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He would not answer any question that might be as little smallest way disapply of Donald Trump.
JEM believed to all who will watch it that Kevin Worrishon will be a great slock puppet for Donald Trump.
I'm committed to ensuring that the conduct of monetary policy remains strictly independent, equally committed to work with the administration in Congress a non monetary matters that are part of the Fed's remit, and I commit myself to accountability.
I'm Stephanie Flanders, head of Government and Economics at Bloomberg, and this is Trumponomics, the podcast that looks at the economic world of Donald Trump, how he's shaking the global economy and what on earth is going to happen next. And this week we're turning our attention back to the Federal Reserve and we're recording this on the morning of Wednesday, April twenty ninth, a few hours before what is likely
to be Japow's final meeting charing the Board. Now, usually that would be a rather stupid, badly time thing to do, but with one exception, and we'll get to that, there's not a lot hanging on this meeting. The big focus is on the man who's likely to be leading the world's most important central bank at the next meeting, Trump's pick, Kevin Walsh. Now, we had an episode back in February.
I encourage you to go and listen to it about what we could expect from a FED led by mister Walsh, featuring my friend and the former senior advisor at the New York Federal Reserve, Krishna Guha, who's now Vice Chairman and head of Economics and Central Bank Strategy at Evercore ISI. Well, since then a lot has happened with implications for that future FED. The Iran warf for status, also a bit more evidence on how AI might or might not be
paving the way to looser policy in the US. And most recently, we had a very lively confirmation hearing for mister Walsh in front of the Senate Banking Committee on April twenty first. Now I was away for the hearing, but catching up afterwards looking at the coverage, it seemed how you felt about it depended pretty heavily on where you sat, So it made me more to check in with Krishna again how he was looking at a Walsh fed Krishna, thanks so much for doing this again and on FED.
Day no less. Great to see you.
Now we were going to try and save your breath. So we've got a few top lines here from what you told us in February, and then we'll get onto what you think now.
So I think it is true that Kevin Walsh has for most of his career as channeled and represented what one might think of a small C conservative Republican leaning economic thinking and principles. There has generally been more concerned with inflation than the labor market, let's say, more focused on supply side issues than demand side management. And so I think there is an aspect that is channeling a set of thinking on one side, if you like, of
the political and economic debates. I think it's also the case that Kevin believes that the really big inflation risks come when you have a combination of fiscal expansion on the part of the government and money financing on the parts of the central bank. So Kevin would say the inflation risks today are completely different from the inflation risks that were there in the early phase of the pandemic, which is why I was a Hawk then and I'm
a dove now. I think that the crewed version of concerns about Wash, which is he's super hawkish on inflation, interest rates and he's super hawkish on QT, just don't bear particularly close examinations. That's not what we should be worrying about. That doesn't mean that there are no points of vulnerability or things that we should be tended to
in the case of a Wash FED. I think the question is it's fine, and indeed, I think very legitimate to critique some of the shortcomings of traditional FED models and backward looking data dependence, but it's going to be very hard to replace that with something that is coherent and systematic and well communicated, and that could go badly wrong if Wash were to turn his back on the old ways of doing business without having figured out a fully coherent set of approach or set of approaches to
replace it.
So first things first, Krishna, was there anything that struck you from Kevin Walsh's testimony that led you to change your expectations for his kind of Federal Reserve in any way?
Not so much change my view, but I thought there were some very interesting parts to that hearing. First and foremost Kevin really doubled down on his promise.
Of quote RESI gen change end quote at the Fair. Now, there's still a lot of gaps.
In terms of filling out what that really means, but I think it's very clear that he's presenting himself not just as a change candidate in general, but as a break with his immediate predecessors, So not just Powell, but that period of relative continuity from Benanti to Yellen to Powell.
To the extent that Walsh has a role model.
In central banking, it's really Greenspan, not one of his immediate predecessors.
Yeah, and I was struck that he was pretty straightforward in blaming the inflation after COVID on central bankers, which the central bankers who were there at the time, I've never got them to really admit that. He was critical of the new framework for inflation targeting that was introduced just around that time. What key aspects of regime change were you thinking about?
