1 00:00:00,280 --> 00:00:09,440 Speaker 1: Bloomberg Audio Studios, podcasts, radio news. I'll tell you if 2 00:00:09,560 --> 00:00:11,400 Speaker 1: our new head of the Fed, who I think is 3 00:00:11,440 --> 00:00:13,720 Speaker 1: going to be great, if he does the job that 4 00:00:13,760 --> 00:00:17,759 Speaker 1: he's capable, we can grow at fifteen percent. I think 5 00:00:17,800 --> 00:00:18,360 Speaker 1: more than that. 6 00:00:27,920 --> 00:00:30,760 Speaker 2: I'm Stephanie Flanders, head of Government and Economics at Bloomberg 7 00:00:31,000 --> 00:00:33,680 Speaker 2: And this is Trumpanomics, the podcast that looks at the 8 00:00:33,680 --> 00:00:36,880 Speaker 2: economic world of Donald Trump, how he's already shaped the 9 00:00:36,880 --> 00:00:40,040 Speaker 2: global economy, and what on earth is going to happen next. 10 00:00:41,600 --> 00:00:43,839 Speaker 2: This week, we look at what some would say was 11 00:00:43,880 --> 00:00:47,760 Speaker 2: the single most important personnel decision that Donald Trump has 12 00:00:47,880 --> 00:00:50,920 Speaker 2: made in the last year, choosing Kevin Walsh to be 13 00:00:50,960 --> 00:00:54,800 Speaker 2: the next Chairman of the Federal Reserve. Assuming Wassh is confirmed, 14 00:00:55,120 --> 00:00:57,560 Speaker 2: that's one piece of Trump Andnomics we can expect to 15 00:00:57,600 --> 00:01:01,320 Speaker 2: be shaping the American and globe bull economy for some 16 00:01:01,480 --> 00:01:04,840 Speaker 2: time after the President himself has gone. So how will 17 00:01:04,880 --> 00:01:08,720 Speaker 2: mister Walsh lead the world's most important central bank? And 18 00:01:08,760 --> 00:01:11,280 Speaker 2: with relations between the Fed and the White House quite 19 00:01:11,319 --> 00:01:14,480 Speaker 2: so fraught, will he be able to win the internal 20 00:01:14,560 --> 00:01:18,640 Speaker 2: support he needs to be effective given the intensely political 21 00:01:18,680 --> 00:01:21,560 Speaker 2: build up to his appointment. For what it's worth, the 22 00:01:21,600 --> 00:01:23,960 Speaker 2: market moves in the days when the choice of Kevin 23 00:01:24,000 --> 00:01:27,840 Speaker 2: Walsh was confirmed in mid January suggests investors think he 24 00:01:27,920 --> 00:01:30,679 Speaker 2: won't let policy be dictated by the president and won't 25 00:01:30,760 --> 00:01:33,319 Speaker 2: let inflation run a mup. You can see that in 26 00:01:33,360 --> 00:01:36,240 Speaker 2: the rise and the dollar, and most strikingly in the 27 00:01:36,319 --> 00:01:40,240 Speaker 2: dramatic fall in the price of gold and silver. And 28 00:01:40,319 --> 00:01:43,400 Speaker 2: yet there are big areas of uncertainty about what Walsh 29 00:01:43,680 --> 00:01:47,240 Speaker 2: really thinks about monetary policy and interest rates, and about 30 00:01:47,240 --> 00:01:50,200 Speaker 2: his plans for the FED itself, which he's been pretty 31 00:01:50,200 --> 00:01:53,040 Speaker 2: critical of in the past. When I was thinking about 32 00:01:53,080 --> 00:01:56,360 Speaker 2: the people who could both understand this story and explain 33 00:01:56,480 --> 00:01:59,440 Speaker 2: how markets were thinking about it, my friend Krishna Guha 34 00:01:59,600 --> 00:02:01,680 Speaker 2: was the first name that came to mind. Krishner is 35 00:02:01,720 --> 00:02:04,120 Speaker 2: the vice chairman and head of Economics and Central Bank 36 00:02:04,160 --> 00:02:08,400 Speaker 2: Strategy at the investment research group Evercore ISI. Before Evercore, 37 00:02:08,560 --> 00:02:10,880 Speaker 2: he was an executive vice president at the New York Fed, 38 00:02:11,120 --> 00:02:13,880 Speaker 2: and we also overlap briefly at the Financial Times many 39 00:02:13,960 --> 00:02:16,560 Speaker 2: years ago, where Krishna was a senior writer on global 40 00:02:16,600 --> 00:02:23,040 Speaker 2: economics and economic policy. Firstly, I guess we had that 41 00:02:23,120 --> 00:02:28,960 Speaker 2: quite dramatic market reaction to his appointment, seeming the investors 42 00:02:29,040 --> 00:02:32,360 Speaker 2: drawing some quite clear conclusions about what he was going 43 00:02:32,400 --> 00:02:34,320 Speaker 2: to mean for the FED and not mean for the FED. 44 00:02:34,400 --> 00:02:37,680 Speaker 2: How did you interpret the reaction and what were some 45 00:02:37,720 --> 00:02:38,920 Speaker 2: of the key takeaways for you. 46 00:02:39,240 --> 00:02:41,760 Speaker 1: So we thought going in that the market would initially 47 00:02:41,840 --> 00:02:47,760 Speaker 1: trade Wash hawkish, so rates higher, yield curved steeper because 48 00:02:47,800 --> 00:02:50,440 Speaker 1: of his balance sheet views and concerns that he might 49 00:02:50,520 --> 00:02:54,680 Speaker 1: restart QT to shrink the Fed's balance sheet, risk off 50 00:02:54,840 --> 00:02:58,480 Speaker 1: in stocks and dollar higher, as he would be seen 51 00:02:58,480 --> 00:03:01,760 Speaker 1: as more of a strong dollar candidate. So the market 52 00:03:01,800 --> 00:03:06,000 Speaker 1: reactions that we've seen, which have broadly gone in those directions, 53 00:03:06,240 --> 00:03:09,880 Speaker 1: I don't think are surprising. At the same time, though, 54 00:03:10,240 --> 00:03:14,320 Speaker 1: my own view is that the market reaction also reflects 55 00:03:14,720 --> 00:03:18,440 Speaker 1: a sense that people don't really understand exactly what kind 56 00:03:18,440 --> 00:03:21,120 Speaker 1: of central bank governor Wash is going to be. I 57 00:03:21,160 --> 00:03:25,519 Speaker 1: think that's reasonable. My own views are that Kevin Walsh 58 00:03:25,600 --> 00:03:29,560 Speaker 1: is unlikely to be an ideological hawk and is more 59 00:03:29,760 --> 00:03:32,359 Speaker 1: likely to be in many respects quite pragmatic. 