Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: It's a busy week for the Federal Reserve. On Monday,
Speaker 2: President Trump confirmed his pick for the role of vice
Speaker 2: chair for supervision, Michelle Bowman. We're also expecting a rate
Speaker 2: decision tomorrow at a pretty tenuous time for the economy.
Speaker 2: The Central Bank may have to take actions that don't
Speaker 2: necessarily align with Trump. So there have been a lot
Speaker 2: of questions about the Fed's independence lately, and I wanted
Speaker 2: to sit down with someone who knows the system inside
Speaker 2: and out. Randy. It is such a pleasure to have
Speaker 2: you on the show. Super Randy Quarrels is kind of
Speaker 2: rare among public servants. He hasn't worked at just the
Speaker 2: Federal Reserve. He's also worked at the Treasury Department. When
Speaker 2: I was writing my book about the Power of the Dollar,
Speaker 2: I researched Treasury like a historian. I witnessed live bond
Speaker 2: auctions and toward the underground tunnels of the building. By
Speaker 2: and large, the inner workings of the Fed and Treasury
Speaker 2: aren't things that the average American pays the time tention to,
Speaker 2: But these days it's kind of gone mainstream, which is surprising,
Speaker 2: and it's all because Elon Musk's Doge is rummaging through
Speaker 2: Treasury's books. Corals served as a senior Treasury official in
Speaker 2: the George W. Bush administration. It was an era of
Speaker 2: conservatism that's lost power in the Republican Party in recent
Speaker 2: years with Trump's rise. The Corals also was nominated by
Speaker 2: Trump to be the first ever Vice Chair for Supervision
Speaker 2: at the Federal Reserve, a job he held from twenty
Speaker 2: seventeen to twenty twenty one. So I wanted to ask
Speaker 2: Quarrels about all of this Doge's interference at Treasury, Trump's
Speaker 2: passed threats to the Fed's independence, and the many challenges
Speaker 2: facing US financial regulators right now. From Bloomberg's Washington Bureau.
Speaker 2: This is the Big Take DC podcast. I'm Saliah Mosen
Speaker 2: today on the show, a conversation about the FED in
Speaker 2: a busy week for the Central Bank with former Fed
Speaker 2: and Treasury official Randy Quarrels. Randy Quarrels was the first
Speaker 2: person to hold the role a Vice Chair for Supervision
Speaker 2: at the Federal Reserve. It's a role that was created
Speaker 2: by the Dot Frank Act after the Global Financial crisis
Speaker 2: to have one point person in charge of making policy
Speaker 2: recommendations about the regulation and supervision of banks to the board.
Speaker 2: And it's the sort of role the average Americans shouldn't
Speaker 2: really have to think about. If you are, there's probably
Speaker 2: a problem in the economy somewhere, like when Silicon Valley
Speaker 2: Bank collapsed in twenty twenty three and suddenly Americans were
Speaker 2: worried about their community banks failing. Quarrels told me about
Speaker 2: what he was hearing when he first took that vice
Speaker 2: chair role in twenty seventeen.
Speaker 1: I was urged by a lot of people, you know,
Speaker 1: just burn this to the ground, you know, put a
Speaker 1: pack of a palm on your back and smite them
Speaker 1: hip and thigh.
Speaker 3: Okay, I could probably.
Speaker 1: Get that done, but they would just get undone when
Speaker 1: the next swinging of the political pendulum happened. And that's
Speaker 1: not good for anybody. It's not good for policy, it's
Speaker 1: not good for the industry, it's not good for stability,
Speaker 1: it's not good for the public.
Speaker 3: And so my thought going in.
Speaker 1: Was, if the changes that are made, you know, to
Speaker 1: refine the framework that was put in place in the
Speaker 1: immediate aftermath of the Great Financial Crisis, you know, if
Speaker 1: we have as.
Speaker 3: Much thought put into those changes.
Speaker 1: If we produce as much analysis around that, and if
Speaker 1: they benefit from as much input from all sorts of
Speaker 1: different places, the changes will be more likely to last.
