WEBVTT - Warsh Eyes Fed ‘Regime Change’ With Less Talk, New Models 0:00:02.720 --> 0:00:07.240 Bloomberg Audio Studios, podcasts, radio news. 0:00:07.680 --> 0:00:12.120 He would not answer any question that might be as 0:00:12.320 --> 0:00:15.880 little smallest way disapply of Donald Trump. 0:00:16.280 --> 0:00:21.080 JEM believed to all who will watch it that Kevin 0:00:21.120 --> 0:00:24.000 Worrishon will be a great slock puppet for Donald Trump. 0:00:24.440 --> 0:00:27.880 I'm committed to ensuring that the conduct of monetary policy 0:00:27.960 --> 0:00:32.960 remains strictly independent, equally committed to work with the administration 0:00:33.080 --> 0:00:36.080 in Congress a non monetary matters that are part of 0:00:36.120 --> 0:00:47.360 the Fed's remit, and I commit myself to accountability. 0:00:49.159 --> 0:00:52.000 I'm Stephanie Flanders, head of Government and Economics at Bloomberg, 0:00:52.159 --> 0:00:54.320 and this is Trumponomics, the podcast that looks at the 0:00:54.320 --> 0:00:57.960 economic world of Donald Trump, how he's shaking the global 0:00:58.000 --> 0:01:00.560 economy and what on earth is going to happen next. 0:01:00.920 --> 0:01:03.600 And this week we're turning our attention back to the 0:01:03.640 --> 0:01:07.600 Federal Reserve and we're recording this on the morning of Wednesday, 0:01:07.720 --> 0:01:11.199 April twenty ninth, a few hours before what is likely 0:01:11.240 --> 0:01:14.840 to be Japow's final meeting charing the Board. Now, usually 0:01:14.920 --> 0:01:17.640 that would be a rather stupid, badly time thing to do, 0:01:18.200 --> 0:01:21.080 but with one exception, and we'll get to that, there's 0:01:21.080 --> 0:01:24.280 not a lot hanging on this meeting. The big focus 0:01:24.400 --> 0:01:26.399 is on the man who's likely to be leading the 0:01:26.440 --> 0:01:30.400 world's most important central bank at the next meeting, Trump's pick, 0:01:30.800 --> 0:01:33.800 Kevin Walsh. Now, we had an episode back in February. 0:01:33.880 --> 0:01:36.000 I encourage you to go and listen to it about 0:01:36.000 --> 0:01:38.800 what we could expect from a FED led by mister Walsh, 0:01:38.959 --> 0:01:41.480 featuring my friend and the former senior advisor at the 0:01:41.520 --> 0:01:44.800 New York Federal Reserve, Krishna Guha, who's now Vice Chairman 0:01:44.880 --> 0:01:49.600 and head of Economics and Central Bank Strategy at Evercore ISI. Well, 0:01:49.640 --> 0:01:52.680 since then a lot has happened with implications for that 0:01:52.960 --> 0:01:56.880 future FED. The Iran warf for status, also a bit 0:01:56.920 --> 0:01:59.920 more evidence on how AI might or might not be 0:02:00.160 --> 0:02:03.360 paving the way to looser policy in the US. And 0:02:03.440 --> 0:02:06.600 most recently, we had a very lively confirmation hearing for 0:02:06.680 --> 0:02:09.720 mister Walsh in front of the Senate Banking Committee on 0:02:09.760 --> 0:02:12.600 April twenty first. Now I was away for the hearing, 0:02:12.880 --> 0:02:15.400 but catching up afterwards looking at the coverage, it seemed 0:02:15.600 --> 0:02:18.320 how you felt about it depended pretty heavily on where 0:02:18.320 --> 0:02:21.040 you sat, So it made me more to check in 0:02:21.080 --> 0:02:24.160 with Krishna again how he was looking at a Walsh 0:02:24.160 --> 0:02:26.799 fed Krishna, thanks so much for doing this again and 0:02:26.919 --> 0:02:27.600 on FED. 0:02:27.440 --> 0:02:29.520 Day no less. Great to see you. 0:02:30.639 --> 0:02:32.640 Now we were going to try and save your breath. 