60 00:03:33,639 --> 00:03:36,240 Speaker 2: Yes, So let's talk about the monetary policy kind of 61 00:03:36,280 --> 00:03:38,280 Speaker 2: interest rate piece first, and then we'll get into that 62 00:03:38,320 --> 00:03:40,600 Speaker 2: the balance sheet things, which for some people will be 63 00:03:41,360 --> 00:03:44,040 Speaker 2: less familiar territory. The reason I guess that there is 64 00:03:44,080 --> 00:03:47,240 Speaker 2: a bit of uncertainty about him is on this point, 65 00:03:47,560 --> 00:03:49,880 Speaker 2: is that he had previously been a hawk, and in fact, 66 00:03:50,000 --> 00:03:52,560 Speaker 2: as our own chief US economist pointed out, if you 67 00:03:52,600 --> 00:03:55,320 Speaker 2: look at his record, he was at the FARED two 68 00:03:55,360 --> 00:03:58,720 Speaker 2: thousand and six twenty eleven, he was more concerned about 69 00:03:58,760 --> 00:04:02,320 Speaker 2: inflation for longer than most governors. So if you look 70 00:04:02,360 --> 00:04:04,560 Speaker 2: at the sort of minutes, it was more worried about 71 00:04:04,600 --> 00:04:08,160 Speaker 2: inflation than downside risk as late as April two thousand 72 00:04:08,160 --> 00:04:10,160 Speaker 2: and nine, so right through two thousand and eight and 73 00:04:10,240 --> 00:04:13,480 Speaker 2: April two thousand and nine, and only really eased up 74 00:04:13,520 --> 00:04:16,680 Speaker 2: on worrying about inflation August two thousand and nine. So 75 00:04:17,160 --> 00:04:20,599 Speaker 2: it's quite striking to hear him now since he's been 76 00:04:21,080 --> 00:04:23,560 Speaker 2: in the running to be Trumb's pick for FED chair, 77 00:04:24,000 --> 00:04:27,839 Speaker 2: emphasizing a rather different approach, seemingly rather different approach, but 78 00:04:27,920 --> 00:04:31,000 Speaker 2: he's pinning it on the impact of AI on productivity 79 00:04:31,040 --> 00:04:33,200 Speaker 2: on the economy, and that's what he can say has 80 00:04:33,360 --> 00:04:35,520 Speaker 2: changed since two thousand and nine, And do you take 81 00:04:35,520 --> 00:04:36,400 Speaker 2: that at face value? 82 00:04:36,680 --> 00:04:39,840 Speaker 1: So I think it is true that Kevin Walsh has 83 00:04:40,400 --> 00:04:45,160 Speaker 1: for most of his career has channeled and represented what 84 00:04:45,160 --> 00:04:49,560 Speaker 1: one might think of a small C conservative Republican leaning 85 00:04:49,800 --> 00:04:54,480 Speaker 1: economic thinking and principles, there has generally been more concerned 86 00:04:54,640 --> 00:04:59,040 Speaker 1: with inflation than the labor market, let's say, more focused 87 00:04:59,040 --> 00:05:03,800 Speaker 1: on supply issues than demand side management. And so I 88 00:05:03,800 --> 00:05:06,640 Speaker 1: think there is an aspect that is channeling a set 89 00:05:06,680 --> 00:05:09,000 Speaker 1: of thinking on one side, if you like, of the 90 00:05:09,040 --> 00:05:12,880 Speaker 1: political and economic debates. But I think what Kevin would 91 00:05:12,880 --> 00:05:16,800 Speaker 1: say if he was on this call is that there 92 00:05:16,920 --> 00:05:19,559 Speaker 1: is a consistency in the way that he thinks about 93 00:05:19,600 --> 00:05:23,159 Speaker 1: inflation risks. So, first of all, Kevin is someone who, 94 00:05:23,440 --> 00:05:27,480 Speaker 1: as I mentioned, thinks that a lot of fed type thinking, 95 00:05:27,640 --> 00:05:29,719 Speaker 1: a lot of New kaynes In type thinking, and the 96 00:05:29,800 --> 00:05:33,080 Speaker 1: modeling that's come from that puts a lot too much 97 00:05:33,160 --> 00:05:36,320 Speaker 1: weight on the demand side of the economy and unemployment 98 00:05:36,560 --> 00:05:41,400 Speaker 1: as a predictor and driver of inflation. Kevin's view is 99 00:05:41,440 --> 00:05:44,960 Speaker 1: that when the economy strengthens, or indeed weakens, the first 100 00:05:45,040 --> 00:05:47,479 Speaker 1: question you should be asking is whether it's supply driven 101 00:05:47,560 --> 00:05:50,160 Speaker 1: or demand driven. And then, of course the implications of 102 00:05:50,200 --> 00:05:54,200 Speaker 1: the economy are potentially very different, as are the implications 103 00:05:54,240 --> 00:05:57,039 Speaker 1: for rates in those two cases. I think it's also 104 00:05:57,120 --> 00:05:59,880 Speaker 1: the case that Kevin believes that the really big inflation 105 00:06:00,160 --> 00:06:04,440 Speaker 1: risks come when you have a combination of fiscal expansion 106 00:06:04,440 --> 00:06:07,320 Speaker 1: on the part of the government and money financing on 107 00:06:07,400 --> 00:06:09,240 Speaker 1: the parts of the central bank. Now, of course the 108 00:06:09,240 --> 00:06:11,359 Speaker 1: FED would argue that it hasn't been doing that, But 109 00:06:11,480 --> 00:06:15,200 Speaker 1: Kevin would say, the government issues bonds to finance fiscal 110 00:06:15,240 --> 00:06:18,120 Speaker 1: stimulus on Monday, and the FED buys bonds in the 111 00:06:18,160 --> 00:06:22,440 Speaker 1: market on Thursday, it's coming fairly close to money financing 112 00:06:22,760 --> 00:06:26,560 Speaker 1: that fiscal expansion. So with respect to the GFC in 113 00:06:26,600 --> 00:06:28,680 Speaker 1: all Canada, my own view at the time as now 114 00:06:28,760 --> 00:06:31,719 Speaker 1: was that Kevin is simply wrong in his assessment. But 115 00:06:32,000 --> 00:06:33,520 Speaker 1: if we think of, say, the difference between where we 116 00:06:33,560 --> 00:06:36,839 Speaker 1: are now and the early phase of the pandemic inflation, 117 00:06:37,520 --> 00:06:39,400 Speaker 1: Kevin would have said, what do we have then? We 118 00:06:39,440 --> 00:06:42,400 Speaker 1: had an impaired supply side, We had a lot of 119 00:06:42,400 --> 00:06:45,120 Speaker 1: fiscal stimulus, and we had a central bank that was 120 00:06:45,200 --> 00:06:48,599 Speaker 1: money financing and expanding its balance sheet. That, in Kevin's world, 121 00:06:48,640 --> 00:06:52,560 Speaker 1: is a recipe for high inflation. What do we have today? 122 00:06:53,080 --> 00:06:56,520 Speaker 1: We have a positive supply shock. We have a large 123 00:06:56,520 --> 00:06:58,920 Speaker 1: government deficit that Kevin certainly thinks in the long run 124 00:06:59,000 --> 00:07:02,000 Speaker 1: is not likely to be sustainable at these levels. But 125 00:07:02,000 --> 00:07:04,000 Speaker 1: it's not going up or down because the tariff take 126 00:07:04,080 --> 00:07:05,960 Speaker 1: is roughly the same as the one Big Beautiful Bill 127 00:07:06,279 --> 00:07:10,120 Speaker 1: fiscal giveaways, and there's no central bank money financing or 128 00:07:10,160 --> 00:07:13,440 Speaker 1: balance sheet expansion. So Kevin would say the inflation risks 129 00:07:13,480 --> 00:07:17,120 Speaker 1: today are completely different from the inflation risks that were 130 00:07:17,120 --> 00:07:19,240 Speaker 1: there in the early phase of the pandemic, which is 131 00:07:19,240 --> 00:07:22,120 Speaker 1: why I was a hawk then and I'm a dove now. 132 00:07:23,160 --> 00:07:25,200 Speaker 2: And obviously there's a lot of uncertainty about what the 133 00:07:25,240 --> 00:07:27,280 Speaker 2: impact of AI is going to be on the economy, 134 00:07:27,440 --> 00:07:30,920 Speaker 2: And there are many people who can look at where 135 00:07:30,960 --> 00:07:33,920 Speaker 2: inflation is now in the US and the sort of 136 00:07:33,960 --> 00:07:36,320 Speaker 2: possibility that you will actually have a fair amount of 137 00:07:36,320 --> 00:07:38,480 Speaker 2: stimulus coming down the track as a result of the 138 00:07:38,480 --> 00:07:41,680 Speaker 2: Big Beautiful Bill and other things. So I get the 139 00:07:41,760 --> 00:07:44,360 Speaker 2: jury is out on what happens to