Before Our Withering Gaze
In June of 2023, Chief Economics Correspondent for the Wall Street Journal Nick Timiraos wrote that, “Federal Reserve Chair Jerome Powell finds himself in a place no central banker wants to be: working to avert a credit crunch, which calls for looser monetary policy, while fighting high inflation, which demands the opposite.”
Well, here we are now in the summer of 2026. Time has changed, but things remain the same. We have a new Fed Chair but the same old problem. Kevin Warsh likewise finds himself in a place no central banker wants to be. Inflation is still embarrassingly above target (and has been for well over five years), which calls for tighter monetary policy. At the same time, the need to avert a credit crunch (from private credit issues now potentially amplified by newly emerging cracks in AI), a potential stock market decline, and an interest expense-fueled debt spiral all demand the opposite.
At the time of Timiraos’s comments in June of 2023, gold was under $2,000 per ounce. Today, three years later, even after a prolonged and brutal correction, gold is still over $4,000 per ounce. In HAI‘s view, Kevin Warsh (like Powell) will continue to find himself where “no central banker wants to be,” and gold will (again) likely be twice the current price or more three years from now.
If Warsh’s first post-FOMC presser was his “give him the benefit of the doubt” honeymoon moment, this week’s July post-FOMC presser represented his first (and very likely not last) encounter with a “place no central banker wants to be” moment.
Warsh was direct and very clear. In his post-FOMC statement he said, “For some households, businesses, and market professionals, five years of high inflation have left a mistaken impression that is hard to shake: that the Fed’s implicit inflation target was somehow above two percent. Let me reiterate: There is no soft inflation target, there is no soft implicit target—not on this Committee’s watch. There is only a target, and it is two percent. Not one of my FOMC colleagues is under any illusion. We have begun a new chapter, and we understand that the five-plus years of inflation above target cannot be cured in nine weeks—or by a single month of modest price decreases.”
Warsh added, “This Fed will not waver. Our credibility rests on performing our duties and delivering on our responsibilities. Americans are right to expect that, because our nation’s prosperity depends on it.”
In HAI‘s view, that sounds great. It really does. It’s most refreshing to hear. Furthermore, HAI hopes it is true. But, until Warsh explains exactly how he will deliver this miraculous disinflationary alchemy (which Powell and almost the exact same FOMC could not deliver previously) without crashing the economy, stock market, government fiscal position, and bond market, in HAI‘s view his convincing words will continue to ring hollow.
Very importantly, Warsh had the opportunity to hike at this meeting if he wanted to. Nevertheless, he opted not to raise the fed funds rate despite a very uncharacteristic three FOMC committee members dissenting in favor of a hike. In other words, if Warsh wanted a hike in rates, he very likely could have arranged one. Despite the tough talk on inflation fighting, Warsh apparently didn’t want to raise rates this month.
In the post-FOMC presser, the press corps seemed to have had similar concerns. Bloomberg’s Michael McKee’s question to Warsh was, “I’m struggling a little bit with some of what you’ve said today, and maybe you can help clarify this. You’ve said over and over again that your job is to bring down prices, to get prices stable, to hit your target, and that you will hit your target… But all you’ve talked about today is talking about it, and it’s not like members of the Committee weren’t there before you talking about it. So, I guess what the American people might be asking is, what are you waiting for?”
In HAI‘s view, that’s a very fair question.
Ann Saphir with Reuters then asked Warsh a very similar question. Saphir asked, “…So I need a little help here too. You’ve—you’ve said repeatedly, you have no tolerance for inflation. And yet, we are seeing above-target inflation repeatedly for five years and through your term so far. And sure, you have no magic wand, but you have not taken action. You just gave us a little peek at your reaction function as well. You said that if underlying inflation is rising, that you would tend to think that you might need to tighten. And, with the exception of the most recent inflation print, that is what we’ve been seeing [underlying inflation rising]. So, could you explain what you mean by no tolerance for inflation, and what you plan to do about it?”
Again, a very good question.
Here is Kevin Warsh’s response to Ann Saphir (which doubles as a response to Mckee’s question): “Sure, so Ann, I hear from you what I hear more broadly from households and businesses: impatience. Deliver it already. This is not a—this is not an excuse, this is a fact, this FOMC, this Board has been in business for eight and a half weeks… The impatience that households and businesses feel have been going on for 63 months. We are on the job, we will deliver, we are focused like a laser on making sure we can do it. But the suggestion that we’re going to be able to do it with our magic wand is one I want to disabuse you and everyone else of.
“But the discussion the last two days gives me more confidence even than I had eight and a half weeks ago. This team that we have at the FOMC, the support that we have from Board staff, and the new hard questions we’re asking, we need to resolve those, and as we resolve those questions, get smarter on those, we’re going to deliver on the remit. You don’t have to take my word for it. If you look broadly at market prices, they are certainly not saying all clear, but they are working in concert to keep us on our toes, and they have tightened financial conditions in this inter-meeting period, and—and that has given us a—that has provided us some—some comfort that—that we’ve got the ability and capability to deliver.”
Feel free to read that response by Warsh over again several times.
In HAI‘s view, it’s a very problematic answer. First, he requests patience (much like Powell). Sure, understood. But after over five years of the Fed failing to deliver on the inflation mandate, perhaps Warsh can understand our collective impatience?
