Fed's Warsh Is A MONETARIST Says Steve Hanke, And Here's His Next Move

Steve Hanke (0:00)

It's becoming clearer that he's leaning heavily into the monetarist zone, strike zone. He literally said, money matters. There's not been a Fed chairman to utter that for decades. They're not talking about cutting government spending. Who's talking about that? They're spending like drunken sailors down there. Deficit will go up.

They'll have to issue more treasury debt, and people who buy it are going to demand a higher yield.

David Lin (0:29)

Steve Hanke is back. He's the Professor of Applied Economics at Johns Hopkins University. He was on the show two weeks ago and had called for a Fed hike in September, as well as the long end of the bond yield curve to keep going up. He was right on both accounts. Well, it's now Thursday, September 17th, a day after the Fed raised the Fed funds rate by 25 basis points, and stocks are rebounding and the 10 years slid to 4.95 after staying above 5% yesterday. Hanke today explains why Kevin Warsh, Fed Chair, is fundamentally a monetarist, a stark contrast from his predecessor, Jerome Powell, who once said that we need to unlearn monetarism. But what does this mean? Now with the interest rate approaching, what Professor Hanke calls the red zone, can the Fed save the economy just in time, and what is their next move? We're going to find out today.

Right now on Kalshi, traders are pricing in a 79% chance that there will be another rate hike before 2027 If you agree, a $50 trade can yield $60 if you're right. Professor Hanke will give us his prediction, so stay tuned. This video was sponsored by Kalshi, the largest prediction market in the United States. Unlike a sports book, you're trading peer-to-peer on real-world events from economic data to political outcomes, and the price moves based on public opinion, not a house. Go to the link in the description down below or scan the QR code here, and new users can get $25 in app credits when they trade $25 if you use my code LIN, L-I-N. Kalshi is CFTC approved and available in all 50 states, including California and Texas.

More on that later. Welcome back, Professor Hanke. Good to see you again.

Steve Hanke (2:06)

Yeah, good to see you, David.

David Lin (2:07)

What was the most surprising thing about yesterday's FOMC? To recap, 25 basis point, unanimous 12 to vote for a 25 basis point hike, and immediately after the announcement or the press conference following the announcement, the 10-year yield actually rose to 5%. This morning on the 17th, the WTI oil price fell 1% and the yields are down. The treasury is now back down to 4.945 and stocks are rebounding on the news.

I wonder if markets are reacting to today's oil price movement or digesting yesterday's Fed. In any case, what was your first, what was your impression of the FOMC from yesterday?

Steve Hanke (2:54)

Well, I thought Warsh did a good job and he's starting to clarify things, at least for, I think not for the general observer, but certainly for me as a monitorist.

If you connect all the dots and recent speeches that he's been giving, it's becoming clear that he's leaning heavily into the monitorist zone, strike zone. And let me just indicate, first, going back, the big speech at Jackson Hole before this press conference, he lifted a number of points that he thought were important. And the sixth point that he raised was he literally said, money matters. Now, there's not been a Fed chairman to utter that for decades. So that's the first thing. The second point is that he continues to stress the fact that you have to monitor monetary aggregates, like things we talk about, M2 and Divisia M4 and things like that. The third thing, he clearly downplays the importance of interest rates. And that's consistent, again, with monetarism, because the monetarists say monetary policy isn't about changes in interest rates. It's about changes in the money supply. And that seems to be what he's saying. Also, the fourth item is that he's for a quiet fit. He very much wants to be focused on rules and discipline. And that's very much in the monetarist framework, too, rules and discipline.

Then if we jump to the press, so if we wind up the Jackson Hole plus the press conference plus other things that he said, and you connect all his dots and know how to interpret them, he's leaning into the monetarist orientation, my orientation, what we talk about in this program over and over again. So remember, what we used to be talking about, we would always be going after Chairman Powell for explicitly rejecting monetarism. Well, now, we have a chairman that's explicitly accepting monetarism, and the fact that money matters, you have to pay attention to the money supply.