Lasting Headwinds Hit Kevin Warsh's 'Agenda of Change' for Interest Rates

**SPEAKER_1** (0:00)
The impact it's having across the market. Joining me right now, Axel Merk, President and Chief Investment Officer at Merk Investments. It was very interesting. He really made his stance on inflation well known. He's strong on inflation, and in fact talked about that we need to have more work to be done, if inflation doesn't behave. I mean, he certainly was alluding to a rate hike may be necessary. What were your thoughts?

**Axel Merk** (0:26)
I think he had several audiences. One is obviously the market, but the other one is his peers. Remember, Kevin Warsh came in with an agenda of change, and you can't just throw him in and saying, I'm going to change everything. One of the challenges that he faces is that his colleagues think they did nothing wrong with regard to the high inflation we've had. One thing I thought was interesting that said is, hey, I contributed to introducing forward guidance.
He tried to say, we need to get rid of forward guidance, but rather than blaming them for doing it, he said, hey, it was my thing. And so he obviously, the previous press conference he had, there were some things that were rather unfortunate. So he straightened all that out.
And he pretty much said, hey, the inflation report was all right, but what we really need is inflation coming down. And so more work needs to be done. And by the way, to kind of pivot to what that means for the markets, today we see the dollar weaker. And part of that is that the bond markets and the rest of the world are reacting. They are getting weaker, making those currencies relatively more attractive. But importantly, the hawkish Warsh is the one that we saw. I thought it was a great success in the sense that he brought all the other FOMC members along. He didn't offend them. And yet he showed that there's a need for reform.

**SPEAKER_1** (1:48)
And so, with that reform, we may see a rate hike. The likelihood of a rate hike in September went up directly after his speech. We saw that. We also had some moves from Treasury Secretary Scott Besson on the buybacks.
What were your thoughts there?
And I ask it because we're talking about Kevin Warsh. When I say, what were your thoughts that, I'm really thinking, did he make it more difficult for the Fed at all?

**Axel Merk** (2:15)
I actually think the delineation is very important.
Buying back bonds is a inherently political activity, and it's good that it's with the Treasury Department. Now, you can argue that it's not very wise, and Druckenmiller obviously did, and I sympathize with that, but it's important that it's a political choice. The Warsh Fed wants to get out of politics. The Warsh Fed wants to get out of QE. The Warsh Fed wants to do less. And incidentally, you talk about the next rate hike. Most views care about the rate hike. What Warsh cares about, I don't think he cares so much whether interest rates are 25 basis points high or lower. He wants to make a better decision-making process. He wants to get the Fed out of politics, and the Fed getting out of politics is not about the president tweeting. It's about the Federal Reserve micromanaging the economy.
These are nuances that most people don't really care about. Warsh feels deeply about it. I happen to agree with Warsh that that's hugely important, more important where interest rates are going to be. But clearly on a program like this, we care interest rates 25 basis points high or lower. Right now, the odds are very high that we're going to see a rate hike.

**SPEAKER_1** (3:27)
Right. 66 in September, 74, 89 in December, and then 91% likelihood in January. So it certainly seems like one may come our way. What about the jobs report and where that may fit in? A lot of folks still talk about the jobs report being, the job situation still being pretty strong, even though our last one obviously took some tough numbers.

**Axel Merk** (3:53)
Incidentally, the Bureau of Labor Statistics just came out and suggest that there will be some downward revisions leading up to March of this year, so the market is a little bit weaker than previously priced in.
It's a high hurdle now for the Fed to take a step back. Not only does the job report need to be substantially weaker, but also Warsh talked about the trend. I mean, it's classic central bank talk, right? It's unlikely we said trend with one report. And so in that sense, Warsh, who doesn't get forward guidance, gave about as much forward guidance as possible that will see a rate hike. That the summer reports are always a bit iffy because of vacation time, back to school, depending on the timing on these things are, you'll see some distortions. And so if we have an out of the ordinary unexpected jobs report, it's probably going to be somewhat shrugged off. Now, clearly the markets will react to it. But I do think unless there's something dramatic happening, we'll see a rate hike in September.