00:00Michael McKee, our chief international economics and policy correspondent here with us in New York, on set to break all
00:05of this down.
00:06Let's start with these hearings. You're going to go down to Washington. He's going to speak before the House and
00:09the Senate.
00:10This is really like one of the first opportunities we'll have to see him, I don't want to say skewered,
00:15but grilled by lawmakers about his plans for the organization.
00:18What do you expect when he delivers those remarks to the Humphrey Hawkins?
00:21I don't think this will be an opportunity to really skewer him since he just started.
00:26Democrats will probably question whether his loyalties are to the president or to the Federal Reserve and the economy, and
00:35Republicans will praise him, no doubt.
00:36He is going to have a more difficult task than perhaps previous Fed chairs because he doesn't want to give
00:43anything away.
00:44He doesn't want to say we're leaning this way or we're leaning that way.
00:47So I would imagine he'll sort of run through where the economy is and say they're prepared to do whatever
00:53they need to do.
00:54But price stability is our guiding star.
00:57Do you think we're going to hear a lot about these task force?
00:59Last time you and I were talking, we were saying they have these different topics, cover a whole bunch of
01:03things, and they can be used either way.
01:05If there's a policy that Warsh wants to implement but knows the president wouldn't like it, he could say, well,
01:09this is what the task force recommends.
01:11But it could also go the opposite way as well.
01:13It can give him some cover if he's doing a policy that could be less popular within the agency.
01:18But he named some names to these task force.
01:20I'm wondering if any of them stood out to you.
01:22And they seemed pretty interesting and like reputable names that the industry would be okay with.
01:26Oh, they're all well-known policymakers or economists, and that plays well.
01:32The question is when they report back, what is it that they can actually say or do or what will
01:40he fall back on?
01:41And that will probably be a focus of the questions is when you get this, how are you thinking you're
01:48going to change the Fed?
01:49Some of it is the stuff on AI.
01:54I mean, who knows?
01:54What are you going to do with that?
01:56Balance sheet will be interesting.
01:57He wants a smaller balance sheet.
01:58He's got people on there, Bill White and others, who have argued for smaller balance sheets.
02:04So, yeah, he could use that as a push forward.
02:08But I think the bottom line on what we get on Tuesday and Wednesday is if you were running a
02:14prediction market, you'd want to bet on the phrase, there's a task force for that.
02:18There's a task force.
02:19Task force.
02:20Everybody agree.
02:20Which he leaned on heavily after that first Fed meeting.
02:22Going back to these names, though, I made a joke.
02:24You've got like a quarter of the Harvard Econ Department there.
02:26You've got Jeremy Stein, Karen Dynan.
02:28Greg Mankiew is on one of these task forces as well.
02:32But then there's like Doug McMillan, the former CEO of Walmart.
02:35Mark Andreessen as well.
02:36I think Doug McMillan is going to be working on data issues.
02:39You know, many of these are names that you know well through covering central banks.
02:43What do you make of those other names that aren't necessarily associated with central bank policy?
02:46Well, obviously, Mark Andreessen is an interesting choice because he's been controversial, shall we say, over the past year.
02:53Doug McMillan, I think, as somebody put it, who knows more about electronic data gathering than the former head of
03:02Walmart?
03:03So there's probably going to be some good experience there.
03:07The question is, what do you do with the data that they're not doing now?
03:11Well, because the Fed actually gets all kinds of private sector data and tries to incorporate it in all of
03:18their thinking about what's going on.
03:20So I don't know exactly where that one takes us other than perhaps they can build support to go to
03:26Congress and say,
03:26you need to give more money to the statistical agencies.
03:29Is there anything you think we'll hear from him in Congress that reporters like yourself,
03:34who's did an excellent job of questioning him at his first appearance, weren't really able to get to?
03:39Is there some long, outstanding question that you expect Congress to address?
03:42Well, I think the balance sheet question is something that really didn't come up at the press conference.
03:48It's big. It's, what, 6.7 trillion dollars?
03:50Yes. And so how far does he think they can go down? How fast? And where would he leave it?
03:56Now, Warsh has expressed the idea of going back to what they call the corridor system, which is scarce reserves,
04:04and the Fed is intervening in the market every day to keep interest rates where they are.
04:08What are the risks of that?
04:09Well, the risk of that, well, there's twofold risks.
04:12One, it means the Fed has to be much more active.
04:16And two, it takes out some of the safety net that banks have right now with excess reserves
04:23and the whole idea of raising capital to try to make them safer goes by the boards.
04:29The other issue is that if you have that kind of system,
04:33then you're going to lose a lot of jobs on Wall Street that are in the repo market and things
04:38like that
04:38because you won't have the kind of trading that we have now.
04:41Let me ask you about inflation.
04:43Kind of a two-part question.
04:45We got minutes from the last meeting.
04:46It seems like there was maybe a more hawkish tilt to those minutes that there was some division among members
04:51of the policy committee
04:51on whether or not they thought they should raise rates at that last meeting and Kevin Warsh's first meeting.
04:56The second question on inflation has to do just with what's going to precede Chairman Warsh's testimony on Capitol Hill.
05:01We'll get new CPI data.
05:02So I guess it's what can we expect from those data next week?
05:05And also, what new did you learn about the policymakers' kind of perspective on where inflation is today?
05:10Well, I think they confirmed the idea that they're done with letting inflation get out of control and not come
05:17down.
05:17They want to really push to bring inflation down.
05:20Now, the question that divides them is how restrictive are they right now?
05:23Some of them don't think they're restrictive enough and they wanted to maybe raise rates in June.
05:29And we'll still have that pressure in July.
05:32But for the most part, I think they're willing to leave interest rates where they are.
05:36And if Warsh can do that, that is probably going to be the biggest win he can get on behalf
05:43of the president.
05:44No rate cuts.
05:45Now, in terms of the data, we're probably going to see a little tick down in the headline numbers
05:49because gasoline prices came down during the month.
05:51But now we're back in the same position that we've been forever of Groundhog Day
05:56because now gasoline prices are going back up again.
05:59And so the July numbers, which we'll get in August, are going to tell a different story.
06:03So for the Fed, it's just keep plowing ahead with interest rates where they are at least
06:09and see what happens in other parts of the economy besides energy.
06:14And maybe you have to respond.
06:16About half the numbers said they were pricing in essentially a rate hike by the end of the year.
06:21Is that not the case anymore?
06:22Do you think that they will hold throughout the end of the year?
06:24Is it just too soon to tell?
06:25I mean, there's so many uncertainties.
06:27I can't imagine trying to make economic policy.
06:29And this is one of the arguments from Warsh when it comes to the dot plot, right?
06:31Those forward projections are not always necessarily useful.
06:34And they can kind of be a wagging the dog kind of issue.
06:37But where do you go from here?
06:38And do you think that stands that we're not going to see a rate hike before the end of the
06:41year?
06:41Well, I was just looking before the show at the latest projections by the markets
06:46in terms of futures and interest rate swaps.
06:50And they're basically still pricing in one and a half increases by the end of the year.
06:55And I think I would have bet you a week and a half ago or a week ago
07:00that they were going to stay on hold for the whole year.
07:03But now we're back at war again, and energy prices are going up again.
07:06And so there is a chance that they're going to have to raise rates.
07:11But nobody really knows.
07:13And that's the hard part.
07:13I suppose if you're Kevin Warsh and you don't want to give guidance,
07:17this is a good thing for you because you have no idea what's going to happen going forward.
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