00:00We had the Federal Open Market Committee meeting, and we heard from Chair Powell.
00:05They basically didn't do anything. Did they have a choice?
00:09No, but I think they did do a few things. They certainly didn't change the funds rate. I don't
00:14think anybody expected that, or at least reasonably. The battle, of course, the dissents
00:19that happened were over the Fed's statement, or at least what people perceive the Fed's
00:23statement to be. Is there an easing bias? Is there a tightening bias? I think it's fair to
00:28say under the hood, members of the FOMC are conflicted. Some view that the next move is
00:35going to have to be flat for an extended period, possibly even up. Others, like Governor Myron,
00:40have a different sign. So that's really what happened.
00:43One of the things I couldn't figure out is the easing bias language that they descended
00:47from the three members. I looked at the statement carefully. I didn't find those words in there.
00:50No, I don't think it's there in black and white. I think probably this is a reading the room
00:56kind of observation of people going on record that we really are uncomfortable with a view that
01:02at the next FOMC meeting, or maybe even the meeting after that, that a cut is forthcoming.
01:08They did say in the statement that there was extreme uncertainty coming out of the Middle East
01:12because of the Iran war. Is that what is driving the concern about rates, or was there a pre-existing
01:19issue with inflation?
01:20I would have to give you the classic economist answer of yes and no. So yes, the uncertainty
01:25is a problem. Oil prices are high. The U.S. economy is less energy intensive, but it will
01:30still raise at least headline inflation. Let's remember inflation was stuck well above the Fed's
01:37target before February 28th. So Iran adds to the problems the Fed faces, but it's not really
01:44the core problem. I think what's vexing the Fed is why it was more difficult to get inflation
01:49down before Iran. But yes, the uncertainty matters.
01:52What about inflation expectations? Because I've seen some indications now they may be rising
01:56in the United States and even in Europe.
01:58So far, I think they're relatively anchored. That's a good news for the Fed. And that's far
02:03more important for the Fed than whatever the inflation number by whatever measure they look
02:07at is today. But I think the risk is if the war continues and prices remain elevated. And of course,
02:14we still have tariffs working their way through the system, even if the ultimate effect is to
02:18stabilize, that's going to be an inflation problem. And that could unhinge expectations.
02:24So what does this mean for the new chair coming in, Kevin Warsh?
02:28Good luck. I mean, Kevin Warsh is actually well suited for this moment. He has outstanding small
02:35p political skills, consensus building skills. He's very smart. He knows these issues. I think his
02:41challenge is going to be looking at the men and women around the table, whether it's the governors or the
02:47FOMC and figuring out how to bring them together. That's going to require two things. One is his
02:53skills, which, as I said, he has. But another is the theory of the case. I mean, how do you
02:57talk about
02:57the economy? I think that'll have to be job one for our new chair.
03:02Some are interpreting that three person dissent as putting a marker down really almost against
03:07President Trump with President Trump's pressing for lower rates. Don't go too far too fast.
03:12I'm not sure that that's true. I mean, it is true. President Trump would prefer lower rates. He certainly
03:16has told us all that. I think it's more a matter of a sincere difference of opinion and policy. And
03:23given where we are right now with the labor market softening a little, yet we have a robust economy.
03:28Inflation is stuck. You can see why people are wondering, is the glass half full or half empty?
03:33When you have uncertainty, more often than not, watching and waiting until you get more information
03:39is the right answer. And I think it is here. Is it a symmetric risk right now as you look
03:44at it? Or
03:44is there a real risk of stagflation where you actually could hurt growth and still have inflation?
03:50Well, there's certainly a risk of stagflation, but I would be more worried about inflation
03:54at the moment. The underlying economy is very good. And the GDP numbers we got for the first quarter
04:01are reassuring still about the pace of AI investment and about final sales,
04:05even though the headline print is a little below expectations.
04:09Kevin Warsh comes in saying that he thinks there is a room for rate cuts because of AI. How does
04:16that
04:16work? Well, the story, if it's correct, is what I would call more of a long run story. So AI
04:23in the
04:23long run certainly has the potential to be disinflationary. It reduces the cost, particularly
04:29in service producing sectors. Think about the costs of producing what lawyers do or accountants
04:35do or engineers, or dare I say economists. That could all be disinflationary. The problem is that's
04:40not today. That's not tomorrow. And it may not even be a year or two from now. The immediate effect
04:46of AI is the aggregate demand effect of building data centers, the investment numbers that showed
04:52up so robust in GDP. All else equal that raises, not lowers, the real interest rate and inflation
04:59is stuck. So I think incoming Chair Warsh's story makes sense as a potential long run hypothesis.
