Warsh’s Fed and Gold: Why Merk Defies the Real-Yield Playbook

A hawkish Federal Reserve chair is supposed to be bad news for gold. Axel Merk, who spent roughly an hour with Kevin Warsh in August, reads it differently, and that tension runs against the standard real-yield playbook for Warsh Fed policy.

The Federal Open Market Committee (FOMC) raised rates by 25 basis points to 3.75%-4.00% on 16 September, with the October and December meetings still ahead. Warsh has not submitted his own dot plot, so investors are inferring his reaction function from outside signals, including accounts like Merk’s.

Merk speaks only for himself, and no independent record of the meeting exists. Here is which claims are confirmed policy, which are his interpretation, and what the gap means for gold positioning into the next two meetings.

What is actually confirmed about Warsh’s Fed so far

The 16 September decision was unanimous. The Committee lifted the target range from 3.50%-3.75% to 3.75%-4.00%, said inflation “remains elevated”, and framed the move as supporting a “timelier return” to the 2% goal.

The September FOMC statement confirms the unanimous vote, the move to 3.75%-4.00%, and the Committee’s language on inflation remaining elevated, which gives you the one hard policy anchor against which Merk’s secondhand account can be tested.

The Summary of Economic Projections (SEP) shows where the committee expects to go. 16 of 18 participants signalled at least one more hike in 2026.

Reuters described the new 3.875% midpoint as “quite tight”. Warsh’s strongest public signal came at Jackson Hole in late August.

Reuters on Jackson Hole: Warsh avowed his commitment to the 2% target, clarified that the policy rate is the Fed’s best tool, and indicated a willingness to pull that lever if circumstances warrant.

For the second consecutive SEP, Warsh declined to submit his own projections. That is why outside accounts carry extra weight, and why you should be careful with them.

The policy rate, not the balance sheet, is where Warsh has actually acted. Treat rate-path signals as the hard evidence and everything else as inference.

What Merk says he heard: QE, interest on reserves and a slight tightening bias

Merk, whose Merk Investments manages about $2.7 billion in precious metals, met Warsh in early August. The session was scheduled for 30 minutes and ran about an hour, as a two-way discussion that was not about rate decisions. Gold did not come up, and the meeting only became public after it appeared on the Fed’s calendar.

Caveat: Everything below is Merk’s interpretation, not Warsh’s stated plan.

His key claims:

• Merk says Warsh dislikes QE and a large Fed footprint.
• Merk says interest on reserves (IOR, the rate the Fed pays banks on cash they park with it) distorts markets and is politically awkward.
• Merk says Warsh spoke of “removing some accommodation”.
• Merk says Warsh has dropped the idea of discussing inflation only in whole numbers.

That “removing accommodation” phrasing does not appear in the September statement or in the summaries located, and its venue is unconfirmed.

Merk’s account of Warsh’s dislike of a large Fed footprint rests on how quantitative easing works in practice: asset purchases expand reserves and compress term premiums, which is why any retreat from them matters for bond yields.

The balance sheet and interest on reserves

Merk argues a genuine shrinkage would mean returning to a pre-2008 regime in which the New York desk intervenes to set rates, something he says staff dislike. He also opposes Fed mortgage-backed securities purchases as credit allocation, which he sees as fiscal territory.

The operational record is less dramatic. J.P. Morgan notes the Fed continues to maintain ample reserves, no change to runoff or reinvestment was cited, and no explicit Warsh comments on IOR were found. The 2019 repo stress is a reminder of why aggressive shrinkage meets practical limits.

The rate bias and the October versus December question

Merk reads a “slight tightening bias” that points to December over October. He was surprised the market priced a large October hike.

That fits the SEP’s signal of one more 2026 hike without an aggressive series. It remains a timing hypothesis you can monitor, not a forecast. Merk’s account tells you what a sympathetic, informed observer believes Warsh intends, so weight it as colour that may overstate some themes and omit others.

Why higher real yields usually hurt gold, and why Merk disagrees

A real yield is the return on a bond after subtracting expected inflation. Gold pays nothing, so when real yields rise, holding it costs more in forgone income.

The conventional chain runs in three steps:

1. Less QE and steady runoff lift the term premium, the extra yield investors demand for holding longer bonds.
2. A restrictive policy path plus higher term premiums lifts real yields.
3. Higher real yields raise gold’s opportunity cost, which tends to pressure prices, especially when the dollar is strong.

World Gold Council and major bank research shows a negative gold-real yield link over a decade, modulated by the dollar and risk sentiment. Reuters’ piece on the forces driving up bond yields suggests investors already see a feedback loop between Warsh’s stance and term premiums.

Merk cites a 10-year real yield of about 2.95%, and treats roughly 3% as a confidence signal under which gold can still do well. That figure is his alone; no verified TIPS yield, nominal yield or spot gold price for early October is available, so none appear here.

These are general historical tendencies, not forecasts. If you hold gold, the controlled higher-for-longer path Warsh appears to be pursuing is historically the harder regime, so your thesis needs a specific decoupling catalyst (an inflation surprise, financial stress or recession fears) rather than reliance on rate policy alone.

For readers weighing a decoupling thesis, our deep-dive into how Warsh’s Fed could change gold’s behaviour examines how reduced guidance alters gold’s sensitivity to policy signals.

What could make this reading wrong, and what to watch before October and December

The tidy logic above has gaps. Warsh’s refusal to submit a dot plot, and a narrative-heavy style Reuters called “touchy-feely”, force markets to guess his reaction function.

That gap in guidance is part of a broader forward guidance overhaul, one that leaves markets weighing speeches and secondhand accounts in place of a clear dot-plot signal.

Reader warning: When the chair publishes no forecast, every secondhand account fills the vacuum. Treat each as one input, not a signal.

Merk himself concedes Warsh’s July messaging confused markets, while Jackson Hole and September were more focused.

Historical precedents for balance sheet surprises

• The 2013 taper tantrum showed abrupt signalling can spike term premiums.
• The 2017-19 runoff showed shrinking without a clear reserve floor can over-tighten.
• The 2019 repo stress showed the danger of underestimating reserve demand.

Data gaps matter too: there are no verified Fed total assets, no CME FedWatch probabilities for October or December, and no independent corroboration of the meeting. Because the evidence is thin and partly secondhand, size any gold or rates position to the uncertainty rather than to Merk’s confidence.

Signals worth tracking:

• Policy language at the October and December meetings.
• Any Warsh comments on reserves or interest on reserves.
• Progress on the five pending Fed reform task forces noted by Reuters.
• Whether any dot-plot or projection disclosure changes.

Reading Warsh’s Fed without over-reading one account

Three layers sit on top of each other. Confirmed policy is a rate-focused, moderately tight Fed pointing to one more 2026 hike. Merk’s account adds a December-leaning tightening bias and a balance sheet philosophy, all unconfirmed. The conventional real-yield mechanism sits in tension with his gold optimism.

The October and December meetings are the first real tests. If the language stays measured and no balance sheet change appears, the rate path, not anecdote, should anchor your view; a sudden shift in reserves commentary or signs of financial stress would change it.

This article is for informational purposes only and should not be considered financial advice. Investors should conduct their own research and consult with financial professionals before making investment decisions. These statements are speculative and subject to change based on market developments.