inflation over the 140 00:07:44,360 --> 00:07:48,040 Speaker 2: next year or two, whether it makes sense to continue 141 00:07:48,080 --> 00:07:52,440 Speaker 2: cutting rate or Eve cut them faster after Kevin wash, 142 00:07:52,440 --> 00:07:56,000 Speaker 2: assuming he becomes fed chair but you know him pretty well. 143 00:07:56,200 --> 00:07:58,080 Speaker 2: How much is he going to be data driven? Now? 144 00:07:58,120 --> 00:07:59,600 Speaker 2: Much is he going to be willing to sort of 145 00:07:59,680 --> 00:08:02,880 Speaker 2: change his mind in the face of the evidence or not. 146 00:08:03,120 --> 00:08:06,920 Speaker 1: Yeah, Kevin's ideal central Bank governor is someone who would 147 00:08:06,960 --> 00:08:10,640 Speaker 1: be fifty percent Alan Greenspan fifty percent stand Drucamiller. Why 148 00:08:10,680 --> 00:08:13,840 Speaker 1: green Span because green Span was, of course the man 149 00:08:13,840 --> 00:08:16,120 Speaker 1: who knew he was the one who would look in 150 00:08:16,240 --> 00:08:20,280 Speaker 1: the fine detail of the obscure economic statistics and private 151 00:08:20,280 --> 00:08:23,800 Speaker 1: sector data and discern what was really happening in the 152 00:08:23,880 --> 00:08:26,400 Speaker 1: economy that would show up in the official data many 153 00:08:26,440 --> 00:08:29,679 Speaker 1: months in the future. And then, of course Drucamiller being 154 00:08:29,840 --> 00:08:33,080 Speaker 1: by many counts one of the greatest macro hedge fund 155 00:08:33,160 --> 00:08:35,720 Speaker 1: managers and somebody who had the ability to see in 156 00:08:35,880 --> 00:08:39,600 Speaker 1: market the signals about not just where the economy is today, 157 00:08:39,640 --> 00:08:42,560 Speaker 1: but where the economy would be going in the future. 158 00:08:43,040 --> 00:08:47,160 Speaker 1: So what Kevin will aspire to do is to have 159 00:08:47,280 --> 00:08:51,480 Speaker 1: a more forward looking and richer, more nuanced sense of 160 00:08:51,559 --> 00:08:53,760 Speaker 1: the outlook for the economy and the bounds of risks 161 00:08:54,280 --> 00:08:57,679 Speaker 1: then you would get by simply plugging last month's employment 162 00:08:57,720 --> 00:09:02,320 Speaker 1: report or CPI data into a model like FRBUS at 163 00:09:02,320 --> 00:09:05,559 Speaker 1: the FED. So he's quite scornful of some of those 164 00:09:06,240 --> 00:09:08,520 Speaker 1: models and the sort of culture of what he would 165 00:09:08,559 --> 00:09:11,320 Speaker 1: say is backward looking data dependency. So I think he 166 00:09:11,440 --> 00:09:16,000 Speaker 1: will try to be yet informed by data, but putting 167 00:09:16,080 --> 00:09:18,319 Speaker 1: more weight on some of the sort of micro corporate 168 00:09:18,400 --> 00:09:21,760 Speaker 1: level data on the one hand, and market signals as 169 00:09:21,880 --> 00:09:25,240 Speaker 1: data on the other, relative to, if you like, the 170 00:09:25,679 --> 00:09:29,680 Speaker 1: top tier economic releases. What I would say with respect 171 00:09:29,720 --> 00:09:32,800 Speaker 1: to that approach is that I have I have a 172 00:09:32,800 --> 00:09:35,480 Speaker 1: lot of sympathy with the idea that we should, we 173 00:09:35,559 --> 00:09:38,640 Speaker 1: really should aim to do better than simply used last 174 00:09:38,640 --> 00:09:41,720 Speaker 1: month's data to understand where the economy is going. We 175 00:09:41,880 --> 00:09:44,400 Speaker 1: do aspire to have a rich understanding of private sector 176 00:09:44,480 --> 00:09:48,240 Speaker 1: data market signals. But it's very hard to be Alan 177 00:09:48,280 --> 00:09:51,720 Speaker 1: Greenspan and it's very hard to be Stan Ruckermiller, and 178 00:09:51,760 --> 00:09:54,520 Speaker 1: being a not very good version of those two could 179 00:09:54,520 --> 00:09:56,439 Speaker 1: be quite dangerous. So it's going to be a big 180 00:09:56,559 --> 00:09:59,079 Speaker 1: challenge to be able to do this in a way 181 00:09:59,320 --> 00:10:04,400 Speaker 1: that is very sophisticated and successful, and an additional challenge 182 00:10:04,440 --> 00:10:10,240 Speaker 1: in making policy in a systematic and predictable way when 183 00:10:10,280 --> 00:10:13,520 Speaker 1: you are, for good reasons, trying to draw in more 184 00:10:13,559 --> 00:10:16,600 Speaker 1: private sector insight and more markets insight as well as 185 00:10:16,800 --> 00:10:18,040 Speaker 1: standard macro data. 186 00:10:18,320 --> 00:10:20,679 Speaker 2: Yeah, I guess this gets a little bit how we 187 00:10:20,720 --> 00:10:23,120 Speaker 2: think he's going to get on with people at the FED. 188 00:10:23,200 --> 00:10:25,960 Speaker 2: But I guess the people who are who would be 189 00:10:26,120 --> 00:10:30,440 Speaker 2: concerned about that combination that you talked about. And to 190 00:10:30,480 --> 00:10:33,120 Speaker 2: your point, he doesn't have the background of Valan Greenspan. 191 00:10:33,120 --> 00:10:35,920 Speaker 2: It's easy to be snobby about non economist FED chairs. 192 00:10:36,000 --> 00:10:39,320 Speaker 2: J Powell not done so badly. He's a non economist. 193 00:10:39,480 --> 00:10:42,480 Speaker 2: Christine Legard was also a lawyer like Kevin Walsh. So 194 00:10:42,520 --> 00:10:45,160 Speaker 2: it doesn't seem to be unfortunately for US economists, it 195 00:10:45,160 --> 00:10:47,960 Speaker 2: doesn't seem to necessarily be in a bar to being 196 00:10:48,000 --> 00:10:51,760 Speaker 2: a good FED chair Central Bank governor. But when you're 197 00:10:51,840 --> 00:10:57,280 Speaker 2: pinning a lot on this argument about how a technological 198 00:10:57,400 --> 00:11:01,280 Speaker 2: change is affecting the real economy, is that going to 199 00:11:01,280 --> 00:11:05,000 Speaker 2: give him some persuading to do the FED making that case, 200 00:11:05,040 --> 00:11:07,640 Speaker 2: trying to get people on side with that, when actually 201 00:11:08,400 --> 00:11:11,120 Speaker 2: he's been a bit rude about some of the people 202 00:11:11,120 --> 00:11:13,079 Speaker 2: inside the FED, and he's even talked about the need 203 00:11:13,120 --> 00:11:16,240 Speaker 2: for regime change and breaking some heads and all these 204 00:11:16,320 --> 00:11:17,040 Speaker 2: kind of phrases. 