0:02:32.680 --> 0:02:35.120 So we've got a few top lines here from what 0:02:35.200 --> 0:02:37.680 you told us in February, and then we'll get onto 0:02:37.800 --> 0:02:38.600 what you think now. 0:02:39.560 --> 0:02:42.760 So I think it is true that Kevin Walsh has 0:02:43.280 --> 0:02:48.040 for most of his career as channeled and represented what 0:02:48.080 --> 0:02:52.480 one might think of a small C conservative Republican leaning 0:02:52.720 --> 0:02:57.400 economic thinking and principles. There has generally been more concerned 0:02:57.520 --> 0:03:01.919 with inflation than the labor market, let's say, more focused 0:03:01.960 --> 0:03:06.320 on supply side issues than demand side management. And so 0:03:06.600 --> 0:03:09.120 I think there is an aspect that is channeling a 0:03:09.320 --> 0:03:11.400 set of thinking on one side, if you like, of 0:03:11.440 --> 0:03:14.800 the political and economic debates. I think it's also the 0:03:14.840 --> 0:03:18.080 case that Kevin believes that the really big inflation risks 0:03:18.120 --> 0:03:22.120 come when you have a combination of fiscal expansion on 0:03:22.120 --> 0:03:25.080 the part of the government and money financing on the 0:03:25.080 --> 0:03:27.320 parts of the central bank. So Kevin would say the 0:03:27.360 --> 0:03:31.240 inflation risks today are completely different from the inflation risks 0:03:31.400 --> 0:03:33.600 that were there in the early phase of the pandemic, 0:03:33.600 --> 0:03:35.960 which is why I was a Hawk then and I'm 0:03:36.040 --> 0:03:41.920 a dove now. I think that the crewed version of 0:03:42.040 --> 0:03:46.200 concerns about Wash, which is he's super hawkish on inflation, 0:03:46.320 --> 0:03:49.880 interest rates and he's super hawkish on QT, just don't 0:03:50.120 --> 0:03:53.400 bear particularly close examinations. That's not what we should be 0:03:53.440 --> 0:03:57.640 worrying about. That doesn't mean that there are no points 0:03:57.680 --> 0:04:00.600 of vulnerability or things that we should be tended to 0:04:01.160 --> 0:04:03.320 in the case of a Wash FED. I think the 0:04:03.400 --> 0:04:06.800 question is it's fine, and indeed, I think very legitimate 0:04:06.800 --> 0:04:10.240 to critique some of the shortcomings of traditional FED models 0:04:10.280 --> 0:04:13.080 and backward looking data dependence, but it's going to be 0:04:13.240 --> 0:04:17.600 very hard to replace that with something that is coherent 0:04:17.800 --> 0:04:22.360 and systematic and well communicated, and that could go badly 0:04:22.400 --> 0:04:25.560 wrong if Wash were to turn his back on the 0:04:25.600 --> 0:04:28.560 old ways of doing business without having figured out a 0:04:28.680 --> 0:04:31.520 fully coherent set of approach or set of approaches to 0:04:31.560 --> 0:04:32.120 replace it. 0:04:35.440 --> 0:04:38.920 So first things first, Krishna, was there anything that struck 0:04:38.960 --> 0:04:43.640 you from Kevin Walsh's testimony that led you to change 0:04:43.640 --> 0:04:47.000 your expectations for his kind of Federal Reserve in any way? 0:04:48.680 --> 0:04:51.120 Not so much change my view, but I thought there 0:04:51.120 --> 0:04:55.600 were some very interesting parts to that hearing. First and 0:04:55.680 --> 0:04:59.520 foremost Kevin really doubled down on his promise. 0:04:59.160 --> 0:05:03.320 Of quote RESI gen change end quote at the Fair. Now, 0:05:03.720 --> 0:05:05.520 there's still a lot of gaps. 0:05:05.160 --> 0:05:08.240 In terms of filling out what that really means, but 0:05:09.080 --> 0:05:11.680 I think it's very clear that he's presenting himself not 0:05:11.800 --> 0:05:14.520 just as a change candidate in general, but as a 0:05:14.560 --> 0:05:19.240 break with his immediate predecessors, So not just Powell, but 0:05:19.400 --> 0:05:24.240 that period of relative continuity from Benanti to Yellen to Powell. 0:05:24.640 --> 0:05:27.640 To the extent that Walsh has a role model. 0:05:27.400 --> 0:05:30.960 In central banking, it's really Greenspan, not one of his 0:05:31.120 --> 0:05:32.440 immediate predecessors. 0:05:32.880 --> 0:05:36.120 Yeah, and I was struck that he was pretty straightforward 0:05:36.440 --> 0:05:40.240 in blaming the inflation after COVID on central bankers, which 0:05:40.480 --> 0:05:42.080 the central bankers who were there at the time, I've 0:05:42.120 --> 0:05:45.560 never got them to really admit that. He was critical 0:05:45.920 --> 0:05:50.960 of the new framework for inflation targeting that was introduced 0:05:51.240 --> 0:05:55.240 just around that time. What key aspects of regime change 0:05:55.279 --> 0:05:56.200 were you thinking about? 