00:00This will likely be an historic week for the Federal Reserve, not just because of a pending decision on interest
00:04rates,
00:05but for the man who leads the century-old organization.
00:08With us now is Michael McKee, Bloomberg's international economics and policy correspondent who covers the Fed for us,
00:13no doubt booking his trip here to Washington, D.C. for Wednesday of next week when the Senate Banking Committee
00:17is going to have a vote,
00:18we have learned. On Kevin Warsh, the president's picked to be the next chair of the Federal Reserve.
00:22Mike, what can we expect? It's the start of the new week here. What is that hearing going to be
00:26like?
00:26I guess we're waiting with bated breath here to see what one member of that committee is going to say.
00:32Well, the vote on the meeting of the Banking Committee to hold a vote may not be open.
00:37They don't always do it in open session, but it'll be short.
00:40They'll already have the votes counted, basically, and they'll come out and make a move to accept him,
00:47and then it goes to the floor of the Senate.
00:51It's a little bit tough these days with the Senate because they've got so many other pending legislative issues,
00:56but one feels that John Thune will find a way to get it to the floor before May 15th so
01:02Kevin Warsh can be sworn in.
01:04We have to assume, we haven't heard yet from Tom Tillis,
01:07but we have to assume that they would not have scheduled the vote unless he had agreed to vote in
01:14favor of the nominee.
01:18There's a lot happening around this meeting, but we're not exactly expecting anything to happen, right?
01:23We're not expecting any significant changes on rate cuts.
01:25It's mostly about the things we've been talking about, about Powell and all this surrounding this meeting itself.
01:32It's really going to be about Jay Powell.
01:34It's technically his last meeting as Fed chair.
01:38If Kevin Warsh is confirmed right away, then he will take over on May 16th.
01:43But there isn't going to be any move in interest rates.
01:47There's not a new set of economic projections.
01:50There's not a new dot plot.
01:51So a lot of this is going to be focused on what Jay Powell's future plans are.
01:57There is a headline out this morning that Todd Blanche was on one of the other morning shows,
02:02the acting attorney general, and he said,
02:04if the probe uncovers anything, the probe by the inspector general, then we are going to investigate.
02:10And that's exactly what Jay Powell said he doesn't want.
02:13He said that until this is really and finally closed, he's not leaving the Fed.
02:18So even if Warsh takes over as chair, Powell may still be on the Fed as a governor.
02:24He can stay until 2028.
02:26So a lot of the questioning, I'm sure, we'll focus on that.
02:29Yeah, you've taken me right where I want to go.
02:31And that is what Powell has said in the past,
02:33that he won't be satisfied until the investigation is completed with transparency and finality.
02:38We haven't heard from Tom Tillis, the senator from North Carolina.
02:40We haven't heard from Jay Powell either.
02:42Do we have any sense of what he meant by that?
02:44If this investigation by the DOJ has been dropped, as Janine Pirro says it has been,
02:49and it's kicked over to the inspector general of the Federal Reserve,
02:51do you think that's enough to satisfy the Fed chair?
02:54Has he indicated as much?
02:55He has not indicated.
02:58I've been told that the Fed is not particularly happy with what they have heard,
03:02but it's going to be Powell's decision.
03:05He wanted the case closed with prejudice, meaning we can't file anything new.
03:10Now, the inspector general has been working on this for a year,
03:14almost since July of last year when Powell asked him to investigate.
03:19So it shouldn't take very long for the IG to get a report out.
03:24And the banking committee has asked for a hearing within 90 days.
03:27It may not even take that long.
03:29And if the IG clears Powell, then maybe he will resign.
03:34But if not, or if it's indeterminate, then Powell probably stays on.
03:39Now, I would guess that Powell is going to stay on until at least we see the inspector general's report,
03:47because he's still in some legal jeopardy if the IG finds that there was something wrong.
03:56Michael McKee, I'm going to go out on a limb here.