205 00:11:17,400 --> 00:11:20,760 Speaker 1: Yeah, so, certainly as a bit of a repair job 206 00:11:20,800 --> 00:11:24,680 Speaker 1: to do in terms of his internal relationships at the FED, 207 00:11:24,679 --> 00:11:28,840 Speaker 1: which will be important for his success. And you know, 208 00:11:28,880 --> 00:11:31,360 Speaker 1: I think if he's smart, which I know he is, 209 00:11:31,880 --> 00:11:34,319 Speaker 1: and if he has enough slack from the administration, which 210 00:11:34,360 --> 00:11:38,439 Speaker 1: I'm not so sure about he will dial down on 211 00:11:38,559 --> 00:11:42,640 Speaker 1: the MAGA regime change stuff from here on in, because, 212 00:11:42,679 --> 00:11:45,920 Speaker 1: of course, even if you're approaching this from the perspective 213 00:11:46,000 --> 00:11:49,320 Speaker 1: of trying to deliver the several rate cuts of the 214 00:11:49,360 --> 00:11:52,679 Speaker 1: administration is hoping for this year, your ability to do 215 00:11:52,720 --> 00:11:55,000 Speaker 1: that is much greater if you are able to win 216 00:11:55,080 --> 00:11:58,360 Speaker 1: over the if you like the old FOMC, get them 217 00:11:58,400 --> 00:12:01,760 Speaker 1: on side rather than fight French warfare, are the committee 218 00:12:01,840 --> 00:12:05,240 Speaker 1: through the balance of this year. Kevin is somebody who 219 00:12:05,240 --> 00:12:07,200 Speaker 1: has said a lot of rude things about the FED recently. 220 00:12:07,240 --> 00:12:10,280 Speaker 1: He's also someone who has very high EQ and good 221 00:12:10,360 --> 00:12:14,400 Speaker 1: people management skills, and so I could imagine him behind 222 00:12:14,440 --> 00:12:19,600 Speaker 1: closed doors actually being relatively conciliatory and try to build 223 00:12:19,600 --> 00:12:22,480 Speaker 1: bridges with folks. But of course, if he comes in 224 00:12:22,520 --> 00:12:24,800 Speaker 1: and says he's going to fire a third of the staff, 225 00:12:24,840 --> 00:12:27,320 Speaker 1: for instance, as Mickey Bowman is doing on the banking side, 226 00:12:27,679 --> 00:12:31,720 Speaker 1: and has no interest in analytic traditional analytics around Ferbus 227 00:12:31,720 --> 00:12:34,320 Speaker 1: and so forth, that would pit people's backs up and 228 00:12:34,360 --> 00:12:36,959 Speaker 1: make it less likely that they would follow him. Your 229 00:12:37,000 --> 00:12:39,480 Speaker 1: point is on the actual merits of the economic judgment. 230 00:12:39,920 --> 00:12:42,440 Speaker 1: I don't think people on the FED are going to 231 00:12:43,240 --> 00:12:46,199 Speaker 1: be willing to go with a positive productivity shock story 232 00:12:46,800 --> 00:12:50,360 Speaker 1: just on an assertion or on a belief or an 233 00:12:50,360 --> 00:12:53,719 Speaker 1: expectation that this is coming. At the same time, I 234 00:12:53,800 --> 00:12:56,400 Speaker 1: think we are already starting to see certain things in 235 00:12:56,400 --> 00:13:00,360 Speaker 1: the data that starting to point in that direction. The 236 00:13:00,400 --> 00:13:04,440 Speaker 1: FED upgraded its productivity assessment for this year in December, 237 00:13:04,760 --> 00:13:08,800 Speaker 1: when Power essentially acknowledged that the base productivity growth has 238 00:13:08,840 --> 00:13:13,240 Speaker 1: already stepped up in the US. My own analysis suggests 239 00:13:13,480 --> 00:13:16,440 Speaker 1: that productivity this year next year will be again a 240 00:13:16,440 --> 00:13:18,600 Speaker 1: bit higher than the last few years, which were a 241 00:13:18,600 --> 00:13:21,120 Speaker 1: bit higher than the years that went before them. And 242 00:13:21,160 --> 00:13:25,840 Speaker 1: so the question is what's the unbiased estimate. The unbiased estimate, 243 00:13:26,080 --> 00:13:27,920 Speaker 1: in other words, something which is equally likely to be 244 00:13:27,960 --> 00:13:30,960 Speaker 1: wrong on both sides probably does have a step up 245 00:13:31,000 --> 00:13:33,600 Speaker 1: in productivity. Just a question of how hard you want 246 00:13:33,640 --> 00:13:34,480 Speaker 1: to push that theme. 247 00:13:34,880 --> 00:13:36,760 Speaker 2: Yes, And I suspect that's something we'll be coming back 248 00:13:36,800 --> 00:13:39,240 Speaker 2: to on trumponomics, not least because there are even some 249 00:13:39,280 --> 00:13:42,080 Speaker 2: small signs of a pickup in productivity in the UK, 250 00:13:42,240 --> 00:13:44,400 Speaker 2: where it has been dead and varied for really a 251 00:13:44,400 --> 00:13:46,760 Speaker 2: long time. So we were waiting to see if those 252 00:13:46,760 --> 00:13:49,640 Speaker 2: get trampled on in the spring rains. Let's get to 253 00:13:50,320 --> 00:13:52,760 Speaker 2: his approach to the balance sheet, because where he has 254 00:13:52,880 --> 00:13:57,360 Speaker 2: talked about really want to bring in the changes outside 255 00:13:57,400 --> 00:14:00,520 Speaker 2: of the sort of traditional monetary policy, had you set 256 00:14:00,600 --> 00:14:04,680 Speaker 2: interest rate, is in this desire to shrink the balance sheet. 257 00:14:04,720 --> 00:14:08,200 Speaker 2: The Fed famously had its I think its balance sheet 258 00:14:08,280 --> 00:14:12,040 Speaker 2: was less than a trillion dollars before the global financial crisis. 259 00:14:12,320 --> 00:14:15,520 Speaker 2: It peaked at about nine trillion dollars after COVID, and 260 00:14:15,360 --> 00:14:18,240 Speaker 2: it's shrunk a little bit as a result of those 261 00:14:18,360 --> 00:14:21,960 Speaker 2: kind of those sales of bonds that the Fed was holding, 262 00:14:22,360 --> 00:14:24,680 Speaker 2: but it's still roughly seven or eight times what it 263 00:14:24,800 --> 00:14:29,520 Speaker 2: was twenty years ago. That potentially has quite big implications 264 00:14:29,520 --> 00:14:31,960 Speaker 2: not for short term interest rates, but for long term 265 00:14:32,000 --> 00:14:37,400 Speaker 2: interest rate if he aggressively moved to restart the shrinking 266 00:14:37,520 --> 00:14:40,440 Speaker 2: of the Fed balance sheet, because obviously they had stopped 267 00:14:40,440 --> 00:14:43,240 Speaker 2: that quite recently. So how do you see that and 268 00:14:43,520 --> 00:14:45,800 Speaker 2: are you concerned about it? Right? 269 00:14:46,320 --> 00:14:48,800 Speaker 1: Yeah, So, first of all, just for your listeners, it's 270 00:14:48,800 --> 00:14:51,120 Speaker 1: made a bit more progress bringing down the balance sheet 271 00:14:51,440 --> 00:14:53,000 Speaker 1: from the peak around I think, as you said, was 272 00:14:53,040 --> 00:14:55,240 Speaker 1: it nine trillion. We're down about six and a half 273 00:14:55,240 --> 00:14:59,120 Speaker 1: trillion at this point. That's an appreciable reduction, and in 274 00:14:59,200 --> 00:15:01,720 Speaker 1: terms of the ratio of the central bank balance sheet 275 00:15:01,800 --> 00:15:04,840 Speaker 1: to nominal GDP, which is or banking assets, which is 276 00:15:05,200 --> 00:15:07,920 Speaker 1: a sort of a kind of reasonable benchmark. You certainly 277 00:15:08,000 --> 00:15:11,920 Speaker 1: unwound the pandemic expansion in the balance sheet, so that 278 00:15:11,960 --> 00:15:15,880 Speaker 1: past at least has roundtripped. But you're absolutely right that 279 00:15:16,360 --> 