0:05:56.680 --> 0:06:00.040 Well, I think we should break that down into a 0:06:00.279 --> 0:06:05.280 work tools and communication. Right, So with respect to the framework, 0:06:05.320 --> 0:06:08.880 I mean you started there already, right, highly critical of 0:06:08.920 --> 0:06:11.760 the framework of the FED foot in place during the pandemic, 0:06:11.760 --> 0:06:14.560 and in fact of course that the FED is itself revised, 0:06:15.000 --> 0:06:18.599 but looking to develop a difference, and he would say 0:06:18.640 --> 0:06:23.240 better understanding of the inflation process and the inflation outlook 0:06:23.360 --> 0:06:27.479 through new models, more extensive modeling of the supply side, 0:06:27.760 --> 0:06:31.160 not just nu Kaunsian modeling of the demand side, looking 0:06:31.240 --> 0:06:35.080 at different and potentially better ways of measuring underlying inflation. 0:06:35.480 --> 0:06:38.440 He's talked about wanting to lean more on trend mean 0:06:39.160 --> 0:06:42.320 or median as opposed to the core PCE measure that 0:06:42.400 --> 0:06:47.000 the FED is typically used to represent underlying inflation on tools. 0:06:47.680 --> 0:06:51.240 There are going to be important changes on communication too. Now. 0:06:51.279 --> 0:06:53.920 Watsh wants to get out of the business of forward guidance. 0:06:54.000 --> 0:06:56.800 I think many would agree that that was overdone in 0:06:56.880 --> 0:06:59.880 recent years, but he wants to go further than that. 0:07:00.240 --> 0:07:02.640 He thinks that central banks have made a fetish out 0:07:02.640 --> 0:07:05.840 of communication, that they just say too much, talk too much. 0:07:06.160 --> 0:07:09.600 He wants to say less talk less. And I think 0:07:09.600 --> 0:07:12.520 that's going to be quite an adjustment for us to 0:07:12.520 --> 0:07:14.239 get used to after. 0:07:14.080 --> 0:07:16.160 A long period in which the FED and other. 0:07:16.080 --> 0:07:20.000 Central banks embraced the idea that by being more transparent, 0:07:20.080 --> 0:07:23.320 by sharing more information with the markets, they would actually 0:07:23.400 --> 0:07:26.600 make policy, not just better understood, but more effective too. 0:07:27.280 --> 0:07:29.680 I was very struck by what he said about communications, 0:07:29.680 --> 0:07:33.040 because it is interesting, even in your and my sort 0:07:33.040 --> 0:07:36.840 of time of looking at markets and thinking about monetary policy, 0:07:37.200 --> 0:07:40.720 the expectations around communications have gone up and up. The 0:07:40.760 --> 0:07:44.160 bond markets, you could argue, have been really spoon fed 0:07:44.320 --> 0:07:47.440 by the FED and got used to thinking they know 0:07:47.720 --> 0:07:50.520 everything about what the Fed's going to do ahead of time. 0:07:51.160 --> 0:07:54.680 Walking back from that really means that you're promising to 0:07:54.720 --> 0:07:59.040 inject more uncertainty into markets and potentially volatility. How much 0:07:59.080 --> 0:08:00.400 you might want to get there in the end, it 0:08:00.440 --> 0:08:02.920 sounds like quite a dangerous sort of scary transition. 0:08:04.040 --> 0:08:06.559 One hundred percent that's exactly my own view. 0:08:06.720 --> 0:08:11.440 I think that, particularly if Kevin is also proposing that 0:08:11.480 --> 0:08:15.720 the FED should change some of its framework and its 0:08:15.720 --> 0:08:19.400 operating practices. If at the same time you also pull 0:08:19.480 --> 0:08:23.320 back from your communication, you're certainly going to have a 0:08:23.400 --> 0:08:27.480 period of more volatility and uncertainty, and so you've. 0:08:27.360 --> 0:08:30.280 Got to be careful how far you go in that direction. 