Well, I think we should break that down into a
work tools and communication. Right, So with respect to the framework, I mean you started there already, right, highly critical of the framework of the FED foot in place during the pandemic, and in fact of course that the FED is itself revised, but looking to develop a difference, and he would say better understanding of the inflation process and the inflation outlook through new models, more extensive modeling of the supply side, not just nu Kaunsian modeling of the demand side, looking
at different and potentially better ways of measuring underlying inflation. He's talked about wanting to lean more on trend mean or median as opposed to the core PCE measure that the FED is typically used to represent underlying inflation on tools.
There are going to be important changes on communication too. Now.
Watsh wants to get out of the business of forward guidance. I think many would agree that that was overdone in recent years, but he wants to go further than that. He thinks that central banks have made a fetish out of communication, that they just say too much, talk too much. He wants to say less talk less. And I think that's going to be quite an adjustment for us to get used to after.
A long period in which the FED and other.
Central banks embraced the idea that by being more transparent, by sharing more information with the markets, they would actually make policy, not just better understood, but more effective too.
I was very struck by what he said about communications, because it is interesting, even in your and my sort of time of looking at markets and thinking about monetary policy, the expectations around communications have gone up and up. The bond markets, you could argue, have been really spoon fed by the FED and got used to thinking they know everything about what the Fed's going to do ahead of time. Walking back from that really means that you're promising to
inject more uncertainty into markets and potentially volatility. How much you might want to get there in the end, it sounds like quite a dangerous sort of scary transition.
One hundred percent that's exactly my own view.
I think that, particularly if Kevin is also proposing that the FED should change some of its framework and its operating practices. If at the same time you also pull back from your communication, you're certainly going to have a period of more volatility and uncertainty, and so you've.
Got to be careful how far you go in that direction.
I also think separately that Kevin himself may run into a very simple problem, which is that fundamentally, the reason why central bankers like to communicate a lot is because it allows them to shape the market's rate path and therefore advance their own objectives in terms of monetary policy, either easing things or tightening things or keeping them where
they are. The problem Kevin's going to run into sooner or later is the market's going to pry something he doesn't like, And then the question is, well, am I going to stay silent or am I going to say.
Something about it?
I think that goes to whether or not it's credible to make this promise. You know, there's a big tool that you're just saying I'm not going to use it, and I'm even going to put up with quite a lot of volatility, some of it based on maybe wrong expectations, in order to give up that tool once he actually gets there. I just wonder if that's going to last. But I guess if he did really get rid of it, then you'd be going back not to a Greenspan fed,
but more like a Volca fed. I mean, famously, Paul Volka raised interest rates on a Sunday night two by two percentage points and actively wanted to shop the market.
Yeah, I don't think there's any going back to Volka.
I don't even think there's any going back really to Green Spans era of you know, just providing very ambiguous, deltic statements and leading the market to figure out what's going on. So I think Kevin's going to have to
try to find a middle way, right. I think it's certainly true that the FED and many other central banks probably talk more than they necessarily need to in aggregate at least with and you count all the different speakers, and that there are lots of things that could be done to improve the signal to noise ratio in central bank communications and to sharpen up the distinction in the
way you talk about different things. Right, the central Bank should, in my view, categorically communicate very clearly and comprehensively about its reaction function. It should also understand that it's very different when it talks about its understanding of the economic outlook. Right. That is something where it has some insights and expertise, good staff, good data, but fundamentally doesn't have a deep forecasting edge over the market and should in general be
quite humble. Plenty of things that can be improved, but just backing away from communication I think ultimately won't work.
One of the areas where he was delphick and indeed ambiguous was in answering questions around, for example, whether Donald Trump lost the twenty twenty election. And this was one of the things when I said, people, depending on where they sat, had a different focus. You know, there were certain people in the markets who were focusing on the
stuff that you've just talked about. Others maybe have a more political mindset, not least Elizabeth Warren focused on him not being willing to say anything that might offend Donald Trump. You and your own notes said it was jarring, which you're very careful with your words. I think shocking would be the word other people might use if I sort of translate it out of Krishna speak. But did you also find it concerning?
I think that while it is a sad statement on the Times that it is controversial to state who did or didn't win the twenty twenty election, I think you could, if you were being generous, make an excuse to Kevin that, look, you're starting to get drawn into political controversy. This is not a question that is pertinent to the role for which he's being considered, which is that of fed chair.