00:15:19,800 Speaker 1: if we're looking for one consistent theme across Kevin Walsh's career, 280 00:15:20,600 --> 00:15:24,840 Speaker 1: it's that he favors a smaller, cleaner, and I would 281 00:15:24,840 --> 00:15:28,880 Speaker 1: add humbler central bank balance sheet, meaning that it's not 282 00:15:29,080 --> 00:15:31,560 Speaker 1: just about the size and composition and duration of the 283 00:15:31,600 --> 00:15:34,480 Speaker 1: balance sheet, but it's also about this idea that a 284 00:15:34,520 --> 00:15:37,840 Speaker 1: big central bank balance sheet is a form of big 285 00:15:37,880 --> 00:15:42,440 Speaker 1: government at big footprint of the government sector in markets, 286 00:15:42,800 --> 00:15:45,360 Speaker 1: and that this is unhealthy in lots of ways, some 287 00:15:45,400 --> 00:15:48,560 Speaker 1: of which relate to the encouragement it gives to the 288 00:15:48,560 --> 00:15:52,120 Speaker 1: fiscal authority to run big deficits and debts, but also 289 00:15:52,200 --> 00:15:55,000 Speaker 1: that just you don't want a system where the central 290 00:15:55,040 --> 00:15:58,680 Speaker 1: bank is such a big actor in money markets and 291 00:15:58,760 --> 00:16:01,920 Speaker 1: in financial markets. So I think that is a deep 292 00:16:02,040 --> 00:16:06,400 Speaker 1: seated and sincere conviction on the part of Wash. The 293 00:16:06,520 --> 00:16:08,800 Speaker 1: question is how should we expect that he will look 294 00:16:08,840 --> 00:16:11,840 Speaker 1: to try to reflect that during his tenure as FAT chair. 295 00:16:12,440 --> 00:16:14,360 Speaker 1: I think the idea that Kevin will go out there 296 00:16:14,400 --> 00:16:17,200 Speaker 1: and try to kick off some big QT program fairly 297 00:16:17,240 --> 00:16:21,560 Speaker 1: soon is laughably improbable. He is somebody who is quite 298 00:16:21,640 --> 00:16:25,120 Speaker 1: savvy and understands full well that his greatest point of 299 00:16:25,200 --> 00:16:29,160 Speaker 1: vulnerability is his past comments about the balance sheet. And 300 00:16:29,200 --> 00:16:31,600 Speaker 1: if he says anything that sounds too hawkish on the 301 00:16:31,600 --> 00:16:34,800 Speaker 1: balance sheet or suggests that he might be keen kick 302 00:16:34,840 --> 00:16:37,640 Speaker 1: on with QT again fairly soon, he writ is to 303 00:16:37,680 --> 00:16:40,480 Speaker 1: blow up in terms of a spike in bond yield. 304 00:16:40,880 --> 00:16:43,640 Speaker 1: That would not only be a big hit to the 305 00:16:43,640 --> 00:16:46,000 Speaker 1: start of his career as VET chair, he would also 306 00:16:46,040 --> 00:16:50,080 Speaker 1: blow up his relationship with Secretary Vesant and President Trump. 307 00:16:50,280 --> 00:16:52,880 Speaker 1: So this is the last thing that Kevin wants. I 308 00:16:52,920 --> 00:16:55,520 Speaker 1: think Kevin will as soon as he starts speaking, he 309 00:16:55,560 --> 00:16:58,880 Speaker 1: will signal that he's going to be very pragmatic on 310 00:16:58,920 --> 00:17:02,160 Speaker 1: the balance sheet, very in terms of what he may 311 00:17:02,480 --> 00:17:06,440 Speaker 1: try to do on the balance sheet. One mechanism for 312 00:17:06,600 --> 00:17:09,560 Speaker 1: signaling that to the market is his idea of a 313 00:17:09,600 --> 00:17:15,000 Speaker 1: Fed Treasury accord that would facilitate closer institutional cooperation between 314 00:17:15,080 --> 00:17:17,240 Speaker 1: the Fed and the Treasury. Now the mention of Fed 315 00:17:17,240 --> 00:17:21,320 Speaker 1: Treasury accords makes some as nervous as to exactly how 316 00:17:21,359 --> 00:17:25,439 Speaker 1: this would affect contritionan traditional conceptions of central bank independence. 317 00:17:25,840 --> 00:17:28,199 Speaker 1: But Kevin will argue that, look, the central Bank can 318 00:17:28,200 --> 00:17:31,199 Speaker 1: be independent but still coordinate the more effective or cooperate 319 00:17:31,240 --> 00:17:33,960 Speaker 1: in a more effective way with the Treasury in the 320 00:17:34,000 --> 00:17:36,360 Speaker 1: here and now. That would be very much I think 321 00:17:36,440 --> 00:17:40,119 Speaker 1: about making sure that any balance sheet plans on the 322 00:17:40,160 --> 00:17:43,640 Speaker 1: Fed side were consistent with plans on the Treasury's debt 323 00:17:43,680 --> 00:17:46,120 Speaker 1: management side, if you like a little bit of sort 324 00:17:46,119 --> 00:17:49,119 Speaker 1: of soft coordination there. But I think the signal to 325 00:17:49,200 --> 00:17:53,600 Speaker 1: market is intended to be that I Kevin Walsh and 326 00:17:53,800 --> 00:17:57,520 Speaker 1: giving Scott Besson a soft veto, not a hard veto, 327 00:17:57,640 --> 00:18:01,119 Speaker 1: but a soft veto on any QT plans. So you 328 00:18:01,119 --> 00:18:03,720 Speaker 1: can all relax because you may not trust me, but 329 00:18:03,800 --> 00:18:06,400 Speaker 1: you know full well that Scott doesn't want higher yields 330 00:18:06,440 --> 00:18:07,919 Speaker 1: and higher mortgage rates. 331 00:18:25,680 --> 00:18:27,280 Speaker 2: Just to get into that whether you because you are 332 00:18:27,320 --> 00:18:29,960 Speaker 2: such a sort of long term observer and thinker about 333 00:18:30,000 --> 00:18:32,399 Speaker 2: this particular bit of the market and the kind of 334 00:18:32,440 --> 00:18:36,280 Speaker 2: interaction of markets with policy of the Fed, you could 335 00:18:36,280 --> 00:18:39,000 Speaker 2: imagine quite a lot of people in the financial markets 336 00:18:39,359 --> 00:18:42,480 Speaker 2: would think, yeah, big government's bad. We don't like FED 337 00:18:42,480 --> 00:18:44,520 Speaker 2: that gets in the way and gets super involved in 338 00:18:44,520 --> 00:18:47,439 Speaker 2: lots of different things. On the other hand, some of 339 00:18:47,480 --> 00:18:49,960 Speaker 2: the people who have talked to me who've been most 340 00:18:50,040 --> 00:18:53,919 Speaker 2: concerned about shrinking the FED balance sheet faster have been 341 00:18:54,000 --> 00:18:56,920 Speaker 2: people who look at the short term liquidity of treasury 342 00:18:57,000 --> 00:19:00,000 Speaker 2: markets and the repurchase market. That's kind of very short 343 00:19:00,160 --> 00:19:03,399 Speaker 2: term equidity that banks need to keep the financial system 344 00:19:03,400 --> 00:19:06,399 Speaker 2: ticking over, and a worried that if you have, over 345 00:19:06,520 --> 00:19:09,199 Speaker 2: time quite a significant reduction in the balance sheet that 346 00:19:09,200 --> 00:19:12,679 Speaker 2: could actually have unexpected consequences that we don't really understand 347 00:19:12,760 --> 00:19:15,200 Speaker 2: for liquidity in day to day markets. Do you agree 348 00:19:15,240 --> 00:19:15,439 Speaker 2: with that? 