First rate: Kevin Warsh’s Fed debut

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1:05The Economist

1:11Hello and welcome to The Intelligence from The Economist. I'm Jason Palmer. And I'm Rosie Bloor.

1:21Today on the show, Germany's left-wing De Linke wins over the young and a selection of our readers' hacks for managing managers.

1:35First up, though.

1:45President Donald Trump put Sharpie to paper yesterday, inking the long-awaited and much-touted deal with Iran. With that, a reminder that for all the power plays and posturing, he always has his eye on markets and money. I didn't want to see economic catastrophe. If you kept this going, that could have happened. But all I know is every time we talked about the possibility of peace, the stock market shot up like a rocket ship. You know who must have been glad Mr. Trump was preoccupied with Iran? Kevin Warsh, freshly minted chair of the Federal Reserve. It was rate-setting time yesterday, his first.

2:24What to expect from this lifetime hawk who got all dovish when angling for the job? From the next chair who should expect relentless Trumpian pressure to lower rates? As you saw a few moments ago, the committee decided to maintain the target range for the Fed funds rate at 3.5 to 3.75%. He held firm. Not the most exciting news. But as so often with Fed shares, there were more tea leaves to be read. In some ways, the least interesting part of the Fed meeting yesterday was what happened to interest rates. Archie Hall is our U.S. economics editor. They stayed flat. Everyone expected them to, and Kevin Walsh managed to push that through.

3:06What was much more interesting was everything else. His communication style, his plans for federal reform, and everything that's said about how he's going to handle the next four years. So let's start with what might otherwise have been the big news, the decision on interest rates. Kevin Walsh came in with a claim that he was going to be a crusading and straight cut, or at least that's what he pushed for during his campaign to get Donald Trump to actually nominate him for the job. And we've argued that was always a dubious proposition that was never really quite in line with, frankly, either his prior reputation or certainly where the American economy was at the moment.

3:41The more pressing issue is that actually since he was nominated in late January, the American economy has shifted pretty decisively. So inflation's now up a decent bit because of in part the Iran war, but also in part investment AI and so on generally is looking firmer than it was at the start of the year. The lay markets, if anything, look a bit stronger as well. So all that pushes in the direction of higher interest rates. And it's become clear that the notion that Walsh was pushing during the campaign that AI would be a disinflationary force and push inflation down, while maybe plausible in the long term, certainly doesn't seem to be biting in the short term when we have data centers and so on, showing up and really pushing demand into the American economy.

4:18So it was always going to be hard to cut interest rates. We're also at a stage, frankly, where inflation is above target, but not devastatingly so. It may well come down, given some of the news from the Iran war side. And so holding on, waiting and seeing was a pretty sensible thing and seems not to have been terribly controversial. But you said that was in fact not the interesting thing. In particular, you mentioned his communication style. What do you mean by that? Central bankers sit on a spectrum. Some of them like to talk and like to explain what they're doing pretty closely to markets and the public.

4:48And they think that means they're better understood, they're treated as more legitimate by the public, and also markets are more likely to know what they're going to do and therefore be less volatile around central bank meetings. There's another school of thought, which is much more where Kevin Walsh is, which is basically that central bankers job is to set interest rates and really not do very much else, and that a lot of the communication that's going on is a distraction. That statement just gives you the facts, as best we can judge it. Walsh even went further. He thinks it might sometimes distort markets if they're too busy looking through the lens of what the Fed's going to do rather than just what the data says about the economy on its own terms.

5:24And so the result of that, we got quite a different communication style. We had a statement that was much shorter and much more terse than usual. He was very willing simply to say, I'm not going to answer that question. I can't give any forward guidance about what we're going to do next. The good news is we'll be meeting in six weeks. Rather than try to give a bit of a window into how he was thinking, is it's more the style of at least the last couple of his predecessors. And he didn't submit a dot for the famous dot plot where Fed governors lay out, where they expect the economy to evolve over the next few years.

