FOMC Live Reaction: Is The Fed Making A Policy Error? | Axel Merk

Axel Merk · Merk Investments

Warsh's policy statement was unimpressive; wording changes added little and cutting words would help.

Axel has long argued for a shorter statement that changes words only with good reason. He objects to the change from 'solid' to 'strong' pace, which Bloomberg and AI tools read as a meaningful upgrade. He also objects to the vague 'accumulation of more information' language that Craig Torres questioned. He says that if the Fed does not need to say something, it should not. He accepts the statement's context: Warsh does not like issuing a statement every six weeks, and an upcoming meeting will have no statement or rate decision. He still says the press conference contained a lot of information for those who listen.

“if you don't have to say something, don't say it.”at 11:04

Axel Merk · Merk Investments

Warsh's 'conditions are tighter but not tight' language signals another rate hike, likely in December.

Warsh said he wants tighter conditions without killing the economy, then said conditions are tighter but not yet tight. Axel reads that as signalling another hike. He expects a December hike unless new information changes the Fed's mind. He sees financial conditions as the relevant measurable data point. Warsh's view is a small move is fine, with no rush, which implies a tightening bias that only works if it is kept in place rather than delivered as a sledgehammer. Axel notes the market's October hike pricing came down slowly after September but ultimately aligned with where Warsh wanted it.

“He wants tighter conditions and he also he said he doesn't want to kill this economy, but he wants tighter conditions. And then he said conditions are tighter, but they are not tight. Right. Which signals another rate hike is to come.”at 14:41

Axel Merk · Merk Investments

Fed independence depends on exiting fiscal policy; buying mortgage-backed securities is fiscal, not monetary.

Axel argues Fed independence is not about a presidential tweet but about the Fed returning to basics and leaving fiscal policy. Monetary policy controls money supply, interest rates and the amount of credit, not allocation of credit to a sector. In his view, buying mortgage-backed securities allocates credit to the mortgage sector, so it is fiscal policy. That began in 2008 and set the Fed on a slippery slope into micromanaging the economy. Removing politics from the Fed would let monetary policy work better: rates could be lower and growth better, because a credible Fed needs no hikes or direct market intervention to tighten conditions.

“Fed independence is not about a presidential tweet. Fed independence is about the Federal Reserve going back to basics to get out of fiscal policy. ... buying mortgage backed security is not monetary policy, it's fiscal policy because you're allocating credit to the mortgage sector.”at 22:40

Axel Merk · Merk Investments

Warsh has a real framework and communicates it well, though critics disagree.

Critics say Warsh gives no forward guidance and surprises markets. Axel says they misunderstand his framework, which is to give markets room to express views the Fed does not impose. Warsh's stance is that the market will react, but the question is how much of a thumb the Fed puts on the scale. Warsh comes from the rules-based camp, and the reaction function is not yet published because getting every committee member on board takes time. Warsh signals his intentions through statements like removing a dose of accommodation, and Axel says the market has largely understood where he wants policy to go.

“yes, I do believe he has a framework. Yes, I do believe he communicates it well, but there are people out there who would strongly disagree with that assessment.”at 36:42

Axel Merk · Merk Investments

Fed shouldn't rush: policy lags are long and variable, so it should only prevent demand-driven overheating.

Merk argues that Fed policy acts with a long and variable lag, so nobody knows what will happen, and that is why the Fed shouldn't be rushing. Hiking 100 basis points and being done with it wouldn't be helpful. Facing a supply shock is among the hardest things a central bank can do, and the pandemic showed the errors. The best a central bank can do is prevent overheating from excess demand, and if that causes a recession, so be it. He notes that the Fed chair has pointed out that conditions are already tighter.

“Fed policy acts with a long and variable lag. And so we don't know what's going to happen. The Fed doesn't know what's going to happen. It's also why the Fed shouldn't be rushing.”at 41:19

Axel Merk · Merk Investments

Fed is tightening, but policy is not a higher-for-longer regime like 2022; it is only removing accommodation.

Merk argues the Fed is in a tightening environment but not a higher-for-longer one like the regime that accumulated in 2022, when Powell eventually moved away from it. He says there is no super high inflation that the Fed must beat at any cost, so the Fed is simply removing a dose of accommodation, which he calls a very different environment. As evidence he cites market pricing of further hikes: one priced for December, the next for March, and another for July of next year, with the path subject to incoming data. He says that path does not look like a super tight policy fit.

“We are in a tightening environment at the Fed, but we are not in a higher for longer environment that accumulated in 2022... We're removing a dose of accommodation. That's a very different environment.”at 1:18:00

Axel Merk · Merk Investments

Precious metals should benefit from an eventual resolution of the Iran conflict; Merk holds precious metals.

Merk says he likes his precious metals holdings because he believes the Iran conflict will be resolved at some point, and any resolution should be positive for precious metals. He adds that long-term physical investors have kept adding to holdings while speculators pulled back, which he calls encouraging. He also argues that gold is tied to real rates: the Iran war is priced as a shock rather than a structural change, which implies higher real rates and is a headwind to gold. Precious metals only do very well if policymakers react strongly to the stagflationary impact. He frames metals and miners as a diversifier if AI debt later forces a slowdown.