349 00:19:16,000 --> 00:19:18,320 Speaker 1: I certainly think if it was mishandled, it would have 350 00:19:18,400 --> 00:19:22,520 Speaker 1: very significant consequences for money markets as well as potentially 351 00:19:22,760 --> 00:19:25,560 Speaker 1: the functioning of the treasure debt market itself. That's precisely 352 00:19:25,640 --> 00:19:28,639 Speaker 1: why wash is going to be extremely careful here. So 353 00:19:28,840 --> 00:19:30,399 Speaker 1: if you forgive me for just being a little bit 354 00:19:30,560 --> 00:19:35,280 Speaker 1: analytic for a second step, Kevin understands full well that 355 00:19:35,880 --> 00:19:41,640 Speaker 1: the size of the fair balance sheet is dictated by 356 00:19:41,800 --> 00:19:46,840 Speaker 1: the amount of reserves that banks want to hold for 357 00:19:46,960 --> 00:19:53,600 Speaker 1: any given chosen operating framework, that the Central Bank operates with. 358 00:19:54,480 --> 00:19:58,440 Speaker 1: So the big change from the pre financial crisis period 359 00:19:58,560 --> 00:20:00,960 Speaker 1: to the present is that the FED moved from what 360 00:20:01,080 --> 00:20:05,040 Speaker 1: was called a scarce reserves system to what's called an 361 00:20:05,080 --> 00:20:10,679 Speaker 1: ample reserves system. In theory, the WASHPED could try to 362 00:20:10,960 --> 00:20:15,880 Speaker 1: overtime move back towards a scarce reserve system, that would 363 00:20:15,880 --> 00:20:21,200 Speaker 1: be extremely difficult to implement operationally, very challenging. It would 364 00:20:21,240 --> 00:20:24,000 Speaker 1: be a massive headache, and it would also involve the 365 00:20:24,119 --> 00:20:28,640 Speaker 1: kind of FED portfolio shrinkage over time that would likely 366 00:20:28,680 --> 00:20:33,000 Speaker 1: put substantial upward pressure on longer term bond yields in 367 00:20:33,040 --> 00:20:36,119 Speaker 1: a way that would be very much antithetical to what 368 00:20:36,240 --> 00:20:38,760 Speaker 1: the Treasury and the White House is trying to achieve. 369 00:20:39,880 --> 00:20:42,879 Speaker 1: We think that the FED itself would not go along 370 00:20:42,920 --> 00:20:47,560 Speaker 1: with that, that the vast majority of the FOMC has 371 00:20:47,600 --> 00:20:51,640 Speaker 1: a sort of settled preference for the ample reserves system. 372 00:20:52,040 --> 00:20:55,520 Speaker 1: So our call is that WASH will not move off 373 00:20:55,600 --> 00:20:59,119 Speaker 1: the ample reserve system towards the scarce reserve system. Once 374 00:20:59,240 --> 00:21:01,640 Speaker 1: you've settled that you're running an ample reserve system, you're 375 00:21:01,680 --> 00:21:04,920 Speaker 1: going to have a big balance sheet period. Now question 376 00:21:05,320 --> 00:21:08,119 Speaker 1: how big. Let's determine by the second part of the 377 00:21:08,160 --> 00:21:11,000 Speaker 1: formula I gave you how many reserves do the banks 378 00:21:11,040 --> 00:21:15,720 Speaker 1: want to hold for a given operating framework. Now that 379 00:21:16,400 --> 00:21:20,920 Speaker 1: may be sensitive to the regulatory regime. What I think 380 00:21:21,200 --> 00:21:25,560 Speaker 1: is potentially going to happen here is that Wash, in 381 00:21:25,720 --> 00:21:29,840 Speaker 1: concert with the Treasury and the other banking regulatory agencies 382 00:21:29,880 --> 00:21:33,760 Speaker 1: in the US, will be pushing hard on banking deregulation. 383 00:21:34,920 --> 00:21:38,280 Speaker 1: The FAD will also, Underwash, be pushing hard on easing 384 00:21:38,400 --> 00:21:41,280 Speaker 1: up on banking supervision, which is the sort of the 385 00:21:41,320 --> 00:21:43,520 Speaker 1: implementation of the rules, if you like, rather than the 386 00:21:43,600 --> 00:21:49,199 Speaker 1: rules themselves. And the hope would be that as a 387 00:21:49,240 --> 00:21:54,280 Speaker 1: result of extensive banking deregulation that makes it cheaper in 388 00:21:54,359 --> 00:22:00,760 Speaker 1: capital terms and liquidity terms to hold government paper, banks 389 00:22:00,800 --> 00:22:04,520 Speaker 1: will choose to hold a bit more government debt, including 390 00:22:04,600 --> 00:22:08,960 Speaker 1: treasury bills, and a bit less by way of bed reserves, 391 00:22:09,800 --> 00:22:14,600 Speaker 1: to the extent that banking deregulation means that the bank's 392 00:22:14,640 --> 00:22:19,320 Speaker 1: desire less reserves. That would then allow Kevin to reduce 393 00:22:19,359 --> 00:22:23,800 Speaker 1: the balance sheet some without stressing money markets. But if 394 00:22:23,800 --> 00:22:28,240 Speaker 1: he tried to reduce the balance sheet today without changing 395 00:22:28,280 --> 00:22:32,320 Speaker 1: the framework or banks demand for reserves in the framework, 396 00:22:32,720 --> 00:22:35,080 Speaker 1: all that would happen is you would have an immediate 397 00:22:35,119 --> 00:22:37,600 Speaker 1: return to money market stress of the kind we saw 398 00:22:37,880 --> 00:22:40,720 Speaker 1: in October and December, and he'd be back in balance 399 00:22:40,760 --> 00:22:43,840 Speaker 1: sheet expansion again within a week. He knows that, and 400 00:22:43,840 --> 00:22:45,040 Speaker 1: that's why it's not going to happen. 401 00:22:45,359 --> 00:22:47,800 Speaker 2: You're always very measured in what you say, Krishna, but 402 00:22:47,880 --> 00:22:52,200 Speaker 2: you seem pretty relaxed about a wash FED. We talked 403 00:22:52,240 --> 00:22:54,840 Speaker 2: about the interest rates. Certainly he doesn't have an outlandish 404 00:22:54,880 --> 00:22:58,040 Speaker 2: approach to setting interest rates. And on this question of 405 00:22:58,640 --> 00:23:04,080 Speaker 2: better coordination with the Treasury or kind of soft coordination 406 00:23:04,200 --> 00:23:08,440 Speaker 2: with the Treasury over balance sheet policy, lot of economists 407 00:23:08,440 --> 00:23:10,760 Speaker 2: have pointed to the possibility that if you have super 408 00:23:10,760 --> 00:23:14,119 Speaker 2: independent fiscal policy and monetary policy in an environment of 409 00:23:14,160 --> 00:23:16,200 Speaker 2: a big FED balance sheet, then you have got quite 410 00:23:16,200 --> 00:23:18,960 Speaker 2: a strong possibility of one arm of policy getting in 411 00:23:18,960 --> 00:23:20,760 Speaker 2: the way of the other. So it doesn't seem crazy 412 00:23:21,240 --> 00:23:23,359 Speaker 2: to have a degree of coordination. I guess the question 413 00:23:23,440 --> 00:23:27,200 Speaker 2: is do we have good coordination joined up policy versus 414 00:23:27,200 --> 00:23:30,119 Speaker 2: bad coordination, which is Trump going on true social and 415 00:23:30,160 --> 00:23:32,159 Speaker 2: demanding interest rate cuts. But you seem to think the 416 00:23:32,160 --> 00:23:34,600 Speaker 2: bats is going to be a healthy one. 417 00:23:34,920 --> 00:23:36,399 Speaker 1: I guess the way I would put in is that 418 00:23:37,000 --> 00:23:40,160 Speaker 1: I think that the crude version of concerns about Wash, 419 00:23:40,600 --> 00:23:43,840 Speaker 1: which is he's super hawkish on inflation and interest rates, 420 00:23:43,880 --> 00:23:47,960 Speaker 1: and he's super hawkish on QT just don't bear particularly 421 00:23:47,960 --> 00:23:50,960 Speaker 1: close examination, certainly not in the here and now context. 