0:08:30.880 --> 0:08:36.319 I also think separately that Kevin himself may run into 0:08:36.400 --> 0:08:40.120 a very simple problem, which is that fundamentally, the reason 0:08:40.160 --> 0:08:43.679 why central bankers like to communicate a lot is because 0:08:43.720 --> 0:08:47.320 it allows them to shape the market's rate path and 0:08:47.400 --> 0:08:52.199 therefore advance their own objectives in terms of monetary policy, 0:08:52.200 --> 0:08:55.000 either easing things or tightening things or keeping them where 0:08:55.000 --> 0:08:57.840 they are. The problem Kevin's going to run into sooner 0:08:57.960 --> 0:09:00.640 or later is the market's going to pry something he 0:09:00.679 --> 0:09:03.840 doesn't like, And then the question is, well, am I 0:09:03.880 --> 0:09:06.280 going to stay silent or am I going to say. 0:09:06.040 --> 0:09:06.839 Something about it? 0:09:07.040 --> 0:09:09.040 I think that goes to whether or not it's credible 0:09:09.080 --> 0:09:10.880 to make this promise. You know, there's a big tool 0:09:11.120 --> 0:09:12.959 that you're just saying I'm not going to use it, 0:09:13.240 --> 0:09:15.079 and I'm even going to put up with quite a 0:09:15.120 --> 0:09:20.000 lot of volatility, some of it based on maybe wrong expectations, 0:09:20.040 --> 0:09:23.319 in order to give up that tool once he actually 0:09:23.360 --> 0:09:25.320 gets there. I just wonder if that's going to last. 0:09:25.320 --> 0:09:27.440 But I guess if he did really get rid of it, 0:09:27.440 --> 0:09:29.440 then you'd be going back not to a Greenspan fed, 0:09:29.480 --> 0:09:31.520 but more like a Volca fed. I mean, famously, Paul 0:09:31.600 --> 0:09:35.199 Volka raised interest rates on a Sunday night two by 0:09:35.280 --> 0:09:39.120 two percentage points and actively wanted to shop the market. 0:09:40.400 --> 0:09:42.360 Yeah, I don't think there's any going back to Volka. 0:09:42.400 --> 0:09:44.400 I don't even think there's any going back really to 0:09:44.520 --> 0:09:49.480 Green Spans era of you know, just providing very ambiguous, 0:09:49.559 --> 0:09:53.720 deltic statements and leading the market to figure out what's 0:09:53.760 --> 0:09:56.320 going on. So I think Kevin's going to have to 0:09:56.360 --> 0:09:58.720 try to find a middle way, right. I think it's 0:09:58.760 --> 0:10:02.800 certainly true that the FED and many other central banks 0:10:03.040 --> 0:10:06.760 probably talk more than they necessarily need to in aggregate 0:10:06.800 --> 0:10:09.079 at least with and you count all the different speakers, 0:10:09.720 --> 0:10:12.480 and that there are lots of things that could be 0:10:12.559 --> 0:10:16.440 done to improve the signal to noise ratio in central 0:10:16.440 --> 0:10:20.760 bank communications and to sharpen up the distinction in the 0:10:20.800 --> 0:10:25.160 way you talk about different things. Right, the central Bank should, 0:10:25.320 --> 0:10:30.920 in my view, categorically communicate very clearly and comprehensively about 0:10:30.960 --> 0:10:34.800 its reaction function. It should also understand that it's very 0:10:34.840 --> 0:10:39.720 different when it talks about its understanding of the economic outlook. Right. 0:10:40.000 --> 0:10:43.880 That is something where it has some insights and expertise, 0:10:43.960 --> 0:10:48.079 good staff, good data, but fundamentally doesn't have a deep 0:10:48.240 --> 0:10:52.079 forecasting edge over the market and should in general be 0:10:52.200 --> 0:10:55.600 quite humble. Plenty of things that can be improved, but 0:10:55.760 --> 0:10:59.480 just backing away from communication I think ultimately won't work. 0:11:00.000 --> 0:11:02.800 One of the areas where he was delphick and indeed 0:11:03.120 --> 0:11:08.520 ambiguous was in answering questions around, for example, whether Donald 0:11:08.559 --> 0:11:10.839 Trump lost the twenty twenty election. And this was one 0:11:10.880 --> 0:11:13.320 of the things when I said, people, depending on where 0:11:13.320 --> 0:11:15.240 they sat, had a different focus. You know, there were 0:11:15.280 --> 0:11:17.040 certain people in the markets who were focusing on the 0:11:17.040 --> 0:11:19.840 stuff that you've just talked about. Others maybe have a 0:11:19.840 --> 0:11:24.720 more political mindset, not least Elizabeth Warren focused on him 0:11:25.200 --> 0:11:29.400 not being willing to say anything that might offend Donald Trump. 