Fed speak: Will Fed Chair Powell point to rate cuts at the September meeting? - Axel Merk
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(Kitco News) With expectations that the Federal Reserve will hold rates steady on September 20, the idea of rate cuts could be brought up sooner than many anticipate, according to Axel Merk, President and CIO of Merk Investments, who sees Fed Chair Jerome Powell as having no real strategy.
"A Federal Reserve does not have a strategy. We have a Fed that's sticking to where they are right now, hoping that somehow things will normalize. What ends up happening is the Federal Reserve does nothing," Merk told Michelle Makori, Lead Anchor and Editor-in-Chief at Kitco News.
The problem is that inflation is not linear, Merk explained. Last week, markets digested the latest inflation numbers that showed the consumer price index rising 0.6% in August — the biggest monthly gain this year. The annual headline number was at 3.7%, up from 3.2% in July. And as the renewed price pressures were blamed on surging energy prices, core inflation, which excludes energy and food, was up 4.3% year over year, a slowdown from July's 4.7%. The Producer Price Index (PPI) also rose 0.7% last month — the sharpest increase in over a year.
At the same time, inflation prints are not the most reliable indicators of what the Fed will do at its meetings on September 20, November 1, and December 13, Merk pointed out.
Historically, when the economy weakens, the Fed pivots and loosens its monetary policy. But the U.S. central bank's options are limited after it promised to keep rates higher for longer.
"We are glued to the next inflation release, which could be higher or lower," Merk said. "The Fed will probably be more restrictive for longer. And it's part of the reason why I don't buy into the soft landing scenario."
Another issue is that the Fed is still a debating club that reacts to economic changes with a delay. "When you are a debating club, you won't make decisive decisions unless a crisis is smack in your face. And that's why they were late in hiking, and that's why they'd be very late in easing," Merk said.
And a delayed response to slowing economic growth might lead to a deeper recession. To get Merk's outlook on precisely when a recession is likely to hit the U.S. economy, watch the video above.
With the Fed boxed into a corner, it is almost inevitable that the U.S. central bank will allow severe economic damage to sink in. "The Fed doesn't want to be accused of having a repeat of the 1970s. That's why they'll be late in cutting rates," Merk added.
Merk does not rule out rate cuts early next year, noting that there will be a lot of Fed speak from Powell on how a rate cut might not necessarily mean an easing of monetary policy.
"At some point, maybe it's next week, maybe later this year, we'll get talk that a rate cut is not actually easing. That sort of mental gymnastics is going to be [the focus] at some point in the coming months," Merk warned. "Powell will say — if and when the Federal Reserve is going to cut rates, it's not really a rate cut because it's just making sure that real rates are not going to go high too much."
Gold price will react to Powell's comments with a rally, Merk said. To get his forecast on whether gold can move significantly above $2,100 next year, watch the video above.
Severe economic damage to force Fed's hand
As the U.S. economy slows down, the marketplace will be more volatile. "People are uncertain about what the Fed is going to do and what the implications are going to be," Merk said.
The U.S. consumers are already losing power, and growth will get seriously hit. "A more severe damage will be caused to economic growth than the market is pricing it," Merk explained. "I do consider the risk of a hard landing to be a significant one."
The employment situation in the U.S. will also see significant weakness, with the tech sector at higher risk of revaluation.
"Instead of having these quiet quitters, we have quiet firings where companies reassign people to different jobs. They're reluctant to lay them off, but we have fewer people getting part-time jobs."
The economic situation will get even more complicated with 2024 being an election year, where everything will be debated and assigned blame. To get Merk's thoughts on how a recession might impact the political landscape, watch the video above.
There are a number of assets that Merk advises to hold when weathering a recession, including gold and mining stocks. Watch the video above to get his thoughts.