But what I found jarring and Somewhat concerning was the fact that Kevin did not seem to feel able to say the words tariff and inflation in the same sentence. Now that is in his core wheelhouse as FED chair. It is central to understanding the evolution of inflation, including by the way, why one might be cautiously optimistic that inflation will come down once these tariff effects have washed
through the price series. I think it's quite problematic that the next FED chair apparently feels unable to say something which is essentially a matter of fact among economists, that tariffs have pushed up the inflation rate over the last year, even though this may well ultimately prove to be a one time change in the price level and not underlying ongoing inflation. It'd be perfectly fine Forash to.
Make that distinction. Poals made that distinction. Wash could even make it more sharply.
But I think it doesn't help your credibility if you can't accept the basic fact that tariff's pushed up prices.
And without getting too into the weeds, I guess related to that you pointed in your note talking about potentially changing the focus of the sort of the inflation measure that he's going to be most focused on. And there is a suggestion that in that choice of rate, because it's sort of adjusting out of away from tariffs, he's kind of escaping that issue around tariffs, but also shopping for measures which support lower rate.
So look, I think it's unfortunate that he backed into that discussion of inflation measures by way of trying trying to avoid talking about tariffs, right, because of course one of the measures the emphasizer trimmed mean.
Trimmed mean is where you just lop off the outliers.
Do you look off the things that are increasing inflation?
Yes, if you're trying to understand the underlying trajectory, the central tendency of prices, you may well want to exclude outliers, providing you doing in a fairly symmetric way on to the downside as well as the upside. But of course, what was politically convenient at this point in time is that, of course the categories that are going up the most and are getting trimmed out of your trimmed mean are of course all the things that have tariffs on them, right,
So I think that was unfortunate. But there is a substance economic sort of question here, which is, we do want to focus on underlying inflation and the medium term inflation outlook.
And it is the case that core PCD.
Inflation, the metric the fact typically refers to, is just one of a number of measures that try to capture what that underlying trajectory of inflation is now. In the presence, Chair Powell has been saying, look, core pc inflation continues to be elevated. In fact, it's just going up still to crest in the low threes.
But Chair Powell is saying.
That this is overwhelmingly because of tariffs, and if you sort of take out tariffs, inflation next tariffs is running a lot closer to two percent. When what points you to trimmed mean on the Dallas version saying two point three percent, He's basically saying the same thing Power is saying, which is, if you trim out the tariff goods, the inflation's a bit above two, but it's not anything like as high as it looks.
He's at least here he's sticking to the idea of being much less clear in his communication.
Will Yeah, And I think the problem also is that I think it's legitimate to say, look, we want to look at a range of measures of underlying inflation. But if it looks like you're shifting the goalpost, shopping around for metrics to suit your story, again, that's just going to weaken your credibility, and that's not going to wash with the rest of the committee, never mind with financial markets.
But it links to something else there, which is which Kevin Walsh showed up, the hawkish Kevin or the dubvish Kevin.
Some of the sort of Wall Street commentary that I read felt that he is slightly more hawkish. Kevin Walsh had turned up and was struck in particular about the way he talked about the mandate only in terms of inflation, when I think even sort of cursory FED watchers know that the FED famously has a dual mandate for full employment as well, even though it tends to talk more about inflation. Did you read anything into that.
I certainly heard the same things that those folks are talking about, but I interpret them in a very different way. I think we want to make a distinction between two things. One is how Kevin thinks about the Fed's mandate, and the second is how he's positioning on policy.
So on the mandate. It's very clear it's been the case for.
A long time that Kevin washes somebody who believes that the FED dual mandates can, to a large extent, be reduced in practice to a single mandate for inflation because in the longer run, in Kevin's view, consistent with any conservative economists, in fact, consistent with many economists period, in the longer run, the FED doesn't get to effect these real variables, and the best contribution it can make to keeping unemployment low is to keep inflation low and stable.
So Kevin would say that he's legally.
Compliant with the dual mandate, but he's really focused on inflation stability as being the foundation for everything else right, and so that necessarily means that he's going to be less twitchy on labor market weakness or risk of labor market weakness than.
His recent predecessors.
I personally think that's a mistake to jump from that to say that he's therefore being more hawkish. I think what we're saying here is we're seeing the new FED chair retire an old form of FED dubbishness and replace it with a new form of FED dubbishness. Farewell, labor market risk dubbish, Hello AI, productivity dubbish.
Normal human beings will be listening to this and wondering how on earth we had not got to the implications for interest rates, the short term interest rates that the Federal Reserve has control over in all of this conversation. But I guess the implication of what you just said is it might not matter a whole lot.