0:11:29.760 --> 0:11:32.120 You and your own notes said it was jarring, which 0:11:32.240 --> 0:11:34.360 you're very careful with your words. I think shocking would 0:11:34.360 --> 0:11:36.160 be the word other people might use if I sort 0:11:36.160 --> 0:11:38.720 of translate it out of Krishna speak. But did you 0:11:38.760 --> 0:11:40.080 also find it concerning? 0:11:40.720 --> 0:11:44.280 I think that while it is a sad statement on 0:11:44.360 --> 0:11:48.440 the Times that it is controversial to state who did 0:11:48.520 --> 0:11:53.280 or didn't win the twenty twenty election, I think you could, 0:11:53.440 --> 0:11:56.640 if you were being generous, make an excuse to Kevin that, look, 0:11:56.720 --> 0:11:59.560 you're starting to get drawn into political controversy. This is 0:11:59.640 --> 0:12:03.800 not a question that is pertinent to the role for 0:12:03.840 --> 0:12:06.240 which he's being considered, which is that of fed chair. 0:12:06.400 --> 0:12:11.360 But what I found jarring and Somewhat concerning was the 0:12:11.400 --> 0:12:15.600 fact that Kevin did not seem to feel able to 0:12:15.640 --> 0:12:18.960 say the words tariff and inflation in the same sentence. 0:12:19.040 --> 0:12:23.240 Now that is in his core wheelhouse as FED chair. 0:12:23.920 --> 0:12:28.800 It is central to understanding the evolution of inflation, including 0:12:28.840 --> 0:12:32.600 by the way, why one might be cautiously optimistic that 0:12:32.679 --> 0:12:36.760 inflation will come down once these tariff effects have washed 0:12:36.800 --> 0:12:42.600 through the price series. I think it's quite problematic that 0:12:42.760 --> 0:12:49.000 the next FED chair apparently feels unable to say something 0:12:49.000 --> 0:12:52.880 which is essentially a matter of fact among economists, that 0:12:53.080 --> 0:12:59.280 tariffs have pushed up the inflation rate over the last year, 0:13:00.080 --> 0:13:03.400 even though this may well ultimately prove to be a 0:13:03.480 --> 0:13:08.360 one time change in the price level and not underlying 0:13:08.640 --> 0:13:12.880 ongoing inflation. It'd be perfectly fine Forash to. 0:13:12.880 --> 0:13:16.760 Make that distinction. Poals made that distinction. Wash could even 0:13:16.800 --> 0:13:17.960 make it more sharply. 0:13:18.440 --> 0:13:22.800 But I think it doesn't help your credibility if you 0:13:22.920 --> 0:13:26.880 can't accept the basic fact that tariff's pushed up prices. 0:13:27.400 --> 0:13:30.560 And without getting too into the weeds, I guess related 0:13:30.600 --> 0:13:33.720 to that you pointed in your note talking about potentially 0:13:33.840 --> 0:13:38.000 changing the focus of the sort of the inflation measure 0:13:38.280 --> 0:13:40.600 that he's going to be most focused on. And there 0:13:40.679 --> 0:13:44.360 is a suggestion that in that choice of rate, because 0:13:44.360 --> 0:13:47.360 it's sort of adjusting out of away from tariffs, he's 0:13:47.440 --> 0:13:50.360 kind of escaping that issue around tariffs, but also shopping 0:13:50.400 --> 0:13:52.400 for measures which support lower rate. 0:13:53.240 --> 0:13:56.840 So look, I think it's unfortunate that he backed into 0:13:56.880 --> 0:14:00.200 that discussion of inflation measures by way of trying trying 0:14:00.240 --> 0:14:04.280 to avoid talking about tariffs, right, because of course one 0:14:04.280 --> 0:14:06.440 of the measures the emphasizer trimmed mean. 0:14:06.800 --> 0:14:09.640 Trimmed mean is where you just lop off the outliers. 0:14:09.760 --> 0:14:12.000 Do you look off the things that are increasing inflation? 