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Markets and commentators noted the supposed "hawkish" tone of the new Federal Reserve Chairman in his first meeting and subsequent press conference this past Wednesday. The decision to keep rates static was not a surprise, but the brief statement and the dot plot were, along with many comments from Warsh.

• The Fed's release removed the comment suggesting that the next move in rates would be down, and ended with the straightforward comment: "The committee will deliver price stability."
•  Fully half of the Fed members indicated that they expected interest rate hikes both this year and next
• In his comments, Warsh hardly mentioned the labor market but emphasized the rise in the CPI.
• He emphatically stated that he intended to get the CPI rate down to the Fed's 2% target, stating that the Fed has missed its target for the past five years. The market interpreted this to mean a hawkish monetary policy.

Unlike under Powell, I do not think we should expect a stream of Fed officials, and the chairman himself, reinterpreting what he had said in light of the market reaction, so we may have to wait until the next Fed meeting (at the end of July) for a meaningful update to Fed policy. Of course, Warsh pointedly observed that the market should react to economic data and not to the Fed's interpretation of economic data, and there will certainly be plenty of economic data over the next five weeks.

The Market Had Already Changed Its View on Rate Cuts

The market expectations on rates have reversed dramatically. In January, Fed Funds futures were pricing in a 94% probability of a cut and zero probability of a hike in 2026.

Now, almost halfway through the year, they are pricing in an 80% probability of a hike and a zero probability of a cut. The shift started before Warsh's first meeting because of concerns about the inflationary impact of higher oil prices, but it accelerated after Warsh's first meeting.

Most significant was that Warsh did not blame the oil price for the latest pick up in the CPI, but referred more than once to how the Fed had failed over the past five years. Real interest rates are now negative, but Warsh may not allow this to continue for long.

Some Important, and Positive, Things From Warsh

Yes, one could say there was a more hawkish tone, but other things stood out to me.

• The clarity of the brief Fed statement (130 words versus 341 for the last statement).
• An acknowledgment that the Fed's own monetary policy is responsible for inflation; this was in stark contrast to the last Fed's repeated "transitory" comments blaming higher CPI on COVID, or war, or oil, on anything and everything except the Fed itself.
• Warsh noted that the data that the Fed has relied on is old data by the time it is collected and released. He commented that CEOs have more accurate and up-to-date information than the statistics released by the government (reflecting criticism of Fed reliance on backward-looking data).

I am no fan of the Fed. It is attempting something that is impossible (how a group of nine people, mostly academics, sitting in Washington can possibly know what is going on in the economy and what is right for the economy; Hayek clearly expounded how this central planning is doomed to failure). It has indeed failed over its 100+ year history, overseeing and indeed being responsible for both the deepest recession and the worst inflation in U.S. history. It should be abolished. A major criticism of the recent Fed has been its reliance on data that is, by its very nature, backward-looking and frequently out of date by the time the Fed considers it. I have suggested that the highly paid economics PhDs that the Fed has on its staff could be more usefully employed listening to company conference calls.

Warsh Understands the Economy and Markets

But Warsh was a breath of fresh air. He made clear and straightforward comments, delivered professionally with conviction, based on a deep understanding of markets rather than the academic backgrounds of recent Fed officials. (Neither Yellen nor Bernanke has ever spent a day in the private sector.)

His comment that the Fed should listen to markets (as they interpret economic news) rather than have markets listen to the Fed was revolutionary in its own way.

So, at the risk of appearing naïve, I see Warsh as a positive for the economy (if not necessarily, at least in the short term, for the markets!)

Market Reaction To Hawkish Tone

The Fed's new hawkishness affected all markets, the bond market most of all, with rates moving up (bonds down), but also the stock market, down before a recovery, as well as gold. The stock market is remarkably complacent; margin debt shot up again, 9% in May, to reach almost 4.5% of total invested, a new all-time record. By contrast, with gold, we saw a pick up in outflows from both the physical and equity ETFs, as well as Commodity Traders turning net short, and most astonishingly, we see the bull/bear index on gold equities report an extremely low bull ratio (7%), with one day last week a stunning zero bull ratio.

From a contrarian point of view, this suggests we are close to a sell-off capitulation. This comes when valuations of the gold stocks are very close to multi-decade lows. Agnico Eagle Mines Ltd.'s (AEM:TSX; AEM:NYSE) price-to-free cash flow multiple, for example, is within a whisker of its low. Last week, partly because of these valuations, I indicated it was time to buy the gold stocks again. Indeed, the ones mentioned are up over the past week, some appreciably. But now, this week, things have changed, and the next move for the gold stocks is likely down, so we would hold off buying for the most part; this may be only very temporary.

Cobre Inches Close To Restart in Positive Development for Franco

Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) received some potentially positive news when a Panamanian commission reported that the Cobre Panama mine shut down by the government over two years ago was broadly well operated with no major deficiencies, but recommended enhanced oversight and reporting. The report suggests that the government will not try to replace First Quantum Minerals Ltd. (FM:TSX; FQM:LSE) as the mine operator, with the next step negotiations over a new financial agreement, making a reopening sooner and smoother than otherwise.

Franco, of course, owns a stream on the mine, which was its largest single revenue source before the mine was shut. Separately, Franco said it is appealing a Burkina Paso court ruling nullifying its stream agreement with a local company that challenged the agreement on the Karma mine. Franco said it is pursuing legal remedies under the provisions of the agreement. This is a small mine, and not material to Franco's revenue. A restart of revenues from Cobre is not fully reflected in the stock price and would be meaningful when restarted. Franco previously wrote off its investment in the mine, so its book does not reflect any value for it.

Franco is a Buy for those who do not own it.

Fortuna Advances Next Mine

Fortuna Mining Corp. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) has received the key environmental approval for its Diamba Sud gold project in Senegal, as it completes its feasibility study, with a view to a construction decision mid-year.

First production is expected in the second half of 2028 and is central to the company's growth pipeline, representing about 15% of the company's net asset value. Fortuna is trading at only about 60% of its NAV, below the peer group average.

The uncertainty in the gold price suggests that the stock could retreat after its recent rally, but it certainly would be one to buy on a pullback.

TOP BUYS this week, in addition to above and below, given my near-term caution on buying following the Fed meeting, include Agnico Eagle, Lara Exploration Ltd. (LRA:TSX.V), and Kingsmen Creatives Ltd. (KMEN:SI).