THE FED WILL SURPRISE EVERYONE: THE NEXT MOVE IS HUGE

**Dan** (0:00)
Here we go.

**Michael Zuber** (0:02)
Alrighty, folks, did Kevin Warsh catch Wall Street offside? You know, we've been talking about Kevin Warsh, new Fed chair, had his first Jackson Hole speech, and it appears that people went into that session with a certain trade on, and it backfired. All you have to do is look at gold and Bitcoin to see their reaction, and see that at least a few people were caught offside. So we're going to ask Dan one simple question.
Did Kevin Warsh surprise Wall Street with how hawkish he sounded? Dan, I don't know if you caught the speech live, but I'm sure you've seen it at least once. I've seen it three times now.

**Dan** (0:42)
Yeah, I didn't. I did not. I actually haven't watched it yet, but I read a couple of articles. I've got a quote here, interesting quote from Kevin Warsh in his speech. You probably will remember this line.
I would be hard-pressed to describe broad financial conditions as restrictive.

**Michael Zuber** (1:00)
Yeah, there were many lines. That was one that I noted. Another one, we have failed at our mission for 58 months.
Another one, this one really cleaned up some past communication. He said that our predominant tool of choice is short-term interest rates.

**Dan** (1:20)
That's their only tool.

**Michael Zuber** (1:22)
Yeah, well, he confused people because earlier he had talked about using the balance sheet.

**Dan** (1:27)
Yeah, I guess quantitative easing.

**Michael Zuber** (1:29)
Yeah, he could use the balance sheet and some other things. So I don't know about you. Again, I've listened to it three times. The first time I was driving, so I wasn't sure I caught it all. So I've listened to it a second time. My second time, I thought it was more hawkish than the first time, so I had to watch it again.
And I don't know that you could call that speech anything else than hawkish.

**Dan** (1:51)
No, he said, hike four times.
Yeah. I don't know if you caught Steve Leesman, CNBC.

**Michael Zuber** (2:01)
I did not. I missed that.

**Dan** (2:01)
Right after the speech when Kevin Warsh took the customary walk.

**Michael Zuber** (2:07)
Walk, yeah.

**Dan** (2:08)
And as he's coming back, Steve Leesman, he walked right by him, and Steve Leesman just happened to be on air at that point. So he yells over to him, he goes, Hey, Chairman Warsh, how you doing? And he actually recognized him and he says, I'm good.
He goes, how was your hike?

**Michael Zuber** (2:28)
Yeah, he started off the speech with a hike analogy, and it really came through.
I know there's a lot of people in my comments that have been calling me crazy for months because I've been pointing at September as the first rate hike, near as I can tell long before anybody else. And I thought maybe we should look at the FedWatch tool, because I think for the first time, the market might actually be starting to agree with me. What does FedWatch say now?

**Dan** (2:55)
About 60 percent hike.

**Michael Zuber** (2:57)
Wow. And before the meeting, I think I checked it was 35

**Dan** (3:03)
Yeah, before the meeting, I don't know if it was that low, but it was close to 40

**Michael Zuber** (3:08)
Yeah.

**Dan** (3:09)
It was definitely on the no-hike side. You know, keep things the same.
It's pretty much flipped 60-40 the other way now.

**Michael Zuber** (3:19)
Yeah. And it's funny, I saw an interesting Wall Street Journal article. I think I read it this morning. Basically, past presidents have gone into Fed meetings looking for reasons to hike.
This meeting, Warsh will be looking for reasons not to hike.
So, I thought that was an interesting turn of phrase and frankly, one I agree with. And I think he's only got one number.
Because next week, we get the jobs numbers. But I think Kevin Warsh was pretty clear, the job market is solid. Unemployment rates 4.1 percent. He's not cutting interest rates with 4.1 percent.

**Dan** (3:55)
It actually may go down to 4 percent.

**Michael Zuber** (3:57)
Yeah. So again, he's not cutting with this. So the jobs numbers mean very little. It's all about CPI and PPI the following week.

**Dan** (4:05)
That's right.

**Michael Zuber** (4:06)
And memory serves, the base effect is not helpful in September.

**Dan** (4:10)
Negative. It's negative.

**Michael Zuber** (4:11)
That's just not good.

**Dan** (4:13)
We're getting a way down. So a negative one dropping off, which implies CPI is going down.

**Michael Zuber** (4:19)
Yeah, CPI is. So dude, I don't know.
I don't know how they don't hike it. I actually came to this epiphany this morning. There's a school of thought that he is using his voice to create this image of a tough guy. So the market does his work for him.