Speaker 2: Last month, Chair Powell said during a hearing that the
Speaker 2: creation of the rule that you had led to more
Speaker 2: quote volatility, and I'm actually going to play the exchange
Speaker 2: between him and the House lawmaker.
Speaker 1: Do we really need to have a separate vice chair
Speaker 1: of supervision?
Speaker 4: So for many years, as you know, we did our
Speaker 4: business without advice chare for supervision. What that means is
Speaker 4: everything goes through the full board and it was effective.
Speaker 4: I think it was all so there was less volatility.
Speaker 1: Explain that why was there less volatility?
Speaker 4: Well, because you've got a group of seven people on
Speaker 4: the board and there will be some as appointments changed,
Speaker 4: there will be there'll be some changes in the approach
Speaker 4: to regulation. But putting it all in a single person,
Speaker 4: admittedly just to recommend to the board can lead to
Speaker 4: it can lead to some volatility in these things.
Speaker 2: Which which is really I'm curious what you make of that. A.
Speaker 1: I think that Jay's right, it will lead to more
Speaker 1: at the margin volatility and regulation. I think when you
Speaker 1: look at what has actually happened. The approach of you know,
Speaker 1: I'm going to put some extreme changes on the table
Speaker 1: and if you don't like it, vote no.
Speaker 3: Didn't work.
Speaker 1: Jay is right that it will lead to more volatility
Speaker 1: in debate around this.
Speaker 3: That was the point of the post.
Speaker 1: There are different ways that one could address the issue,
Speaker 1: but I think that is actually a good feature. If
Speaker 1: you're going to preserve the independence of the FED system
Speaker 1: with respect to monetary policy, which I think is a
Speaker 1: sensible thing to preserve, the institution has to be willing
Speaker 1: to accept that many other things that are within its purview.
Speaker 1: Its participation in the payment system, it's regulation of banks,
Speaker 1: it's regulation of other financial institutions.
Speaker 3: There are a range of tasks that have been given
Speaker 3: to the FED.
Speaker 1: Those are appropriately more subject to political influence, to political direction,
Speaker 1: even than monetary policy. And if the FED were to insist, look,
Speaker 1: we are seven philosopher kings and we have fourteen year terms.
Speaker 1: We are above this political input on everything that we do,
Speaker 1: and we will consider the regulatory issues in the same
Speaker 1: way as we consider monetary policy issues, and we will
Speaker 1: give your input, whatever constituent you are, all the consideration
Speaker 1: it is due. Then inevitably we're going to undermine confidence
Speaker 1: in the institution and erode the support for the independence
Speaker 1: of the FED with respect to what's really important for
Speaker 1: it to have independence with which is monetary policy.
Speaker 2: You bring up central bank independence, and Trump has pivoted
Speaker 2: quite a bit since he was inaugurated this year. He's
Speaker 2: no longer aggressively admonishing j. Powell in public, calling him
Speaker 2: a quote bonehead, or talking privately about firing him. Is
Speaker 2: this for you a sigh of relief or are you
Speaker 2: kind of bracing for something another u turn from this president.
Speaker 3: No, I don't.
Speaker 1: Expect there to be I think that for the reasons
Speaker 1: that everyone listen to this would probably agree with. There
Speaker 1: are good reasons for the Federal Reserve to be insulated
Speaker 1: from the political pressure with regarding mine minitary policy. Now
Speaker 1: you can talk about the style in which it was done.
Speaker 1: There's a Trump style. It is not to everyone's chase.
Speaker 1: And Jay is a very good friend of mine, and
Speaker 1: you know so, I was not particularly happy with the
Speaker 1: style in which his comments were made earlier.
Speaker 3: But it's not as though it's.
Speaker 1: Illegitimate for a president to comment on monetary policy. It's
Speaker 1: not as though it's a violation of norms. It is
Speaker 1: not unprecedented. I don't even think it's necessarily appropriate for
Speaker 1: a president to comment on the Federal Reserve's monetary policy stands.
Speaker 1: I mean, presidents have done that over the century long
Speaker 1: history of the FED, many many times to a much
Speaker 1: greater degree. You know, Lyndon Johnson famously, you know, pushing
Speaker 1: Bill Martin up against the wall, Harry Truman calling the
Speaker 1: entire FOMC into his office and saying, you will do
Speaker 1: what I say, and then announcing to the press that
Speaker 1: they had agreed to do what he.