03:58And Beth, you watched our interview yesterday with Dan Yergin.
04:01We talked to him, the great energy expert, about the Fed's capacity to see through what's been going on in
04:05the Middle East.
04:06And he expressed some real hesitation that they'll be able to do that.
04:09So even as Christina points out, there's not going to be any sort of cuts or increases at this meeting
04:13this week.
04:14I suspect the dialogue around that table is going to be fascinating.
04:17And I wonder if you could talk a bit about that, the way that Fed policymakers in their speeches and
04:22interviews leading up to this meeting
04:23have addressed all of the uncertainty that is part of the war,
04:28that this war has wrought as they kind of see their way through the economy.
04:33Well, there are kind of two aspects, because there are two mandates.
04:36Before the war, even, there were concerns about the labor market.
04:40The Fed's been more worried since the war started about inflation.
04:43So they'll be talking about both and what they think is going to happen in each.
04:47The feeling is that the labor market is stable, but not all that healthy.
04:52While inflation may be a real danger, they want to look through the energy prices because those are temporary.
04:58And at some point, they'll start to come back down.
05:00But they won't go as low as they were for some time.
05:05And the stories that you read about the second round effects, Bloomberg had a great one yesterday.
05:10I encourage everybody to read that.
05:13There's a feeling that, like an offshore tsunami, this is going to start hitting all kinds of companies in the
05:20U.S. and around the world
05:21because supplies have not been delivered and because companies can't operate without enough fuel.
05:27And so prices are going to continue to go up, not just for energy.
05:32We noted that China has already started raising prices on exports that are not energy-related.
05:39And we import a lot from China.
05:41So we could continue to see inflation rise for some months.
05:45And that creates a real dilemma for the Fed.
05:48Do they threaten the labor market by raising rates to head off inflation?
05:53Or do they stimulate the economy and risk further inflation by cutting rates?
05:58So this is not going to be a story that goes away soon for the Fed and whoever is the
06:03chair.
06:05But I want to ask you about that because one of the criticisms of Powell's tenor and the Fed under
06:09his command
06:10was that they were slow to respond initially to inflationary trends.
06:14And if we're seeing these second-stream effects from the war
06:17and we see all the things you just talked about starting to kick in,
06:20if you have this uncertainty lingering at the top of the Fed,
06:24does that impact their ability to be nimble and to respond where they need to to these economic trends?
06:30Probably not, because Kevin Warsh is really going to be the only change.
06:34And we sort of know where Stephen Myron comes down all the time.
06:38So the rest of the Open Market Committee has been dealing with shocks like this for now years.
06:44And they've had a lot of chance to talk through what's going on with the war
06:49and its effect on prices and scenarios for what might happen.
06:54I think they'd be able to react appropriately.
06:57The question is, what's the best reaction?
06:59And that's hard to know.
07:01It's interesting that Kevin Warsh is coming into the Fed,
07:04critical of the Fed's performance with the inflation breakout in 2021.
07:10And he said he wants to change the Fed's inflation framework.
07:14So it will be interesting to see whether he can and by how much in a short period of time
07:20to try to head off any criticism that the Fed might be slow or react wrongly this time.
07:27Our international economics and policy correspondent, Michael McKee, joining us here on this Sunday morning.
07:31That interview with Tom Till is scheduled to take place here in a few minutes' time.
07:34We'll be monitoring that, of course, bringing you any headlines from what the North Carolina senator has to say
07:38about his position on Kevin Warsh's nomination, now that those charges,
07:42or that investigation, rather, into Jerome Powell has been passed from the Justice Department
07:46on to the IG at the Federal Reserve.
07:49And I should note that Mike McKee is going to have special coverage for us on Wednesday,
07:52a special edition of Surveillance the Fed Decides,
07:54starting at 1.30 p.m. on Bloomberg Radio and Bloomberg Television.
07:57And I should note that Mike McKee is going to have a special edition of the U.S.
Comments