5:54And then you mentioned something of reforms. What does Mr. Walsh want to do with the Fed? He appears to have great ambitions. He's long been someone who's said both that he loves the Fed and really cares about the institution, but also that he thinks it's in pretty urgent need of repair. And some of that is genuine longstanding belief, and some of that, particularly recently, has certainly been hammed up in his campaign to persuade Donald Trump, who certainly doesn't love the Fed. He's someone who can be trusted to take the reins. Specifically, what he pushed for now was effectively, if we're being uncharitable, kicking the can down the road, if we're being more charitable, trying to really work through how to do this properly.

6:30And that was the announcement of five task forces, which are going to go through various bits of the Fed's remit, like the balance sheet, what data it looks at, including how it communicates, and report back with a set of recommendations that he could then take forward to see how to reform the Fed. So certainly this is not, he's coming in, all guns blazing, day one, huge changes in the next few months. But it does seem like if we have this conversation a year's time, the Fed could look fairly different. But coming back to the rate decision, he did what was expected and what you think is right for the economy right now?

7:02Yeah, absolutely. The particular decision to not raise or indeed not lower interest rates wasn't terribly controversial. It was effectively what almost every Fed watcher expected. The Iran war is obviously very in the news right now. It's a terribly important geopolitical story. As an economic story for the US, it's moderately important, but not hugely so. High oil prices did matter. They did raise inflation a little bit, but ultimately they didn't really knock about the US economy in the way that has been true for a lot of the rest of the world in response to this war. So what we're left with instead for the US is an economy that's doing pretty well.

7:36Inflation is a little bit high. Some of that reflects the Iran war. Some of that reflects AI exuberance, a general hot economy, fiscal stimulus, and a whole bunch of other factors. And the question going into later this year, where it may well be possible the Fed needs to raise rates a bit, certainly judging by the dot plot that was released yesterday as well, a number of Fed governors and regional bank presidents think so, will really lie on does inflation recede either naturally or as a result of the Iran war deal pulling oil prices down, or do all those other factors that I mentioned firm inflation up and kind of keep it in a sort of place where the Fed actually does need to intervene and raise rates later on in the year.

8:15But raising rates is going to be relatively difficult under Mr. Trump, who always, always wants lower ones. Yes, that's the looming political danger over this Fed. And the question a lot of Fed watchers were asking going into this meeting was how political and how much of a lackey, frankly, Kevin Walsh would appear to be. We recognize that inflation has been running well ahead of the Fed's long-stated inflation goal of 2%. That's been going on for more than five years. He came out very, very strong in asserting the Fed's commitment to its 2 % inflation target, which implicitly, of course, means that if inflation is durably looking like it's going to be a problem, he's suggesting the Fed would be very happy to raise rates and deal with that.

9:04and he really foregrounded the inflation side of the target, which was interpreted as more of a hawkish tilt. So in that sense, good news on the politics side. Walsh wasn't coming out and saying, inflation's not a problem, AI's going to fix everything, we're okay to cut rates, which was a little bit of the tone of some of his campaigning rhetoric from last year when he was trying to sell the president on appointing him. The less reassuring part was that the flip side of Walsh's pretty non-communicative style is it's very easy for him to avoid confronting potentially difficult choices, and therefore it's hard to know exactly how he'd respond in a real crunch point, which may be part of the point of not communicating a lot.

9:41So, for instance, right now he can say, we didn't raise interest rates, we didn't lower them, we kept them flat. I'm not going to speculate about what I'm going to do in the future. And indeed, on almost any substantive question, we have a task force for that, they'll report back. And so he's very, very unlikely to say anything that's going to annoy the president. But obviously, at some point, he also has to make decisions. I think we're going to come up with some new and interesting things. We made some changes today. I expect more changes to come. And whether those decisions also keep the president happy, or whether he's willing to sidestep and push against the president's wishes, as a good fare really ought to do in the right circumstances, that still remains to be seen.

10:19Thanks very much for joining us, Archie. Thank you.

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11:31Merz Lick Eier, which roughly translates to Merz Lick's Balls. Tom Nuttall is the Economist Berlin bureau chief. Insulting Friedrich Merz, the German chancellor, is perhaps not exactly what you would expect from a senior opposition politician. But that probably wouldn't trouble Heidi Reichenbach, who is one of the leading figures for Germany's Die Linke, or the left party. Die Linke is gaining momentum with some young voters who have been mobilising around Miss Reichenich's powerful, perhaps off-colour speeches. This weekend, at the party's annual congress in Potsdam, they will be looking for strategies to keep climbing.

