SPECIAL REPORT: Fed Hikes Rates! | Axel Merk
Axel Merk frames the rate hike as a withdrawal of accommodation rather than a move into clearly restrictive territory, while emphasizing the Federal Reserve’s 2% inflation target, credibility, and independence. He argues that election timing may favor a December move over an October hike, and discusses Treasury-led yen intervention, balance-sheet reform, and the uneven effects of policy across a K-shaped economy. Markets remain resilient even as lower-income households struggle, while gold may benefit from weak fiscal discipline and declining currency purchasing power. Separately, the host attributes to Darius Dale a forecast of one or two additional hikes, and Merk highlights AI investment risk and elevated real yields as important market variables.
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Axel Merk argues that the Federal Reserve's election-adjacent meeting schedule makes an October or year-end rate hike unlikely unless inflation data are unusually poor, despite market expectations for a hike exceeding 90%. The host also attributes to Darius Dale a forecast of one or two hikes to reinforce anti-inflation credibility and potentially create room for easing in 2027.
The episode frames monetary policy as a credibility and signaling exercise: the latest hike was unanimous, the Fed is targeting a credible path to 2% inflation, and policy bias can tighten financial conditions without an immediate rate move. Merk warns that allowing 3% inflation to become the new normal would undermine that credibility, while productivity could support lower rates only if inflation remains contained.
Merk argues that political accountability should remain with Treasury rather than the Federal Reserve when addressing currency markets, favoring Treasury-led yen intervention and expanded Japanese repo facilities over monetary-policy action. He similarly says Fed purchases of mortgage-backed securities can become political sector allocation and that an eventual Fed-Treasury asset exchange could move the central bank further from politics.
Merk distinguishes an ample-reserves operating framework from quantitative easing or printing money to hold rates down, but argues that excess reserves can push money unnecessarily into the economy and elevate asset prices. His proposed balance-sheet reform would return toward the pre-financial-crisis regime, in which the New York Fed intervened directly in markets to set rates.
The discussion links inflation and fiscal credibility to demand for real assets: the Fed sets the risk-free rate while inflation erodes cash purchasing power, and Merk cites weak fiscal discipline and unresolved entitlement spending as reasons for precious-metals exposure. He notes that gold remained around $4,200-$4,300 even with 10-year real rates at 2.69%, while real yields near 2.6% could potentially decline from here.
GEO-POLITICS
“The headline that came out, yeah, Trump demands 1% or lower interest rates after the 1st rate pay tag. That is, I mean, that makes good theater, it's good politics.”—
“What I would have hoped for today, we didn't see it, is that at least 1 or some other people would have declined to put in a dot for the…”—
ECONOMY
“the Federal Reserve influences what we call the risk free rate of money. Everything else is priced around that. Maybe maybe the 10 years even more that…”—
“But as Kevin Warsh pointed out, the labor market is somewhat decent, but inflation is too high…”—
“We need to see or he needs to see inflation come down to 2% on a credible path on a timely basis…”—
MARKETS
“The next problem is that an ample reserve regime elevates asset prices. You're pushing money into the economy unnecessarily.”—
“Once was during a very slow period in August and once was on Labor Day…”—
“As long as the top leg of the k is thriving, it almost doesn't matter what the bottom leg of the k is doing even though it's the vast majority…”—
FORECASTS
“And I think Darius Dale did a good job of this, saying that he was using a football analogy, but was saying that, basically, he expected the Fed to hike…”—
“It's looking forward, if we do have a recession, it will presumably be induced by some sort of bust in AI…”—
Why the Fed still matters (risk-free rate and inflation)
Axel Merk explains that the Fed sets the risk-free monetary baseline, while inflation erodes cash purchasing power and makes the policy rate consequential.
Why the unanimous vote stood out
Merk views the unanimous hike as notable because recent Fed decisions featured dissent, signaling unusual agreement around inflation concerns.
