SPECIAL REPORT: Fed Hikes Rates! | Axel Merk

Macro / Policy Context (Fed Rate Hike)

• The Federal Reserve delivered its first rate hike since 2023, described as highly anticipated.
• Key market-relevant framing:
  • The Fed influences the risk-free rate, which affects pricing across other assets.
  • Inflation is still considered too high, while the labor market is described as “somewhat decent.”
  • Geopolitics is cited as a contributor to the decision, with higher oil prices linked to:
    • Iran war-related dynamics
    • Russia–Ukraine war
• The hike was described as unanimous, contrasting with some prior Fed meetings where votes were not unanimous.

What the Fed Is Trying to Do (as Discussed)

• Inflation goal: 2% on a credible path and in a timely manner.
  • The discussion references a prior failure to pass a Powell/Walsh-style “inflation trend test.”
• Narrative: monetary policy is treated as a signaling exercise—“less said, more important” if credibility and clarity matter.
• Core debate point: the Fed is prioritizing price stability over deliberately harming the labor market to reach inflation targets.

Key theme: the Fed doesn’t need to harm the labor market to achieve its objective.

Inflation Expectations and “How Many More Hikes”

• The discussion contrasts earlier confusion (e.g., the July meeting) with later messaging (e.g., Jackson Hole):
  • “Inflation is too high… need to see inflation come down to 2%”
• Market-implied odds mentioned:
  • ~90%+ rate hike expectations after more recent inflation data.
  • Later cited odds:
    • ~50% odds of an October rate hike
    • ~128% odds that a hike occurs by Dec 9 (positioned as “after the election”)
• Conclusion: next actions are expected to be data-dependent, not pre-committed “three hikes/four hikes” style.

Neutral Rate / Restrictive Stance (Important Nuance)

• A media-highlighted phrase: the Fed removed some accommodation, which some audience members found ambiguous.
• Axel’s interpretation:
  • Even after the hike, the Fed is still not declaring “restrictive.”
• Market impact nuance:
  • Market pricing 1 year out became about half a rate hike higher than before the meeting (i.e., the hike shifted expectations more hawkishly).

Balance Sheet / Reserves / QE (“Fed Plumbing”)

• The Fed was said to continue an “ample reserve regime.”
• Distinction emphasized:
  • Large balance sheet effects can occur even without additional QE-style “printing” momentum.
  • “Ample reserves” are treated as more of market plumbing than a political “QE/asset purchase” choice.
• Uncertainty discussed:
  • What level of balance sheet/reserves is “low enough” without breaking the system.
• Aspirational direction mentioned:
  • Returning to a pre–financial-crisis regime, such as the New York Fed intervening in markets to set rates rather than heavy reliance on reserves / paying interest on reserves.

Fed Independence vs Politics / “Operation Twist”

• Disclosed concern: political pressure to push rates lower.
• Specific political claims referenced:
  • A headline/tweet that Trump demanded rates be ~1% or lower after the first hike.
• “Kabuki” / framing argument:
  • Keeping Fed decisions in its “swim lane” supports Fed independence and avoids monetizing debt through rate manipulation.
• “Operation Twist” / Treasury-side framing:
  • Presented as Treasury-related rather than the Fed executing it.
  • Interventions should belong to the side with political accountability (Treasury), not the Fed’s monetary mandate.
• Possible Fed–Treasury operational coordination was also discussed:
  • e.g., repo facilities and potential swaps/dumps of bond portfolios to keep the balance sheet “cleaner,” framed as reducing politics.

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Precious Metals / Gold (Rate-Hike Implications)

Key Numbers and Market Logic

• Real rates referenced:
  • 10-year real interest rates: ~2.69%
• Gold level mentioned:
  • Gold held around $4,200–$4,300, noted as “holding up” even with hike risk.
• Outlook logic:
  • Gold competes with the real value of money.
  • Even if the Fed does the “right thing,” the guest argues the economy is not “out of the woods” due to:
    • Lack of fiscal discipline
    • Limited progress on entitlement reform

Near-Term Caution / Trading Mechanics

• Timing note for gold:
  • Discouraged from using leverage/trading into quadruple witching on Friday, Sept 18 (derivatives expirations).
• Near-term expectation:
  • Because real yields are “pretty darn high,” there’s a good chance real yields decline, which could support gold.
• Risk drivers:
  • Middle East / oil shocks can heavily affect rates and bond pricing, making timing difficult.
• Additional warning:
  • Avoid trading oil futures due to complexity/liquidity and history of extreme outcomes (including prior negative oil prices).

Portfolio / Risk Role of Precious Metals

• Precious metals were described as:
  • A diversifier/hedge in scenarios of debt/fiscal stress, overinvestment, and “stocks expensive.”
  • A hedge when markets are “crazy,” not necessarily a short-term trading vehicle.

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Assets / Instruments Mentioned

• Gold (including physical gold)
• Silver
• Oil
  • Mentioned as oil futures (discouraged for retail)
• U.S. Treasuries / government bonds
• Mortgage-backed securities (MBS) (as part of Fed asset-purchase discussion)
• S&P 500 (referenced in the diversification context)
• Yen (referenced in connection with Treasury facility/repo discussion)
• ChatGPT (mentioned as an example of AI-related spending; not treated as an investable ticker)
• No specific stock/ETF tickers were provided.

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Step-by-Step / Methodology Frameworks Discussed

Fed Credibility / Signaling Framework

• Fed communicates enough to maintain credibility regarding progress toward 2% inflation.
• Markets “calibrate” based on whether incoming inflation data show enough progress.

Gold Valuation Framework

• Gold’s role is assessed relative to the real yield / real rates environment.
• If real yields decline and purchasing-power concerns persist, gold can be supported.

Risk Management Framework for Trading

• Avoid using leverage around major derivatives expirations (quadruple witching).
• Avoid attempting to trade complex commodities (like oil futures) unless professionally equipped.

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Key Recommendations / Cautions (As Stated)

• Don’t rely on oil futures trading unless you understand the complexity and risks.
• For gold:
  • The discussion stressed no guarantees about price “tomorrow.”
  • Use caution around Sept 18 quadruple witching; avoid leverage.
• For investing generally:
  • Precious metals may serve as a hedge/diversifier tied to longer-term fiscal/purchasing-power risks (depending on investor risk appetite).
  • Portfolio implementation should likely involve professional financial advisers.

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Disclosures / Disclaimers Mentioned

• Host disclaimer: “Nothing… is intended to be personal financial advice.”
• General disclaimer: no endorsement of specific investment activities; encourages guidance from a professional adviser.

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Presenter / Source Acknowledgements

• Adam Tagert (Thoughtful Money founder/host)
• Axel Merk (Merk Investments; “Fed watcher” guest)
• Kevin Walsh / Kevin Warish (referred to in the context of the Fed chair; spelled variably)
• Additional referenced sources/commentators:
  • Kevin Walsh
  • Bloomberg (referenced for a market/sentiment comment)