“The reason why I like my precious metals holdings is that I do believe there's going to be a resolution at some point. Any resolution should be a positive for precious metals.”at 1:14:38

Axel Merk · Merk Investments

Gold miners' very high margins make mining attractive versus high-cost, uncertain AI investment for capital.

Merk says precious metals miners have phenomenal margins. He argues gold now competes with AI for investor capital, and AI is a very high-cost investment with uncertain margins. Because of the high margins, industrial investments in general and precious metals mining in particular are becoming quite attractive, so the playing field is more level. He cautions with an analogy: when software was 'eating the world' in 2011, a low-barrier, high-margin industry boomed, and that marked the start of a bear market in gold.

“On the mining side, the margins are phenomenal that these miners have. ... gold is competing with AI, which is very high cost investment, uncertain margins, and so suddenly industrial investments in general and precious metals mining in particular, because of the high margins, are becoming quite attractive.”at 1:16:42

Axel Merk · Merk Investments

Precious metals miners look attractive: high margins and very attractive valuations after a volatile year.

Merk argues that high margins at precious metals miners are making industrial investments in the sector, especially mining, quite attractive, and that the sector now offers a more level playing field. He calls valuations very attractive, while acknowledging the sector is down year to date, very volatile, and not for the faint of heart after dramatic gains last year. He ties his positive view to the monetary backdrop: the Fed is tightening but not in a higher-for-longer regime, which he says makes him more positive on miners and gold than he otherwise would be. He says he likes to hold the sector if the investor can afford the risk and describes it as part of his allocation.

“...industrial investments in general and precious metals mining in particular, because of the high margins, are becoming quite attractive... And as far as valuations are concerned, I think they're very attractive.”at 1:17:20

Axel Merk · Merk Investments

Oil prices are tied to Iran war risk; a resolution would ease the oil-driven inflation concern.

Axel tracks the correlations between oil, gold and bond prices. Last week a risk-off move saw bonds rally while oil rose, a clear short-term decoupling he hopes shows the market is moving past the Iran war. He says it may not last, since tensions could re-escalate. If a resolution comes, the inflation concerns induced by high oil prices should fade, which matters for how the Fed thinks about the economy. Warsh referenced the decoupling several times, which Axel sees as encouraging for the path ahead.

“last week we had this risk off environment and bond prices rallied in that while oil prices went higher. And so there was a clear decoupling at least the short term, remains to be seen whether that persists.”at 28:00

Axel Merk · Merk Investments

Refined fuel is scarce, so high prices must persist to cut demand; subsidies would backfire.

Merk says consumers are suffering from high fuel prices, but there isn't enough oil, especially refined fuel. Fuel therefore has to be more expensive so consumption falls, and that is the only way to deal with the shortage. Subsidizing fuel would cost an arm and a leg and create other problems. He adds that if the US and Iran reach a resolution, oil would likely fall below a toll-system scenario, and if the world muddles through, it adapts, for example by investing in refining in Canada.

“we are all suffering from the high fuel prices, but that's just what it is, right? There isn't enough oil around, especially not refined fuel. And so it has to be more expensive, so there's less consumption of it. It's the only way to deal with it.”at 43:00

Axel Merk · Merk Investments

Warsh's November 16 productivity conference will likely be a significant policy speech on productivity.

Warsh said productivity gains have been ongoing and not just in recent months, and said he would speak at a productivity conference on November 16. He plans to learn from many experts and widen the task-force work. Axel reads the speech as the venue for Warsh to lay out how the Fed should look at productivity going forward. Warsh is a new Fed chair who has learned that too much openness in press conferences creates confusion, and he has found speeches an effective tool. Axel says the market has missed this announcement.

“he made an announcement that there's going to be a conference on productivity on November 16 in which he is going to speak.”at 19:44

Axel Merk · Merk Investments

The US deficit is tremendous and no politician appears willing to tackle it.

Merk says it is bad news that nobody in politics appears to want to tackle the deficit, which is quite tremendous. He sees a starting point in the discussion around the Treasury secretary, who has political accountability, unlike the Fed. He says the fiscal debate has begun, but he doesn't know whether the Fed chair will tell Congress to get its act together.

“it's really bad news that nobody in politics appears to want to tackle the deficit and the deficit is quite tremendous”at 46:40

Axel Merk · Merk Investments

Trump's pledge not to touch Social Security is not the leadership needed to reform it.

Merk argues leadership matters for spending because it sets the tone. President Trump, among others, said he won't touch Social Security, and Merk says that isn't the leadership needed to reform it. He argues that presidents have influence over the budget through veto power, but Congress holds the spending power, and entitlements have followed a pendulum where cuts are partly reversed.