Oil, Iran, Ukraine, and non-monetary inflation
Merk says oil inflation driven by Iran and Russia-Ukraine conflicts is largely non-monetary, limiting what interest rates can directly accomplish.
Warsh’s three buckets: growth, inflation, geopolitics
Kevin Warsh organized the decision around stronger growth, insufficient inflation progress toward 2%, and geopolitical risks affecting the outlook.
Policy as a signaling exercise
Merk argues monetary policy works partly through credible signals, making Warsh’s concise, disciplined communication more effective than sprawling explanations.
“We don’t need to harm the labor market”
Warsh said the Fed can pursue 2% inflation without deliberately damaging employment, signaling that rate hikes are not intended to crush the labor market.
Price stability vs. the employment mandate
Merk agrees Warsh prioritizes price stability because sustained low inflation ultimately provides the strongest foundation for employment and household welfare.
Wealth gap and who the Fed can actually help
The Fed cannot set individual wages or directly close the wealth gap, but price stability helps asset-poor households preserve purchasing power.
The no-hire, low-fire economy
The labor market appears resilient in aggregate, yet workers without jobs face a low-hire, low-fire economy and reduced geographic mobility.
Trump’s call for 1% rates
Trump’s demand for 1% rates highlights political pressure, while Merk says Fed independence requires staying within monetary policy rather than managing fiscal choices.
Can the Fed refuse to monetize the debt?
Merk says the Fed can refuse to monetize government debt, warning that politicized central banking would encourage unlimited spending and eventual instability.
Warsh as longtime Fed critic and consensus-builder
Warsh’s long criticism of the Fed informs his reform agenda, but he is pursuing consensus and discipline rather than attempting an immediate institutional takeover.
October vs. December hike odds and the election
Merk expects an October hike to be less likely because of the election, with December more plausible unless inflation data deteriorate sharply.
Data will dictate the next move
Neither markets nor the Fed know the full hiking path; incoming inflation, oil, and economic data will determine subsequent decisions.
Balance sheet, QE, and ample reserves
Warsh wants markets to respond to data rather than Fed speculation, and Merk says the latest communication partially restores that signal.
Why Merk wants a scarce-reserves regime
Warsh kept the ample-reserves framework for now, but Merk believes his longer-term preference is a smaller balance sheet and interest rates as the primary tool.
Friction with Trump, Bessent, and Treasury
Merk favors returning to scarce reserves, arguing that ample reserves obscure market stress, subsidize banks, and inflate asset prices.
Operation Twist, the yen, and speculators
The Fed’s plumbing reforms face internal resistance, especially from operations staff who benefit from the simplicity of abundant reserves.
Was the hike just a hawkish “flex”?
Merk distinguishes the Fed’s balance-sheet mechanics from QE, arguing that current reserve payments support financial plumbing without representing an active stimulus campaign.
Did the bond market get what it wanted?
Treasury and the administration may pressure markets, but Merk prefers political interventions such as yen support and Operation Twist remain Treasury’s responsibility.
Resilient spending vs. collapsing sentiment
Treasury’s yen intervention and signaling aim to restrain leveraged speculators without trying to defeat the market, while Fed-Treasury cooperation remains operational.
The K-shaped economy
Merk interprets Darius Dale’s forecast of one or two hikes as a possible hawkish demonstration designed to reinforce inflation credibility and reassure bond investors.
How the Fed helped create the K-shape
The hike may have pleased bond markets, but Warsh is trying to reduce the Fed’s thumb on the scale and let productivity and inflation data guide policy.
Will Warsh cave — next Volcker or a ruse?
Warsh believes productivity gains could eventually permit lower rates, but credibility around the 2% target must come first so 3% inflation does not become normalized.
Mentors, principles, and “punched in the face”
Merk accepts the host’s classroom analogy: an early forceful signal can establish credibility, allowing future policy to be less confrontational.
“We removed some accommodation”
Resilient spending and depressed sentiment coexist because necessities continue during hardship, while discretionary luxury consumption and political identity drive much of the variation.
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