In the near term, let's say next quarter or two, certainly, and plausibly beyond that, a live debate about changing the policy rate in the US.
I think it's very clear that with the oil inflation.
Shock coming on top of all the prior inflation shocks, including the tariff shock that's only now cresting, the FED is going to be firmly in the mode of policing inflation developments at least here through the end of the summer and potentially long beyond that before they can return to any consideration of the case for rate cuts. At the same time, I think they're very very far away from contemplating any serious consideration of a rate hike, So
the next few FED meetings simply aren't live. And what happens around iron, the war, energy and the economic data is really in the driving seat, but I think it still matters what position the new chair is starting to set out, and I think he is setting the foundations for making the case potentially later this year to shift from backward looking policing of current inflation shocks to forward looking monetary policy with rate cuts motivated by an expectation
that AI and technology more broadly will raise the potential growth rates of the US and reduce inflation pressures going forward. So I think what we're seeing here is that Walsh recognizes, for the time being, there is no debate about rates.
You're in this monitoring policing phase. But I think he's positioning so.
That at the earliest responsible moment, when he can say the tariff stuff has rolled over and the oil inflation indeed is looking like a one time hit to the pedline prices, then he can say to the Committee, and now is the time to look forward and to ask what the inflation outlook looks like over the next several years and make the case that that is tech driven, this inflationary and therefore the FED should be willing to move to consider cuts not because the labor market's weak, but because.
Tech is going to drive this inflation going forward.
You said, there's not very much live about these next few meetings and the meeting that's happening after we speak today on Wednesday, except there was one question today, which is whether or not Jay Powell is going to stick around once Kevin Welsh is confirmed and in place in the FED. There's been a lot of background to this, the investigation and the case against Jay Powell on grounds of excessive expenditure on the FED renovation that has been
withdrawn at least for the time being. That's what's allowed Kevin Walsh's confirmation to go forward. If we imagine that we're in a world in the day's time, people are listening and he said that he's going to stick around at least for a bit. Does that change the first few months of Walsh's tenure Do you think significantly?
I think it does matter if power stays or goes, if he stays on.
If we're in a world where you know he's staying.
On for a bit, it does slow the transition in the composition of the FED Board and the FMC. It means it takes longer for that seat to become vacant and for Trump to be able to put in another appointee, presumably a wash ally, onto the board, and so it slows down a little bit the process by which Kevin is going to be able to build majorities in favor of some of the changes that he wants to make that require votes either of the FED Board or of the FMC.
But I don't see Powell staying on to lead the resistance.
I think he has a sort of narrow and circumscribed view of why it could be appropriate for him to stay on. That would be really to see out the remaining aspects of this legal threat to FED independence from the DOJ investigation, to make sure that all the loose ends are firmly tied up, and in doing so, not just to settle the question in this case and the precedent, but also to avoid any suggestion that he walked under pressure with an implied threat that if he didn't, they'd
come back at him with more legal suits. I think he will feel it as to be very important that institutionally he leaves having upheld the independence of the FED to the greatest of his ability, And I think if we're in a world where he's staying that's the reason why he's staying not because he wants to fight Kevin Walsh over regime change, to frameworks, balance sheet, for communications.
That's for the larger committee to assess. And I think that conduct of FED policy FED institutional reform will be a negotiation between the new chair and the old committee. The POWE, I think, to the greatest extent, even if he's around, will try not to be at the forefront of that.
In that spirit, I guess we can expect that this week's press conference will be the last time for quite a while that we hear substantial commentary from him on monetary policy, though possibly not from you, Krishner, given that we seem to have a revealed preference for having you on the show quite often. Thank you so much.
It's incredibly kind of you, Steff. I'd be happy to be back olive.
So it's weird. Kevin Walsh seemingly wants a regime change at the FED, fundamentally different approach to forecasting, inflation, setting policy, managing its balance sheet, dealing with the treasury, and most of all, he wants a lot fewer communications about everything it's doing. But if we're just looking on the outside, we may be waiting a long time for anything to change. Thanks for listening to Trump Andnomics from Bloomberg. It was hosted by me Stephanie Flanders, and I was joined by
Krishna Guha from Evercore ISI. Trumpnomics was produced by Summer Sadi and Moses and with help from Amy Keen and sound design by Blake Maples and Kelly Garry. And I know for a fact that we have loyal, appreciative listeners who listen every week and have not bothered to review it. So pull your finger out, give us your rating wherever you listen