“I do think the leadership matters. ... President Trump amongst others said he's not going to touch social security. And so, that's not exactly the leadership you need to reform Social Security.”at 50:23

Axel Merk · Merk Investments

California's proposed one-time wealth tax is expropriation: retroactive, narrow, and a bad precedent.

Merk says the California wealth tax represents everything wrong with taxation. A good tax should be broad, and taxing a tiny group is unacceptable, since most people should be affected by a tax. A retroactive tax is a bad idea, and a 5% levy amounts to expropriation. He argues the tax's disruptiveness signals that some people are willing to be extremely disruptive to attack. Polls are roughly even and prediction markets give it little chance of passing, but what the tax stands for bothers him more than the tax itself.

“A retroactive tax is absolutely a bad idea. Obviously, the amount 5% is expropriation. So that's absolutely not acceptable.”at 53:29

Axel Merk · Merk Investments

US housing is frozen by high rates and lock-in; homes as real assets should hold value.

Merk says the housing market is frozen for now because interest rates are reasonably high and people aren't moving jobs. Cost of living keeps people from relocating, and wealthy owners locked into very low rates face much higher costs if they move, including property taxes and mortgage costs. He doesn't expect rates to fall, and he sees the market going through a normalization after years of low rates pulled transactions forward. He says he doesn't know how long that lasts. Because homes are real assets, prices should probably be okay, everything else equal.

“for the time being we have a frozen housing market, right? Because interest rates are reasonably high, people are not moving jobs actively. ... Homes are real assets and everything else equal, they should probably be okay.”at 56:28

Axel Merk · Merk Investments

Dollar stays dominant without a rival; the alternative to the dollar is fragmentation, not another currency.

Merk agrees that BRICS-type currency alternatives won't emerge, but says the question is wrong: the dollar does not need a rival, and the alternative is fragmentation with no world reserve currency. Deglobalization threatens the 'machinery' that makes US borrowing cheap, since the US borrows cheaply to invest abroad, which is effectively a short on the dollar. In risk-off episodes, deleveraging squeezes the dollar higher. Policymakers can kick the can down the road, and the US has deeper pockets than Europe, so the dollar stays dominant for a while, though foreigners may demand a higher price for debt. Central banks have an incentive to de-dollarize, but cannot do it overnight.

“There does not need to be an alternative. The alternative is fragmentation. The alternative is that there is no world reserve currency.”at 1:03:47

Axel Merk · Merk Investments

Tariffs reduce foreign financing of US debt, raising US borrowing costs and long-term yields.

Merk argues tariffs don't just impede the flow of goods but also the flow of currency. All else equal, tariffs mean less financing of US debt by foreigners, so borrowing costs are higher than they would otherwise be, and he notes that long-term yields on US debt have been going up. He stresses that foreigners won't dump their debt tomorrow, but the cost of borrowing rises at the margin.

“Tariffs don't just impede the flow of goods, tariffs also impede the flow of currency... when you have tariffs you have less financing of US debt by foreigners.”at 1:04:10

Axel Merk · Merk Investments

Iran war is priced as a temporary shock, not a structural change, implying higher real rates.

Merk argues markets price the Iran war as a shock rather than a structural change. That implies higher real interest rates, which he calls a headwind for gold, all else equal. The headwind reverses only if policymakers react strongly to the stagflationary impact, which then helps precious metals. He notes that a resolution would also be good for oil prices, and an Iran faltering would presumably also help oil prices.

“the war in Iran is priced in as a shock rather than as a structural change. And it implies a higher real interest rates. And I don't wanna get even more nerdy than we have been, but all else equal, that's a headwind to the price of gold.”at 1:14:09

Axel Merk · Merk Investments

AI debt binge could cause a slowdown that forces the Fed to react; hedge with metals.

Merk says the AI debt load is a bearish risk he hasn't fully covered. If there is a slowdown because of too much of a debt binge on the AI train, unlike the late nineties, he thinks the Fed will react, because the debt burden will need buffering when it implodes. He suggests diversifying into precious metals, including miners, as a hedge against that outcome. The argument is conditional on a slowdown occurring.

“If we ought to have a slowdown because there's too much of a [debt] binge on the AI train, different from the late nineties, I do think that the Fed will react to that because this debt burden is gonna needs to be buffered, right, when that implodes.”at 1:15:59

Axel Merk · Merk Investments

Long-term real interest rates are off their peak and signal market confidence in the Fed, so policy isn't too tight.

Merk notes that yields are off their peak, particularly long-term real interest rates. He acknowledges pushback on discussing these, since nobody knows long-term inflation, but argues that market measures of long-term real rates are mostly confidence measures on whether the Fed can achieve its goals. He concludes that these readings sound like it is alright to be in the sector, while admitting scenarios where things could turn out badly; he weighs the balance of risks and keeps his allocation.

“We also, by the way, off the peak in the yields. ...on the long term real interest rates. ...there are market measures on these and they are mostly confidence measures on the Fed on what they will be able to achieve.”at 1:18:56