Speaker 3: Said, even though they had not.
Speaker 2: They've got political motivations there, right, because if you can
Speaker 2: juice the economy, cut rates, get growth going, I can
Speaker 2: get reelected again.
Speaker 1: Yes, the practice of presidents not commenting on monetary policy
Speaker 1: is a relatively recent one. It goes back to Bill Clinton.
Speaker 1: You know that it was inappropriate for a president to
Speaker 1: say something about monetary policy goes back to Bill Clinton.
Speaker 3: And it was advice, as I.
Speaker 1: Understand it, that it was given to him sort of
Speaker 1: early on, which is, don't get in a fight with
Speaker 1: the Fed, because you'll lose the lessons of that century
Speaker 1: of history of presidents being willing to come in on
Speaker 1: monetary policy is that they almost always lost.
Speaker 2: Trump issued an executive Order on Independent Agencies last month,
Speaker 2: and that would give the executive branch more authority over
Speaker 2: financial regulation that sits inside the FED, but has a
Speaker 2: carve out to retain the Fed's authority of or interest rates.
Speaker 2: I'm wondering what you make of that.
Speaker 1: Well, I think it's an example of the fact that
Speaker 1: there's just a general agreement that monetary policy should be
Speaker 1: is appropriately insulated from direct political control and the force
Speaker 1: of direct political influence. That doesn't mean that it has
Speaker 1: to be or even should be spared political commentary, including
Speaker 1: by the president.
Speaker 2: What about allowing the executive branch more authority over financial regulation?
Speaker 3: That's part of the reason for this post.
Speaker 1: Financial regulation is something that is inherently has a strong
Speaker 1: political element. A wise political system will not be constantly
Speaker 1: churning regulation from one pole to another, but should be
Speaker 1: regularly refining regulation. A very reasonable program for any political
Speaker 1: administration is to improve the productive capacity of the economic infrastructure,
Speaker 1: and you can't really be effective in doing that without
Speaker 1: affecting financial regulation. If we're really to address our fiscal situation,
Speaker 1: we can only do that by growing the denominator of
Speaker 1: the debt to GDP ratio. There's just not enough political
Speaker 1: agreement in the country to agree on either tax increases
Speaker 1: or spending decreases of the scale that would be necessary
Speaker 1: to really change the debt to GDP trajectory.
Speaker 3: And we did it in the aftermath of World War Two.
Speaker 3: We can do it again.
Speaker 1: That's absolutely not unattainable.
Speaker 3: But you can only do it by growing the economy.
Speaker 2: When we come back. What quarrels is watching as Trump's
Speaker 2: second term unfolds and his thoughts on Doge going under
Speaker 2: the hood of Treasury's payment system. So we've been talking
Speaker 2: about the Federal Reserve, but I'm a former treasurreer or
Speaker 2: that's my favorite building to talk about, and you've been
Speaker 2: inside of there. One part of that agency that everyone
Speaker 2: is talking about these days is the payment system. It's
Speaker 2: gone mainstream. It's within the Bureau of Fiscal Service, which
Speaker 2: is inside the Domestic Finance unit that you oversaw as undersecretary.
Speaker 2: So you know how sensitive and significant the work that
Speaker 2: that bureau does. How do you feel about Doge's access
Speaker 2: to the payment system.
Speaker 1: I haven't talked with the folks at the Treasury. You know,
Speaker 1: who are directly involved with that about the Doge incident.
Speaker 3: So there are details that I don't know.
Speaker 1: I'm actually a fan of the concept of DOGE, and
Speaker 1: you know, the administration has said that Doze has gone
Speaker 1: in with read only access to the systems that Treasury runs.
Speaker 1: And in that case, that seems like a totally legal
Speaker 1: and be a perfectly appropriate thing for a president to do,
Speaker 1: to say, look, I want second pair of eyes to
Speaker 1: come in and look at this.
Speaker 2: Do you think that there are certain safeguards that need
Speaker 2: to be in place.
Speaker 1: I would think that the principal safeguard is that their
Speaker 1: access be read only.