422 00:23:51,160 --> 00:23:54,320 Speaker 1: That's not what we should be worrying about. That doesn't 423 00:23:54,440 --> 00:23:58,240 Speaker 1: mean that there are no points of vulnerability or things 424 00:23:58,240 --> 00:24:00,720 Speaker 1: that we should be attended to in the case of 425 00:24:00,760 --> 00:24:04,520 Speaker 1: a Wash FED. As I indicated earlier on monetary policy, 426 00:24:04,560 --> 00:24:07,359 Speaker 1: I think the question is it's fine, and indeed, I 427 00:24:07,359 --> 00:24:10,199 Speaker 1: think very legitimate to critique some of the shortcomings of 428 00:24:10,520 --> 00:24:14,160 Speaker 1: traditional FED models and backward looking data dependence, but it's 429 00:24:14,200 --> 00:24:17,520 Speaker 1: going to be very hard to replace that with something 430 00:24:17,560 --> 00:24:23,119 Speaker 1: that is coherent and systematic and well communicated, and that 431 00:24:23,160 --> 00:24:26,600 Speaker 1: could go badly wrong if Wash were to turn his 432 00:24:26,680 --> 00:24:29,120 Speaker 1: back on the old ways of doing business without having 433 00:24:29,200 --> 00:24:32,440 Speaker 1: figured out a fully coherent set of approach or set 434 00:24:32,480 --> 00:24:35,840 Speaker 1: of approaches to replace it. With respect to the balance sheet, 435 00:24:36,240 --> 00:24:39,080 Speaker 1: I think Wash is going to be much more careful 436 00:24:39,119 --> 00:24:42,639 Speaker 1: than many think. Nonetheless, though we are already paying the 437 00:24:42,680 --> 00:24:47,439 Speaker 1: price today in markets for Kevin's past comments on the 438 00:24:47,480 --> 00:24:51,680 Speaker 1: balance sheet and the uncertainty that this is created about. 439 00:24:51,840 --> 00:24:55,719 Speaker 1: If you like the Fed's balance sheet reaction, function in 440 00:24:55,800 --> 00:24:59,879 Speaker 1: a wash error, and having lived through the Taper ten 441 00:25:00,480 --> 00:25:03,440 Speaker 1: at the New York FED, where I was a senior advisor, 442 00:25:04,040 --> 00:25:06,560 Speaker 1: I will tell you that I at least have always 443 00:25:06,600 --> 00:25:10,160 Speaker 1: taken away from that episode how potentially dangerous it can 444 00:25:10,200 --> 00:25:14,360 Speaker 1: be for central banks to try to reset market expectations 445 00:25:14,840 --> 00:25:17,080 Speaker 1: as to the approach that they're going to take to 446 00:25:17,119 --> 00:25:20,560 Speaker 1: their balance sheets going forward. Now, I'm absolutely not predicting 447 00:25:20,880 --> 00:25:25,000 Speaker 1: a wash taper tantrum, but I am saying that he 448 00:25:25,080 --> 00:25:27,920 Speaker 1: has is going to have to move very carefully to 449 00:25:28,960 --> 00:25:33,800 Speaker 1: update and clarify markets and guide markets as to his 450 00:25:33,960 --> 00:25:38,720 Speaker 1: thinking on the balance sheet himself. And then separately, as 451 00:25:38,760 --> 00:25:45,080 Speaker 1: you suggested, a Fed Treasury accord has potentially some upsides 452 00:25:45,200 --> 00:25:49,639 Speaker 1: and potentially some can very concerning downsides, And the devil 453 00:25:49,680 --> 00:25:52,880 Speaker 1: really would be in the detail as to whether this 454 00:25:53,119 --> 00:25:58,520 Speaker 1: was a sensible vehicle for a cooperation starting from the 455 00:25:58,560 --> 00:26:01,280 Speaker 1: principle of very firm and dependence on the side of 456 00:26:01,280 --> 00:26:04,879 Speaker 1: the central bank but looking to cooperate where appropriate to 457 00:26:05,040 --> 00:26:09,480 Speaker 1: implement policy, or whether this would be a vehicle for 458 00:26:09,720 --> 00:26:13,639 Speaker 1: some erosion of that central bank's independence. The bond market 459 00:26:13,760 --> 00:26:17,720 Speaker 1: certainly will will be wary until we find out exactly 460 00:26:17,760 --> 00:26:18,280 Speaker 1: which type. 461 00:26:18,280 --> 00:26:21,040 Speaker 2: It is at some level, all of this is irrelevant 462 00:26:21,040 --> 00:26:24,359 Speaker 2: if he doesn't bring a majority of his colleagues on side, 463 00:26:24,400 --> 00:26:27,439 Speaker 2: at least to some degree. You talked about we're already 464 00:26:27,440 --> 00:26:29,280 Speaker 2: paying the price in the markets. He's paying the price 465 00:26:29,359 --> 00:26:31,560 Speaker 2: not just for former comments about the balance sheet, but 466 00:26:31,640 --> 00:26:34,000 Speaker 2: the fact that he has been chosen by Donald Trump 467 00:26:34,400 --> 00:26:37,040 Speaker 2: in a very politicized environment where a lot was said 468 00:26:37,080 --> 00:26:40,159 Speaker 2: about the need to lower interest rates and etc. Etc. So, 469 00:26:40,640 --> 00:26:42,560 Speaker 2: as you said, he has a repair job to do. 470 00:26:42,640 --> 00:26:44,480 Speaker 2: Everything that we've read about him, we had a very 471 00:26:44,480 --> 00:26:46,879 Speaker 2: good profile. The politico had a very good profile. He 472 00:26:46,960 --> 00:26:49,080 Speaker 2: seems to be not someone who would go in as 473 00:26:49,080 --> 00:26:50,840 Speaker 2: a bull in a china shop. He seems, from a 474 00:26:50,880 --> 00:26:53,800 Speaker 2: young age, has shown a very good networking ability and 475 00:26:53,840 --> 00:26:56,520 Speaker 2: ability to win people over. Do you think you're going 476 00:26:56,560 --> 00:26:58,320 Speaker 2: to see what a lot of people are expecting, which 477 00:26:58,359 --> 00:27:02,400 Speaker 2: is very split boats relative to the past on the FMC, 478 00:27:03,760 --> 00:27:05,720 Speaker 2: And do you think j. Powell's going to stick around, 479 00:27:06,160 --> 00:27:08,600 Speaker 2: which will also make it slightly more difficult for him. 480 00:27:08,800 --> 00:27:10,720 Speaker 1: Let me take that in reverse order. First of all, 481 00:27:10,920 --> 00:27:16,639 Speaker 1: I think the recent month's escalation of Trump attacks administration 482 00:27:16,720 --> 00:27:19,359 Speaker 1: attacks on the FED culminating in the issuance of the 483 00:27:19,400 --> 00:27:22,280 Speaker 1: DOJ subpoenas against Powell have made it a lot more 484 00:27:22,440 --> 00:27:24,560 Speaker 1: likely that Powell will stay on. I don't think he 485 00:27:24,640 --> 00:27:26,639 Speaker 1: was actually intending to stay on beyond May. I think 486 00:27:26,640 --> 00:27:29,399 Speaker 1: it's made him more likely than he will. With that said, 487 00:27:29,800 --> 00:27:32,200 Speaker 1: and certainly I don't think he can possibly step down 488 00:27:32,520 --> 00:27:36,840 Speaker 1: Powell at a minimum unless the DOJ investigation is closed 489 00:27:36,880 --> 00:27:39,560 Speaker 1: down beforehand, because he can't look like he's leaving under pressure. 