0:14:12.920 --> 0:14:16.240 Yes, if you're trying to understand the underlying trajectory, the 0:14:16.320 --> 0:14:21.880 central tendency of prices, you may well want to exclude outliers, 0:14:22.040 --> 0:14:24.600 providing you doing in a fairly symmetric way on to 0:14:24.640 --> 0:14:27.280 the downside as well as the upside. But of course, 0:14:27.320 --> 0:14:31.280 what was politically convenient at this point in time is that, 0:14:31.360 --> 0:14:34.080 of course the categories that are going up the most 0:14:34.120 --> 0:14:36.240 and are getting trimmed out of your trimmed mean are 0:14:36.240 --> 0:14:38.680 of course all the things that have tariffs on them, right, 0:14:38.800 --> 0:14:41.880 So I think that was unfortunate. But there is a 0:14:42.000 --> 0:14:46.320 substance economic sort of question here, which is, we do 0:14:46.480 --> 0:14:49.640 want to focus on underlying inflation and the medium term 0:14:49.800 --> 0:14:50.960 inflation outlook. 0:14:51.080 --> 0:14:54.240 And it is the case that core PCD. 0:14:53.920 --> 0:14:57.640 Inflation, the metric the fact typically refers to, is just 0:14:57.760 --> 0:15:00.760 one of a number of measures that try to capture 0:15:00.960 --> 0:15:06.080 what that underlying trajectory of inflation is now. In the presence, 0:15:06.480 --> 0:15:10.360 Chair Powell has been saying, look, core pc inflation continues 0:15:10.400 --> 0:15:14.240 to be elevated. In fact, it's just going up still 0:15:14.360 --> 0:15:15.920 to crest in the low threes. 0:15:16.400 --> 0:15:18.640 But Chair Powell is saying. 0:15:18.920 --> 0:15:23.160 That this is overwhelmingly because of tariffs, and if you 0:15:23.480 --> 0:15:26.680 sort of take out tariffs, inflation next tariffs is running 0:15:26.680 --> 0:15:30.680 a lot closer to two percent. When what points you 0:15:30.800 --> 0:15:34.360 to trimmed mean on the Dallas version saying two point 0:15:34.400 --> 0:15:38.080 three percent, He's basically saying the same thing Power is saying, 0:15:38.200 --> 0:15:41.640 which is, if you trim out the tariff goods, the 0:15:41.680 --> 0:15:44.000 inflation's a bit above two, but it's not anything like 0:15:44.040 --> 0:15:45.520 as high as it looks. 0:15:45.640 --> 0:15:47.720 He's at least here he's sticking to the idea of 0:15:47.760 --> 0:15:49.960 being much less clear in his communication. 0:15:50.320 --> 0:15:52.840 Will Yeah, And I think the problem also is that 0:15:53.280 --> 0:15:55.880 I think it's legitimate to say, look, we want to 0:15:55.880 --> 0:15:58.200 look at a range of measures of underlying inflation. But 0:15:58.280 --> 0:16:01.760 if it looks like you're shifting the goalpost, shopping around 0:16:01.760 --> 0:16:04.800 for metrics to suit your story, again, that's just going 0:16:04.840 --> 0:16:06.760 to weaken your credibility, and that's not going to wash 0:16:07.080 --> 0:16:11.360 with the rest of the committee, never mind with financial markets. 0:16:11.600 --> 0:16:14.600 But it links to something else there, which is which 0:16:14.720 --> 0:16:20.920 Kevin Walsh showed up, the hawkish Kevin or the dubvish Kevin. 0:16:21.240 --> 0:16:22.960 Some of the sort of Wall Street commentary that I 0:16:23.040 --> 0:16:26.960 read felt that he is slightly more hawkish. Kevin Walsh 0:16:26.960 --> 0:16:29.840 had turned up and was struck in particular about the 0:16:29.840 --> 0:16:32.680 way he talked about the mandate only in terms of inflation, 0:16:32.840 --> 0:16:36.080 when I think even sort of cursory FED watchers know 0:16:36.200 --> 0:16:39.520 that the FED famously has a dual mandate for full 0:16:39.560 --> 0:16:41.920 employment as well, even though it tends to talk more 0:16:41.960 --> 0:16:44.320 about inflation. Did you read anything into that. 0:16:45.040 --> 0:16:48.200 I certainly heard the same things that those folks are 0:16:48.280 --> 0:16:51.520 talking about, but I interpret them in a very different way. 0:16:52.720 --> 0:16:55.480 I think we want to make a distinction between two things. 0:16:55.800 --> 0:17:00.040 One is how Kevin thinks about the Fed's mandate, and 0:17:00.200 --> 0:17:04.399 the second is how he's positioning on policy. 