SPECIAL REPORT: Fed Hikes Rates! | Axel Merk

Adam Taggart (0:00)

And we should be live. Welcome to Thoughtful Money. I'm Thoughtful Money Founder and your host, Adam Taggart. Welcome you here for another special report as we try to do every time the Fed releases its latest update, and then followed by the Fed Chair Press Conference. I'm joined as usual by Fed Watcher extraordinaire, Axel Merk. Axel, thanks so much for joining us again today.

Axel Merk (0:21)

Great to be with you on this very special day.

Adam Taggart (0:24)

Yes, very special day. Well, it is a special day. It's the first rate hike since 2023 It's highly anticipated by the market, but we have a change in trajectory for policy rate at the Fed.

Axel Merk (0:36)

I thought you said it's special because it's my birthday, but all right.

Adam Taggart (0:39)

Is it? The Fed met.

Axel Merk (0:40)

You want to talk about the Fed? All right. All right. We'll talk about the Fed. Wow.

Adam Taggart (0:46)

Wow.

Congratulations. Yeah.

Axel Merk (0:49)

Exactly.

Yes.

Where do we start? Why do we care? Maybe. I'd like to take a step back. The Federal Reserve influences what we call the risk-free rate of money. Everything else is priced around that. Maybe the 10 years, even more that. So we care what they do with the bazooka. We care what happens to inflation. Obviously, holding cash is not all that risk-free when your purchasing power gets eroded. But as Kevin Warsh pointed out, the labor market is somewhat decent, but inflation is too high. The question is whether you can do anything about it with all the geopolitical stuff going on. And Kevin said, yep, they can do something and they're doing it. And they had a unanimous decision to hike rates today.

Adam Taggart (1:43)

So a couple of things. One, interesting that it was unanimous. We've had many of the recent Fed releases have been marred, if you will, by, what do you want to call them? Blanking on the exact term, but where it's not unanimous, you've got people that are basically voting the opposite direction. Usually in the past, the Fed has always tried to have a unanimous statement. But to the point you just mentioned there, so it's not the only factor, but an important factor that is, I think, in influencing inflation and to a certain extent, inflation expectations, although I think those are still relatively muted, though correct me if that statement's wrong, is higher oil prices. And those are largely due to the wars in Iran and between Russia and Ukraine.

What can the Fed do to inputs like that?

Axel Merk (2:42)

So first, since we both had a running start to this meeting, sorry, we're trying to catch our breath here.

But Kevin Walsh actually had time to prepare for this press conference, and he did. He was succinct. He was to the point. He answered every question. He didn't take any follow-up question. He wrapped it up in 30 minutes, but let most people, not everybody, ask a question. But to the framing, Kevin Walsh said in the intermediate period, and he mentioned three buckets, he said the economy has strengthened, he said inflation trends matter, and the inflation trend test, so to speak, wasn't passed. And then he said geopolitics helped lead to today's decision without getting too much into the details. But yes, and so the broader than item is, well, can he do anything about it, inflation? And I think Kevin, more so than many others, realizes that monetary policy is a signaling exercise.

And obviously, that signaling needs to be credible.

That's also why he thinks, the less you say, the more important it gets, because then the few things you say, the market will take seriously. Now, obviously, it matters then that what you say actually makes sense and is to the point. But as a reminder, the market was confused after the July meeting because Kevin decided to go all over the place with a bunch of notions that he had introduced in his task forces. And so he needed to get focused. He did that in late August in his Jackson Hole speech, where he said very simply inflation is too high. We need to see or he needs to see inflation come down to 2 percent on a credible path on a timely basis. May not have used exactly those words, but he said those things. And he said up to that point that test hadn't been met. And then a few more inflation data came out, and the market then took the rate hike expectations up to over 90 percent because the latest inflation numbers were somewhat similar, didn't show a big decline. And so he said, okay, I'm going to hike rates now, was unanimous. And what he said is this is a step in that direction. And that's exactly what he can do at this stage. And can he get inflation down to 2 percent? Well, of course he could. He could use a sledgehammer. One item to maybe take that up front. He closed the press conference, and last answer he gave, he said, I don't think we need to harm the labor market or need to do harm to the labor market to achieve our objective. Maybe that will get quoted somewhere. I haven't seen anybody pick up on it. I also didn't see the market react to it, which surprised me because it means, to the extent that the Federal Reserve engages in more rate hikes, it's certainly not Kevin's intention to crush the labor market to get to the 2 percent target. I think that's super, super relevant.