presided over his first rate decision, keeping the target range at 3.50% to 3.75%. Hours later, the Bank of Japan raised its benchmark rate to 1.0%—the highest level since September 1995. Spot silver hovered near $70.42 an ounce, up nearly 10% on the week and more than 90% year-on-year, caught between divergent monetary forces and a structural supply deficit.

Warsh’s debut came with a sharp upward revision to the Fed’s inflation outlook. Policymakers now expect consumer prices to rise 3.6% in 2026, up sharply from the 2.7% forecast three months ago. The median projection for the fed funds rate also moved higher, to 3.8%, driven by a still-robust labor market that added 172,000 jobs last month. Overnight index swaps priced a 42.2% probability of another rate hike before year-end—a headwind for non-yielding assets like silver.

Tokyo, meanwhile, acted to contain an energy-driven inflation spike. The Bank of Japan’s 25-basis-point increase brought the key rate to 1.0%, citing surging energy costs that threatened to fan price pressures across the economy. The move was tempered by a geopolitical easing: the United States and Iran reached an interim agreement that allows Tehran to resume oil exports, reopening the Strait of Hormuz and calming crude markets. That ceasefire helped pare back earlier inflation fears, though energy still accounted for more than 60% of the May CPI rise.

On the physical side, the market remains structurally tight. The Silver Institute projects a sixth consecutive annual supply deficit in 2026, this one reaching 46.3 million ounces—up from 40.3 million ounces the year before. Cumulative inventory drawdowns since 2021 have already exceeded 762 million ounces, with industrial demand from solar panels, electric vehicles, data centers and artificial intelligence infrastructure providing a persistent floor. More than half of all silver consumption now comes from industrial sources, and mine supply struggles to keep pace because most output is a byproduct of base-metal operations.

Yet one key demand sector is showing signs of strain. Solar manufacturing, which consumed 186.6 million ounces of silver last year, is expected to use just 151 million ounces in 2026—a 19% decline. Chinese producers are aggressively substituting copper for silver in cell metallization. Longi Green Energy plans to launch commercial production of copper-based rear-contact cells in the second quarter of 2026, while Jinko Solar has announced a similar shift. Shanghai Aiko Solar has already brought silver-free cells to market. The substitution has limits: TOPCon cells, with their high-temperature production processes, cannot use alternative metals, and copper raises assembly costs while introducing reliability concerns. For now, high-efficiency solar designs continue to require silver.

The upshot is a market locked between macro headwinds and a deepening physical tightness. On the monetary front, Warsh’s dot plot offers little near-term relief, and the BOJ’s tightening adds another layer of policy restraint. But the cumulative supply gap—now in its sixth year—keeps a floor under prices, with the next resistance zone at $72 and a potential path toward $80 if demand holds. Whether the Fed’s new chief signals any shift in tone later today may determine which force gains the upper hand.