05:06I don't think it could be a theory of the case for cutting rates now. To cut rates now, you'd
05:11have to
05:11have a view that the economy's weakening is such that that trumps small t, the inflationary pressures.
05:18There are other parts of the Fed's job besides just rates. What do we expect from Kevin Warsh's
05:25Chair in the other parts? Well, I think he's signaled that he wants to take a look at least
05:30in a couple of areas. One is the size of the Fed's balance sheet, which of course ballooned enormously
05:35since the global financial crisis. That's not really as simple as saying, do I want a big balance
05:41sheet or a small balance sheet? Because the Fed has proven to be the market maker of last resort
05:46in the treasury market multiple times. And the treasury market is the market for the world's safe
05:51asset. Regulation, perhaps unwittingly, made it hard for private market makers to do the job they
05:58could be doing. So a Fed balance sheet is pretty important. But I do expect Kevin Warsh to spend a
06:03lot of time there. The other is financial regulation, especially since the global financial crisis,
06:08the Fed got more territory in financial regulation. So there may be a look. Do we have the right rules?
06:15Do we have the right capital regime? I would expect incoming Chair Warsh to take a hard,
06:20to take a hard look at that. A warning though, regulation, unlike monetary policy, is a political
06:26subject. And so do expect Congress, do expect the president to, with good merits, have political views
06:34to balance. A further question that's been raised by some other members of the Fed right now is
06:38the relationship of the regional Fed to the national Fed. That in fact, maybe there should be more power
06:45or authority or responsibility taken into Washington. Does that make sense? I don't think so. I think the
06:51decentralized structure of the Fed is a feature, not a bug. Remember the history lesson for the Fed is it
06:58was done to get points of view throughout the nation. We're a nation of different business sectors
07:03and different geographies. That said, there is a point that I think regional presidents may be
07:09communicating too much. In any organization, the top of the organization needs to set the tone
07:16internally and externally. So having a lot of debate inside strikes me as a good thing.
07:21Doing it out in the press or on television, I'm less persuaded that's a good thing.
07:25There's a good deal of talk about what a chair Warsh will do in terms of, for example, forward guidance
07:32and even number of news conferences that are held. The dot plot. How much of that is in the authority
07:38of the chair? Does that need to be voted on by the full Fed? Well, he would need to get
07:42his colleagues
07:43support, but I suspect he could get it. I count myself as among those who wonder what the utility of
07:48the dot plot is and the excessive communication. There's a continuum, if you will. Chair Greenspan,
07:55was quite opaque. He famously said, you know, if you thought you understood me, you must be mistaken
08:00to chair Bernanke, who was extremely transparent. I think probably an incoming chair Warsh wants to be
08:07somewhere in between there. One thing that incoming chair Warsh will have that has not been had for
08:14a very long time is a former chair sitting in the room, at least for some period of time. What
08:19will
08:19that do to that dynamic, do you think? I'm not sure it's actually going to do very much. I think
08:26Chair Powell's, current Chair Powell's points of view are well known. He's said them many times. I expect
08:31he'll repeat those as a governor in the time he has left. I think he also is somebody who would
08:37be
08:37deferential in the way he would be to a new chair. I don't think it's going to change things
08:42very much. Whether he leaves is a personal decision and he'll have to make it. The independence of the
08:48Fed. We also spoke with former U.S. Treasury Secretary Hank Paulson about the challenges facing the next
08:54Fed chair. Paulson agreed that Warsh has a hard road ahead, but that he is up to the task. When
09:01you have a
09:02chairman of the Fed, you want someone who understands markets, who is a good communicator, has a good
09:10understanding of sound economic principles. And I think Kevin Warsh meets those tests, right? And he's
09:16been before he's done it. Now, I think his job becomes more difficult because there's independence
09:24of the perception of independence. So I think how this transition between Jay Powell, who's just been
09:31a star performer and got great credibility and integrity, I think how that transition is handled
09:39and how the administration deals with it is either going to make Kevin's job more difficult or, you
09:46know, somewhat easier. But Kevin won't have an easy job anyway. And, you know, I compliment the Trump
09:54administration on selecting him.
09:56I don't know.
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