12:19Tom, we've talked a lot about the AFD and the rise of the right, a bit less about the left. Where is this rise in popularity coming from with the left? In some ways, it's one of the most extraordinary stories in German politics. About 18 months ago, we had a snap election looming in Germany. And Die Linke, which has been around for the best part of 20 years, was literally on the verge of extinction. They were languishing at about 3 % in the polls. There'd been a very acrimonious split with a figure called Sarah Wagenknecht over foreign policy and cultural issues. The party was bruised. It's lost a lot of its MPs.

12:59Voters were either literally dying out because they were too old, or they were moving to the far-right AFD. And what happened was, first of all, a very good ground game. They knocked on hundreds of thousands of doors, which is not actually a typical campaign tactic in Germany. And then just a few weeks before the election came this extraordinary decision by Friedrich Merz for his party, the Conservative Christian Democrats, to vote in Parliament with the AFD on some anti-immigration measures. And this was exactly what D-Lincoln needed. Miss Reicheneck, who we heard at the beginning of this clip, gave an electrifying speech in the Bundestag against this.

13:39It went viral on social media. And all of a sudden, you saw De Linca start, if you look at the charts, it's almost a vertical line from January 2025 to the election a month later. They're now sitting at 11 % in the polls, only a couple of percentage points behind the social democrats, the main party of the centre-left, who sit in government with Mr. Mertz's CDU. Do you expect them to maintain that momentum? Yeah, that's the big question. I mean, they feel like the wind is in their sails. It's not only that they're doing a lot better than they were. It's that their electorate and their membership has completely changed.

14:13So in the past, one of the main bases for Die Linke was an older electorate in East Germany, former communist East Germany. Now what we have is a party that's become much, much younger, both in terms of its electorate and its membership, and also some of its leaders, including Miss Reichschenek. It's become much more Western in terms of its voter base. It's about sort of 50-50 between West and East, which is a radical change from the past. And this has meant that the sort of conversations that the party has and the way it presents itself to the electorate are rather different from what we saw in the past.

14:47As the AFD has got stronger and stronger, it's now the most popular party across all of Germany and in Eastern Germany by an absolute mile. Die Linke likes to present itself as the most credible, as they would say, anti-fascist force in Germany. So what does Die Linke actually stand for? One of the things that they decided on in the election campaign last year was to have a very, very disciplined campaign focused basically on two issues. One of them was the cost of living and the other one was housing. So rents have gone up very quickly in most German cities in recent years. A lot of people have been struggling.

15:26You do have very strict rent control laws in Germany compared to some other parts of Europe. but nevertheless, this is something that the party realised that basically everybody could get behind. It wasn't the sort of thing that was going to expose divisions within the party. It was a very simple message to take to the doorstep. What about the issues that divide the party still? Yeah, so Dilinka as a party of the far left is riven with division, as parties of this sort always are. We saw this last year when the party came quite close to kind of ripping itself apart over Israel and Gaza. And to simplify a little bit, some of the party's newer, younger members who, like in similar parties elsewhere in Europe, are incredibly exercised by this issue.

16:10And last year at the Party Congress, you actually had a number of senior figures of the party quit in protest. They thought that some of the motions that were emerging from some of the younger branches basically were coming quite close to anti-Semitism. They've put together a motion for this year's Congress that they think is kind of big and capacious enough to please everybody. I spoke to Catherine Gable, who's a D-Linker MP who sits on the party's board, and she says that the party's younger members have been important in redefining the party's focus through their protests. The social protests that we're engaging in this summer, we've already started on the 1st of June and managed to put 6 ,000 people on the streets in very short notice.

