00:00You got our attention earlier today when you sent us this appeared to be early draft or potentially what the
00:09Fed chair nominee will say to Congress tomorrow.
00:12First of all, it's surprising to get that out there ahead of time.
00:16What was in it and why do you think this saw the light of day?
00:20It's interesting. I'm not entirely sure why his prepared remarks were released before the actual testimony takes place tomorrow.
00:28What is interesting is that chairman, I'm already getting ahead of myself, chairman designate or nominee to be the next
00:35chairman of the Fed, Kevin Warsh, focused entirely on the Fed's monetary independence.
00:41That's to say that the Fed is responsible for any inflation that occurs in the economy and so needs to
00:46set interest rate policy accordingly.
00:48But he specified that the Fed is responsible to both the executive branch and the Congress in any additional responsibilities
00:57that it takes on.
00:58Including bank regulation and any other attention that it gives to issues basically beyond setting monetary policy.
01:04So the Fed is responsible for any inflation.
01:07So even a supply shock such as what we're seeing right now with the Strait of Hormuz being effectively closed
01:12and an increase in energy prices that that could be, in his view, attributed to the Fed.
01:17That's the line in his prepared remarks.
01:19And it struck me as shockingly hawkish, especially for somebody who's being appointed to the role with the expectation from
01:26the president that he's going to deliver interest rate cuts.
01:29Now, the political mind that I have or my political brain kicks in and says that he needs to assert
01:36some degree of independence.
01:38He needs to sound somewhat hawkish if he's going to appear politically independent.
01:43And so this could all just be political rhetoric.
01:45It could be a little bit of theater.
01:47But this is also very reminiscent of the Kevin Warsh that we knew when he was a governor 20 years
01:53ago.
01:54I want to dig into that.
01:54But it also gets to so many members of this administration.
01:59I don't think I'm speaking out of turn.
02:01But if you go and watch some of those confirmation hearings, they seem to toe the line and kind of
02:08say what they should or what they expect members of Congress to hear that, you know, we're going to do
02:13the right thing.
02:14I'm going to take my job seriously.
02:15And then once they get into the job, they kind of do the president's bidding.
02:19I don't think I'm speaking out of turn.
02:21Do you feel like Kevin Warsh could possibly be doing that?
02:24He knows to get the job, he probably has to say certain things.
02:26No?
02:26I think there are three certain truths that we need to keep in mind as we head into tomorrow and
02:31tomorrow's hearing.
02:32The first is that this is all political theater.
02:35So you're exactly right there.
02:36He's going to say what you expect him to say.
02:38He's going to sound reasonably hawkish.
02:40We know the Democrats on the committee are going to really ask him his opinion about the DOJ's investigation of
02:46the Fed and the Fed's independence.
02:48They're going to say that he's perhaps unaware of what's going on in the lower end of the income distribution.
02:53The Fed needs to deliver economic outcomes for a broad swath of Americans.
02:57We know in advance that that's what's going to take place.
03:00The other two truths that are equally important and perhaps most important for markets are he doesn't have the votes
03:07to get through committee.
03:08Tom Tillis, Republican senator from North Carolina, is not going to allow him to move through committee.
03:13And then even if he does move through committee, he's not going to have the votes on the FOMC to
03:18deliver big interest rate cuts.
03:19So we need to keep all three of those facts in mind as we head into tomorrow's hearing.
03:23There's a checks and balance on that Fed board, right?
03:25That's right.
03:26There is a certain degree of checks and balances when it comes to who gets to set monetary policy and
03:33who gets to decide on the path of interest rates.
03:36And the Fed chairman alone, the chairman of the board of the Federal Reserve System, does not have the single
03:42vote that decides.
03:44Instead, he needs to really build a coalition.
03:46And right now it's a hawkish committee.
03:48So let me present you with a hypothetical then, Stuart, if we're going to play this out.
03:51And if Kevin Worsh gets approval and if, let's say, Senator Tillis drops, you know, his opposition, Fed Chair Jay
04:02Powell actually ends up stepping down and there is some sort of transition here.
04:07Does the path for Federal Reserve rates this year change when that happens?
04:13Probably not very much.
04:15Okay.
04:15Okay.
04:16Probably not very much.
04:17The first thing that we need to keep in mind as we count votes is that if we were to
04:21end up seeing Kevin Worsh ascending to the Fed, which is a big if, he would take Myron's seat.
04:27So the most dovish person on the committee ends up leaving.
04:30You then end up having someone who's basically a moderate in Chairman Powell stepping down for the sake of tradition,
04:37effectively.
04:38And the real swing votes, the people who are probably most important right now in setting the thematic trajectory of
04:46interest rates, policy rates, are regional Fed branch presidents who are hawkish.
04:52And so he's just not going – even if he were to ascend to the chairmanship, even if everything evolves
04:57as it typically does, he's probably not going to have the votes on the committee to deliver the sort of
05:02interest rate cuts the president wants or that Stephen Myron says that he wants right now.
05:06And he's not going to be able to make it through committee as long as the DOJ investigation is going
05:11on and Republican Senator Tom Tillis from North Carolina has his foot firmly down.
05:18He is not going to allow any Fed nominee to move through while the DOJ investigation is ongoing.
05:24So my motto has really been for the president, he gets to decide, investigate her interest rate.
05:29And even if he chooses to have his Fed nominee move through by dropping the investigation, he still might not
05:35get that interest rate cut that he's hoping for.
05:37Right, right.
05:38So can one assume that if Kevin Walsh is his own man and he gets this position that we then
05:48will continue to see for the next couple of years or two and a half years, a president that puts
05:53pressure on the U.S. Central Bank?
05:55And that's not a good thing for anybody.
05:56It's not a good thing for anybody.
05:58I think that if we were to see Kevin Walsh ascending to the chairmanship of the Fed, I think that
06:05he would focus on some of the other initiatives that might matter for the administration.
06:10He might focus on shrinking the Fed's footprint, the Fed's balance sheet, shrinking the degree to which the Fed interacts
06:16with any shrinking the extent to which the Fed is participating in bank regulation and even parties and instead focusing
06:23on deregulation and reigning in the Fed's interest in other things.
06:27Let's say, you know, climate policy and encouragement of reductions in banks lending to fossil fuels and other sort of
06:35energy producers.
06:36I think that those are ways that he could placate the administration without truly delivering the interest rate cuts that
06:42he needs.
06:42And I think that he has somebody in Secretary Besant that understands that swift interest rate cuts wouldn't necessarily be
06:49great for long term finance and costs anyway.
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