0:17:05.160 --> 0:17:07.679 So on the mandate. It's very clear it's been the 0:17:07.680 --> 0:17:08.000 case for. 0:17:08.000 --> 0:17:12.600 A long time that Kevin washes somebody who believes that 0:17:12.800 --> 0:17:16.399 the FED dual mandates can, to a large extent, be 0:17:16.560 --> 0:17:21.160 reduced in practice to a single mandate for inflation because 0:17:21.200 --> 0:17:24.359 in the longer run, in Kevin's view, consistent with any 0:17:24.720 --> 0:17:28.840 conservative economists, in fact, consistent with many economists period, in 0:17:28.880 --> 0:17:31.680 the longer run, the FED doesn't get to effect these 0:17:31.720 --> 0:17:34.800 real variables, and the best contribution it can make to 0:17:34.920 --> 0:17:38.480 keeping unemployment low is to keep inflation low and stable. 0:17:38.720 --> 0:17:40.640 So Kevin would say that he's legally. 0:17:40.400 --> 0:17:43.040 Compliant with the dual mandate, but he's really focused on 0:17:43.480 --> 0:17:47.480 inflation stability as being the foundation for everything else right, 0:17:48.160 --> 0:17:51.040 and so that necessarily means that he's going to be 0:17:51.119 --> 0:17:55.639 less twitchy on labor market weakness or risk of labor 0:17:55.640 --> 0:17:57.280 market weakness than. 0:17:57.240 --> 0:18:00.600 His recent predecessors. 0:18:00.960 --> 0:18:03.320 I personally think that's a mistake to jump from that 0:18:03.440 --> 0:18:07.560 to say that he's therefore being more hawkish. I think 0:18:07.640 --> 0:18:12.560 what we're saying here is we're seeing the new FED 0:18:12.680 --> 0:18:17.720 chair retire an old form of FED dubbishness and replace 0:18:17.760 --> 0:18:22.800 it with a new form of FED dubbishness. Farewell, labor 0:18:22.840 --> 0:18:38.560 market risk dubbish, Hello AI, productivity dubbish. 0:18:39.280 --> 0:18:41.600 Normal human beings will be listening to this and wondering 0:18:41.760 --> 0:18:43.920 how on earth we had not got to the implications 0:18:43.920 --> 0:18:46.639 for interest rates, the short term interest rates that the 0:18:46.640 --> 0:18:50.480 Federal Reserve has control over in all of this conversation. 0:18:50.560 --> 0:18:52.280 But I guess the implication of what you just said 0:18:52.320 --> 0:18:53.920 is it might not matter a whole lot. 0:18:54.400 --> 0:18:57.880 In the near term, let's say next quarter or two, certainly, 0:18:58.119 --> 0:19:03.399 and plausibly beyond that, a live debate about changing the 0:19:03.440 --> 0:19:05.040 policy rate in the US. 0:19:05.520 --> 0:19:09.000 I think it's very clear that with the oil inflation. 0:19:08.800 --> 0:19:12.800 Shock coming on top of all the prior inflation shocks, 0:19:12.800 --> 0:19:16.040 including the tariff shock that's only now cresting, the FED 0:19:16.160 --> 0:19:18.919 is going to be firmly in the mode of policing 0:19:19.760 --> 0:19:23.159 inflation developments at least here through the end of the 0:19:23.160 --> 0:19:26.560 summer and potentially long beyond that before they can return 0:19:26.600 --> 0:19:30.160 to any consideration of the case for rate cuts. At 0:19:30.160 --> 0:19:33.080 the same time, I think they're very very far away 0:19:33.440 --> 0:19:38.360 from contemplating any serious consideration of a rate hike, So 0:19:38.720 --> 0:19:41.919 the next few FED meetings simply aren't live. And what 0:19:42.080 --> 0:19:45.639 happens around iron, the war, energy and the economic data 0:19:46.040 --> 0:19:49.560 is really in the driving seat, but I think it 0:19:49.720 --> 0:19:54.159 still matters what position the new chair is starting to 0:19:54.320 --> 0:19:58.080 set out, and I think he is setting the foundations 0:19:58.840 --> 0:20:04.240 for making the case potentially later this year to shift 0:20:04.680 --> 0:20:11.560 from backward looking policing of current inflation shocks to forward 0:20:11.920 --> 0:20:19.960 looking monetary policy with rate cuts motivated by an expectation 0:20:20.880 --> 0:20:26.240 that AI and technology more broadly will raise the potential 0:20:26.520 --> 0:20:31.639 growth rates of the US and reduce inflation pressures going forward. 0:20:32.160 --> 0:20:35.680 So I think what we're seeing here is that Walsh recognizes, 0:20:35.880 --> 0:20:38.720 for the time being, there is no debate about rates. 