16:54So I think it's going to be like a very scorching hot socialist summer. And is that what you're anticipating, Tom, a scorching hot socialist summer? Yes, I mean, I think they're going to be pretty active about bringing people onto the streets. I think looking ahead, Fridjik Mertz's government is embarking on a programme of domestic reforms, which means cuts to welfare programmes, cuts to healthcare provision. We're probably going to have a very bitter row on pensions coming in the next few weeks. And this is basically grist to the mill of Die Linke. They're going to fight back against this stuff very hard.

17:30They've already brought thousands onto the streets for some protests, and they promised that there will be lots more in the summer ahead. Germany, of course, has a coalition government. So where does Die Linke stand in relation to that? What's its role in the current situation? One of the tricky things for the party is to what extent basically they want to be a party of political power, either in coalition governments in Germany's states or supporting governments, versus a kind of protest movement that spends a lot of time on the streets that has a political wing. It's not going to be possible for the party to avoid this.

18:06The reason for that is that the AFD has got so big in these states, it's attracting in some parts more than 40 % of the vote. Because no other party will work with them to make a coalition, the space of that has been completely squeezed. And so you'll have the very, very awkward situations where the CDU, the main conservative party, in order to put together a coalition government, it needs to have votes from De Linca. Both of these parties detest the other. So it's a horrible situation. You have lots of people in De Linca who will say, well, I didn't join this party to put Conservatives into office.

18:42And then you'll have other people in the party say, the only thing that matters is that we stop the AFD from entering government. And if that means that we have to hold our nose and vote for CDU prime ministers in these states, then that's what we have to do. But this is a very uncomfortable discussion for the party to have. So how does that all shake out in terms of strategy? What happens next? They will discuss this in Potsdam at their Congress this weekend. They will embark on a summer of protests against all of these domestic reforms that they hope will prove as mobilising as their election campaign last year was.

19:20And I think the, as it were, good news for Die Linke is that in the capital, Berlin, the vote is so fragmented that Die Linke actually has a chance of coming first and attempting to put together a left-wing city government with the Social Democrats and the Green Party. And this is the thing that they're really excited about. They have been in government in Berlin before, but they've never run the government, and now they have a chance of doing that. So basically, this is the thing that's really exercising the party right now. Tom, thank you very much. Thanks, Rosie.

20:04Have you ever been in a situation where you've done what you feel is a great piece of work and then your boss comes along asking for things to be changed, making things worse? You get the feeling that they're only pointing things out so they have something to do. Andrew Palmer, No Relation, hosts Boss Class, our wildly successful podcast series about the world of work and management. Well, let me tell you a secret. There's a hack that can help you. It's the idea of Atwood's Duck, the deliberate insertion of a redundant or incomplete feature whose only purpose is to be discovered and removed by the higher arts.

20:47That way, your boss feels they've done something useful, but no actual damage has been done to the end product. The phrase AdWords duck comes from a video game, an apocryphal story about a programmer who added a pixelated duck to the character of the queen in a chess-related game. A producer reviewed it and asked for one thing only, get rid of the duck. The programmer complied and the game was ready to ship.

21:25I mentioned Atwood's Duck in a recent piece, and to my surprise, many of you emailed in to tell me about equivalents. So here's one from Construction. Peter DeMann wrote from Canada to say that in Construction, this phenomenon is called leaving something for the inspector. So when an inspector comes to look at something, If it's electrical, you leave the cover off a junction box. If it's a building, you leave some piece of concrete out of place. Something really simple so that this person will feel important. They found it. They've got rid of it. Their job is done. That's not the only example of a duck-based tactic.

22:02Mervyn Taylor wrote from Dublin to say that Atwood's duck may not be a duck at all. It could be a potato. The Admiral's potato is something that people in the Navy referred to. And it's the idea that when someone is coming aboard again to inspect a ship, a potato is left out. It's there only for the Admiral to spot it, tell it to be tidied up, and the inspection can then proceed. And then a final variation on the idea of Atwood's duck. And this has the memorably unpleasant name of the hairy arm. This came from Arnold Peterson, who emailed from California, to say that in the business of TV commercials, the hairy arm refers to the deliberate insertion of a hand model with a hairy arm.

22:48It gives someone at the agency a very obvious thing to ask to be removed. Everything else is left untouched. The commercial goes out just as the producers wished it would.