Speaker 2: I'm curious, what are you going to be watching for
Speaker 2: in the next coming weeks and months of Trump's second term.
Speaker 5: I'll principally be watching for the success in seeking to
Speaker 5: accelerate a deregulatory program that can materially improve the productive.
Speaker 1: Capacity of the economy, because I do believe that the
Speaker 1: greatest economic and financial issue that the country phases is
Speaker 1: not anything in the banking system currently, but it is
Speaker 1: fundamentally the debt to GDP ratio and the trajectory that
Speaker 1: it's on. So in the Eisenhower Kennedy administrations. Eisenhower tried
Speaker 1: to pay down the debt with very high marginal tax rates,
Speaker 1: and it wasn't terribly successful. Kennedy came in, had a
Speaker 1: big tax cut, and then over time inflation was a
Speaker 1: big part of that too, with the Johnson fiscal stimulus.
Speaker 1: But over time the denominator grewed in such a way
Speaker 1: that the detch GPE ratio was quite reasonable as we
Speaker 1: moved into the seventies.
Speaker 3: But our tax level is already relatively low.
Speaker 1: I think it can be brought a little lower, but
Speaker 1: it's already relatively low. We can't get that same sort
Speaker 1: of juice from cutting taxes that we could in nineteen sixty.
Speaker 1: We can get a lot of juice out of streamlining
Speaker 1: regulation and rationalizing regulation. So what I'll mostly be looking
Speaker 1: for is the success in the administration's program of doing that.
Speaker 1: And part of it is that I'm trained as a lawyer,
Speaker 1: but that's one of the reasons that the fights over
Speaker 1: sort of control of the administrative agencies I find are
Speaker 1: very interesting.
Speaker 2: So we've covered what you're looking at in your old
Speaker 2: stomping grounds in the executive branch. What about over that
Speaker 2: the Fed? This week we've got a rd deecision. Powell
Speaker 2: has this balancing act right. He has to make sure
Speaker 2: investors are sure that the economy is strong, but that
Speaker 2: the FED will step in if it needs to. How
Speaker 2: do you see Powell handling this on Wednesday?
Speaker 1: There's a lot of uncertainty right now that's affecting the
Speaker 1: stock market. I did not see it actually affecting the fundamentals.
Speaker 3: Of the economy.
Speaker 1: And we aren't completely done with getting inflation back down
Speaker 1: under control. So I agree that it's a difficult balancing act,
Speaker 1: but that the thumb on the scale definitely ought to
Speaker 1: be on the side of ensuring that we keep inflation
Speaker 1: under control. And putting the thumb on the other side
Speaker 1: of the scale, would I think risk reaccelerating inflation concerns.
Speaker 2: So you don't see tariffs causing a recession from the beginning.
Speaker 1: Of the process, I've said, you know, I expect that
Speaker 1: we don't get inflation under control at the end of
Speaker 1: the day without a short and shallow recession. Might there
Speaker 1: be a recession? If so, it would be short and shallow.
Speaker 1: It would not trouble me with respect to the fundamental
Speaker 1: strength of the economy. On the other side of that
Speaker 1: brief correction and much more important.
Speaker 3: To get inflation right.
Speaker 2: All right, Randy, sir, thank you so much for joining.
Speaker 2: It was a pleasure to have you.
Speaker 3: Thanks. It's good to be on.
Speaker 2: This is the Big Take DC podcast from Bloomberg News.
Speaker 2: I'm Sialia Mosen. This episode was produced by Julia Press.
Speaker 2: It was edited by Aaron Edwards and Reed Pickard. It
Speaker 2: was fact checked by Adrianna Tapia and mixed and sound
Speaker 2: designed by Alex Sugia. Our senior producer is Niami Shaven.
Speaker 2: Our senior editor is Elizabeth Ponso. Our executive producer is
Speaker 2: Nicole beemsterbor Sage Bauman is Bloomberg's head of podcasts. If
Speaker 2: you liked this episode, make sure to subscribe and review
Speaker 2: The Big Take DC wherever you listen to podcasts. It
Speaker 2: helps people find the show. Thanks for listening.