0:20:38.800 --> 0:20:42.920 You're in this monitoring policing phase. But I think he's 0:20:42.920 --> 0:20:44.240 positioning so. 0:20:44.400 --> 0:20:50.960 That at the earliest responsible moment, when he can say 0:20:51.359 --> 0:20:54.560 the tariff stuff has rolled over and the oil inflation 0:20:54.840 --> 0:20:58.199 indeed is looking like a one time hit to the 0:20:58.240 --> 0:21:03.040 pedline prices, then he can say to the Committee, and 0:21:03.119 --> 0:21:07.520 now is the time to look forward and to ask 0:21:07.560 --> 0:21:09.960 what the inflation outlook looks like over the next several 0:21:10.080 --> 0:21:13.679 years and make the case that that is tech driven, 0:21:13.800 --> 0:21:17.560 this inflationary and therefore the FED should be willing to 0:21:17.640 --> 0:21:20.560 move to consider cuts not because the labor market's weak, 0:21:20.920 --> 0:21:21.639 but because. 0:21:21.400 --> 0:21:23.600 Tech is going to drive this inflation going forward. 0:21:23.760 --> 0:21:27.320 You said, there's not very much live about these next 0:21:27.359 --> 0:21:29.760 few meetings and the meeting that's happening after we speak 0:21:29.800 --> 0:21:33.160 today on Wednesday, except there was one question today, which 0:21:33.240 --> 0:21:36.880 is whether or not Jay Powell is going to stick 0:21:36.920 --> 0:21:41.639 around once Kevin Welsh is confirmed and in place in 0:21:41.680 --> 0:21:43.919 the FED. There's been a lot of background to this, 0:21:44.280 --> 0:21:48.240 the investigation and the case against Jay Powell on grounds 0:21:48.240 --> 0:21:51.840 of excessive expenditure on the FED renovation that has been 0:21:51.880 --> 0:21:54.959 withdrawn at least for the time being. That's what's allowed 0:21:55.040 --> 0:21:58.919 Kevin Walsh's confirmation to go forward. If we imagine that 0:21:58.960 --> 0:22:00.760 we're in a world in the day's time, people are 0:22:00.760 --> 0:22:03.159 listening and he said that he's going to stick around 0:22:03.240 --> 0:22:06.240 at least for a bit. Does that change the first 0:22:06.240 --> 0:22:09.120 few months of Walsh's tenure Do you think significantly? 0:22:09.840 --> 0:22:13.320 I think it does matter if power stays or goes, 0:22:13.920 --> 0:22:14.960 if he stays on. 0:22:15.480 --> 0:22:17.640 If we're in a world where you know he's staying. 0:22:17.359 --> 0:22:21.280 On for a bit, it does slow the transition in 0:22:21.359 --> 0:22:24.240 the composition of the FED Board and the FMC. It 0:22:24.280 --> 0:22:27.480 means it takes longer for that seat to become vacant 0:22:27.520 --> 0:22:30.480 and for Trump to be able to put in another appointee, 0:22:30.520 --> 0:22:34.560 presumably a wash ally, onto the board, and so it 0:22:34.640 --> 0:22:38.080 slows down a little bit the process by which Kevin 0:22:38.480 --> 0:22:42.199 is going to be able to build majorities in favor 0:22:42.200 --> 0:22:43.920 of some of the changes that he wants to make 0:22:44.000 --> 0:22:47.159 that require votes either of the FED Board or of 0:22:47.240 --> 0:22:47.920 the FMC. 0:22:49.080 --> 0:22:53.159 But I don't see Powell staying on to lead the resistance. 0:22:54.119 --> 0:22:57.960 I think he has a sort of narrow and circumscribed 0:22:58.600 --> 0:23:03.320 view of why it could be appropriate for him to 0:23:03.440 --> 0:23:07.040 stay on. That would be really to see out the 0:23:07.240 --> 0:23:13.040 remaining aspects of this legal threat to FED independence from 0:23:13.119 --> 0:23:16.600 the DOJ investigation, to make sure that all the loose 0:23:16.720 --> 0:23:20.639 ends are firmly tied up, and in doing so, not 0:23:20.800 --> 0:23:24.920 just to settle the question in this case and the precedent, 0:23:25.160 --> 0:23:29.119 but also to avoid any suggestion that he walked under 0:23:29.200 --> 0:23:32.840 pressure with an implied threat that if he didn't, they'd 0:23:32.880 --> 0:23:36.720 come back at him with more legal suits. I think 0:23:36.800 --> 0:23:39.919 he will feel it as to be very important that 0:23:40.680 --> 0:23:44.960 institutionally he leaves having upheld the independence of the FED 0:23:45.200 --> 0:23:48.639