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So here's the laces this morning. The Republican Senator Tom Tillis Tanning CNN is still planning to block Kevin Walsh's nomination. The ongoing DOJ probe into FED Chad J. Powell, clouding the confirmation process. The former New York Fed President Bill Dudley Jodge us now for more, Bill, welcome, And this is a difficult question to answer, so forgive me. We
go straight to the ram of speculation. But if you had to guess what the FMC looks like in the month of June, what would you guess it's going to look like.
I assume that somebody's going to blank. Either the Trump administration is going to withdraw their investigation of the renovation of the headquarters building, or Tom Tillis is going to decide that he will align himself with the Republican majority in the Centme Banking Committee and vote to firm power. But we're not sure. We're not sure. And if they don't, you know, if Tillis doesn't withdraw his objection, if the Trump administration doesn't stop the probe, then it's very likely
that Powell will stay on as the acting chair. At that point, Trump is threatened to fire Paul as the acting chair, and it's not clear legally whether he has the authority to do so. So it's a bit of a mess. It obviously makes it the job for Kevin Wortsch also more difficult, not just because of delaying potentially his taking over from Powell, but also he's going to be viewed with quite a bit of skepticism, I think
by the rest of the committee. Is he there to do what's appropriate for the Fed in terms of the conduct of monetary policy or is he there to do the president's bidding.
So Bill, these are important questions, and we all take seriously the threat to central bank independence. But I think we also take comfort from how while anchor inflation expectations have been throughout all of this, do you see anything on the horizon that might upset some of that.
Well, Inflations expectations are anchored in part because people think the federal do the right thing, so it's not independent of the behavior. So I think that people would be very upset. I think if Powell is somehow fired and it goes into the courts and it has to be adjudicated, Kevin Worsh, I think is going to have to win the hearts and minds of the rest of the Federal Open Market Committee. I think it's very unlikely that the
Fed's going to cut rates in June. I think the headline inflation going to be close to four percent on a year over year basis. Then I think the sentiment is going to be to watch and wait, and in part to ensure that inflation expectations do stay well anchored.
We saw yesterday Treasury Secretary Scott Peasant came out and took the heat off of Kevin Orsh should he become a FED chair by May fifteenth, as is expected or at least scheduled, saying that he would understand if the FED needs to wait on rate cuts, even if he ultimately saw large cuts. Beyond that, how do you see a Treasury Fed accord working together to shrink the balance sheet and reshape the way that the FED controls rates at the front end and the shape of the curve.
I don't think they're going to change how they execute monetary policy. I think they're going to remain in a regime where reserves are above the supply, reserves above the demand, reserves. Well, I think they're going to do is make some changes structurally that reduce the demand for reserves. And if the demand for reserves can come down, then the supply of reserves can come down and the balance sheet can shrink. But I think what's probably being exaggerated a little bit
is how much restraint that will cause. If you shrink the balance sheet, I say, at trillion dollars, which is probably an order of magnitude that we're talking about, it's going to exert very little real restraint on the economy. So the idea that balance sheet reduction can lead to dramatic declines and short term rates, I just don't think that's credible.
I remember back in twenty twenty one, you came on the show and you said that ten year yields could be at five percent. You could see FED funds rates at five percent. Given the inflation building and the system right now, do you think that people are overly sanguine with just how much inflation is building in the system as a result of the commodity shock stemming from the Middle East.
Well, I think that it's correct for the FED to think of this as a temporary shock that energy prices are probably going to go back down in the fullness of time, but I think they're constrained for two reasons. Number one, we've been missing the inflation target to the upside for five years in a row, so every month and year you stretch that out, there's more risk to inflation expectations. And number two, the Fed's independence is under attack.
The feds independence was not under attack, the risk to inflation expectations would be significantly lower.
Bill, It's going to see you. Thanks for your stern conversation. There built out be there, the former New York Fed president some pretty pointed, pointed opinions on the future of this central bank and the threast to independence that we've seen building from the administration this year.