Second, Warsh says the notion that he and the FOMC have a magic wand “is one I want to disabuse you and everyone else of.” Again, understood, but if we are to believe Warsh when he talks about being certain of his ability to achieve on inflation what hasn’t been achieved for over five years (for very understandable and challenging reasons HAI has discussed for years) then we do need to assume Warsh has a magic wand.
Third, if Warsh is “focused like a laser on making sure we can do it” (bring inflation down to the 2% target), then not only does he not have a magic wand now, but he and the FOMC are still searching (albeit reportedly diligently) for a magic wand that alluded his predecessor and virtually the same FOMC.
Fourth, when Warsh references “the new hard questions we’re asking,” and that “we need to resolve those, and as we resolve those questions, get smarter on those,” he is again plainly saying that we don’t yet have answers to those same tough questions that caused the last five years of high inflation (let alone a plan on how to effectively defeat inflation).
Lastly, when Warsh says that the bond market selling off (raising rates) has “provided us some—some comfort that—that we’ve got the ability and capability to deliver,” HAI gets very worried. The bond market aggressively selling long-term U.S. debt (the 30-year note yield is now at its highest level since June 2007) isn’t a ringing endorsement of the market’s confidence in the Fed’s forward control over inflation.
Even worse, the market tightening financial conditions runs directly into one of those previously referred to “tough questions” the Fed is still searching for an answer to—namely, rising long-term interest rates act as a drag on the economy and the stock market, and increase government interest expenses. That situation carries the potential for lower government income taxes and capital gains taxes on raising government outlays that dramatically worsen an already extremely problematic fiscal reality.
To HAI, Warsh looked like someone very committed to selling a message, but he also appeared to have no logical argument whatsoever to describe how he would or could deliver. Amid the tougher questions, in HAI‘s view, Warsh looked much like a deer in the headlights.
Again, HAI isn’t surprised, and doesn’t view it as Warsh’s fault. In HAI‘s view, Warsh is merely tasked with convincingly delivering what’s ultimately a very empty message.
Importantly, in addition to clear cracks emerging in the new Warsh doctrine, this week also offered other indications that the tide may soon turn for the precious metals. The strengthening dollar and rising yields over recent months that Warsh described as tightening financial conditions are also now slowing economic growth (impacting tax receipts) and increasing interest expenses (via higher interest rates). This week, Treasury Secretary Scott Bessent seemed to blink.
On Wednesday, a Wall Street Journal article titled, “Japanese Yen Jumps 3% Against U.S. Dollar as Intervention Suspected” indicated that Bessent is active in operations to weaken the dollar (by helping to strengthen the yen). On Friday, a Kyodo News article titled, “U.S. assistance is ‘beyond psychological support’: Japan currency diplomat” further supported the idea of a U.S.-assisted intervention to both strengthen the yen and weaken the dollar.
The idea of active U.S. Treasury currency intervention was then further reinforced on Friday by a Reuters article titled “US Treasury informed banks that it may intervene in yen, source says” that reports that the U.S. Treasury is informing banks that they can sell U.S. dollars to buy Japanese yen.
This week, Warsh’s tough talk (but unwillingness to hike rates) combined with the U.S. Treasury Department’s efforts to weaken the dollar strike HAI as very compelling evidence that the temporarily gold-bearish Warsh doctrine (an anti-debasement narrative) is now beginning to run into a much stronger, dominant gold-bullish trend of debasement reality.
Without some magic wand that Warsh just admitted he doesn’t have, the only obvious way out of the U.S.’s debt spiral predicament is to embrace, not fight, the “debasement trade.” This week was an indication that the U.S. may convincingly talk anti-debasement, but will continue to walk the walk on debasement. If that read is right, as HAI strongly suspects, then HAI also expects gold to have a very strong remainder of the year and beyond.
On July 13, Federal Reserve Governor Christopher Waller gave a speech to the New York Association for Business Economics. In his hawkish speech advocating for a willingness to hike rates to quell inflation, Waller said forcefully that, “sternly staring at inflation until it melts before our withering gaze is not an option.”
Along with Warsh, and despite the bluster, Waller voted to hold rates steady. Given the disconnect between rhetoric and action, it might be worth considering that though staring at inflation until it melts before our gaze is not an option, perhaps sternly staring at inflation until it effectively debases the value of the U.S.’s debilitating debt load might be the dedicated goal. In HAI‘s view, regardless of rhetoric, the balance of evidence strongly suggests the latter. Furthermore, in HAI‘s view, gold is the best bet for protection.
Weekly performance: The S&P 500 was up 0.1.05%. Gold was off 0.25%, silver was down 0.73%, platinum gained 3.50%, and palladium was up 2.65%. The HUI gold miners index was off 1.30%. The IFRA iShares US Infrastructure ETF was down 3.38%. Energy commodities were volatile and down on the week. WTI crude oil lost 4.47%, while natural gas was off 3.20%. The CRB Commodity Index was down 2.84%. Copper was up 2.86%. The Dow Jones US Specialty Real Estate Investment Trust Index was off 2.99%. The Vanguard Utilities ETF was down 4.13%. The dollar index was down 1.64% to close the week at 99.80. The yield on the 10-yr U.S. Treasury was up 6 bps on the week, closing at 4.74%.
Have a wonderful weekend!
Morgan Lewis
Investment Strategist & Co-Portfolio Manager
MWM LLC