490 00:27:40,200 --> 00:27:43,000 Speaker 1: With that said, I think, and the appointment of Kevin 491 00:27:43,040 --> 00:27:45,320 Speaker 1: Wah she was somebody who has long been regarded as 492 00:27:45,560 --> 00:27:49,640 Speaker 1: a legitimate candidate to run the Central Bank makes it 493 00:27:49,720 --> 00:27:52,840 Speaker 1: harder for Powell to justify staying on for some extended 494 00:27:52,880 --> 00:27:55,280 Speaker 1: period of time than would have been the case if 495 00:27:55,600 --> 00:27:57,959 Speaker 1: Trump had appointed one of his own advisors, for instance, 496 00:27:58,000 --> 00:28:03,320 Speaker 1: like Kevin Hassett into that seat. With respect to the Committee, 497 00:28:03,480 --> 00:28:05,640 Speaker 1: there is a lot of folks in the market seem 498 00:28:05,720 --> 00:28:08,919 Speaker 1: to think that the FED is going to become the 499 00:28:08,920 --> 00:28:11,879 Speaker 1: Bank of England and everything's going to be decided on 500 00:28:12,160 --> 00:28:14,399 Speaker 1: the FED equivalent of a five to four votes and 501 00:28:14,440 --> 00:28:16,640 Speaker 1: does the governor Does the governor not have the fifth 502 00:28:16,720 --> 00:28:20,919 Speaker 1: vote he needs, It's not inconceivable. That's where it ends 503 00:28:21,000 --> 00:28:23,680 Speaker 1: up but it's not the base case. The base case 504 00:28:23,760 --> 00:28:26,119 Speaker 1: is still that the FED will make policy the way 505 00:28:26,160 --> 00:28:28,800 Speaker 1: the FED has always made policy, which is through a 506 00:28:28,840 --> 00:28:33,919 Speaker 1: structured negotiation between the chairman and his senior allies. Typically 507 00:28:34,240 --> 00:28:36,399 Speaker 1: the troika figures the New York FED President and the 508 00:28:36,480 --> 00:28:39,680 Speaker 1: vice chair a structured negotiation between that leadership group and 509 00:28:39,720 --> 00:28:43,120 Speaker 1: the wider committee. That negotiation will be a lot more 510 00:28:43,120 --> 00:28:46,880 Speaker 1: stressed this year for all the reasons that you articulate, 511 00:28:47,440 --> 00:28:49,720 Speaker 1: but I still think of it as operating by way 512 00:28:49,720 --> 00:28:54,040 Speaker 1: of that structured negotiation. Within that, it matters he has 513 00:28:54,080 --> 00:28:58,440 Speaker 1: the leverage. So the more allies WASH has on the 514 00:28:58,440 --> 00:29:01,760 Speaker 1: FED board, more seats that are vacated, allowing Trump to 515 00:29:02,000 --> 00:29:07,000 Speaker 1: point to new officials, it increases its leverage within that negotiation. 516 00:29:07,920 --> 00:29:10,200 Speaker 1: But I think the odds are still that what we 517 00:29:10,320 --> 00:29:15,320 Speaker 1: get is predominantly a negotiated outcome rather than a drum 518 00:29:15,400 --> 00:29:17,680 Speaker 1: roll and drama as to which way the vote is 519 00:29:17,720 --> 00:29:19,200 Speaker 1: going to break on a given day. 520 00:29:20,720 --> 00:29:22,560 Speaker 2: And of course, the crucial difference between the Bank of 521 00:29:22,560 --> 00:29:26,840 Speaker 2: England and the Fed is FED the German votes first, 522 00:29:27,000 --> 00:29:29,880 Speaker 2: and that the Bank of England the governor votes last. 523 00:29:30,200 --> 00:29:34,840 Speaker 1: In almost every case, the decision has essentially been arrived 524 00:29:34,840 --> 00:29:36,959 Speaker 1: at by the time they sit down at the table. 525 00:29:37,440 --> 00:29:40,200 Speaker 1: And the reason it's been arrived at is because, again, 526 00:29:40,640 --> 00:29:44,120 Speaker 1: the way the FED makes decisions is through a chair 527 00:29:44,360 --> 00:29:48,640 Speaker 1: led effort to craft a central view that the vast 528 00:29:48,680 --> 00:29:51,880 Speaker 1: majority of people can sign up to, even if it's 529 00:29:51,920 --> 00:29:55,760 Speaker 1: not their very first best preference, for whatever it's worth. 530 00:29:56,200 --> 00:29:59,520 Speaker 1: I actually think that is a superior way to run 531 00:29:59,560 --> 00:30:02,520 Speaker 1: a central bank. I don't believe that a central bank 532 00:30:02,520 --> 00:30:05,240 Speaker 1: can actually operate with nine or in the Fed's case, 533 00:30:05,440 --> 00:30:08,840 Speaker 1: nineteen different reaction functions. I think it has to have 534 00:30:09,000 --> 00:30:13,080 Speaker 1: a reaction function, and that means something that's crafted, a 535 00:30:13,200 --> 00:30:16,920 Speaker 1: central view that's crafted. So that's where I think WASH 536 00:30:16,920 --> 00:30:19,320 Speaker 1: will try to go. I do think that the Old 537 00:30:19,320 --> 00:30:23,360 Speaker 1: Committee will try to meet him halfway, but the extent 538 00:30:23,400 --> 00:30:27,719 Speaker 1: to which that's possible will depend both on economic conditions, 539 00:30:27,880 --> 00:30:30,960 Speaker 1: whether they give the Old Committee the slack to meet 540 00:30:31,360 --> 00:30:35,120 Speaker 1: Wash halfway in terms of inflation risks and labor market pressures, 541 00:30:35,800 --> 00:30:38,960 Speaker 1: and it will depend on WASH's own conduct and the 542 00:30:39,000 --> 00:30:42,360 Speaker 1: conduct of Trump relative to the Fed. I think the 543 00:30:42,400 --> 00:30:44,760 Speaker 1: hope is that we can preserve some version of the 544 00:30:44,760 --> 00:30:47,960 Speaker 1: old way of making policy, but it is going to 545 00:30:48,000 --> 00:30:50,840 Speaker 1: be under unique stress this year. 546 00:30:53,000 --> 00:30:57,080 Speaker 2: Crystal clear as always and extremely useful and interesting. 547 00:30:57,320 --> 00:30:59,600 Speaker 1: Thank you so much, he's supposed to have always fun 548 00:30:59,640 --> 00:31:00,000 Speaker 1: to do it with. 549 00:31:00,000 --> 00:31:05,200 Speaker 2: Thanks for listening to Trumpnomics from Bloomberg. It was hosted 550 00:31:05,200 --> 00:31:08,479 Speaker 2: by Me, Stephanie Flanders and I was joined by Krishna Guha. 551 00:31:09,000 --> 00:31:13,160 Speaker 2: Trumponomics was produced by Samasadi and Moss, and sound design 552 00:31:13,400 --> 00:31:16,760 Speaker 2: was by Blake Maples and Aaron Casper. To help others 553 00:31:16,800 --> 00:31:19,680 Speaker 2: find the show, please rate and review it highly wherever 554 00:31:19,720 --> 00:31:20,080 Speaker 2: you listen