Tug of Warsh: will the new chair politicise the Fed?

0:00Kevin Warsh:With no fees or minimums on checking accounts, it's no wonder the Capital One bank guy is so passionate about banking with Capital One. If he were here, he wouldn't just tell you about no fees or minimums. He'd also talk about how most Capital One cafes are open seven days a week to assist with your banking needs. Yep, even on weekends, it's pretty much all he talks about. In a good way. What's in your wallet? Terms apply. See CapitalOne.com slash bank. Capital One N.A. Member FDIC. Taking care of your eyes shouldn't be a hassle. That's why Warby Parker is a one-stop shop for all your vision needs.

0:37Kevin Warsh:Our prescription glasses and sunglasses are expertly crafted and unexpectedly affordable. Stop by a nearby store or use our app to virtually try on frames and get personalized recommendations. Did we mention we offer eye exams and take vision insurance too? For everything you need to see, head to your nearest Warby Parker store or visit warbyparker.com today. That's warbyparker.com.

1:04Donald Trump:The Economist

1:12Kevin Warsh:Hello and welcome to The Intelligence from The Economist. I'm your host, Rosie Blore. Every weekday, we provide a fresh perspective on the events shaping your world.

1:27Kevin Warsh:Thailand holds an election this weekend and there's all to play for. But since the country's monarchy dominates politics and the economy, the people's will is only one part of the picture. Our correspondent explains what's at stake. And mention Hong Kong and you might think of the glittering skyscrapers, the night markets, the buzz of the streets. But today we highlight something that even visitors to the city are now enjoying, in praise of the humble Hong Kong tram.

2:03Kevin Warsh:First up though.

2:12Kevin Warsh:Last year we spoke on the show about who Donald Trump might pick as the next chair of the Federal Reserve. It's a decision with a big impact on America and the world economy. In the end, the person who got the nod was Kevin Walsh. In the whole country, I would say that this was the perfect candidate. This was not a surprise or anything. This was the man that's most qualified. Top student, best schools, everything was like perfect. Youngest person ever to serve on the Fed. Got the whole package. Trump lauded Walsh's lengthy CV, writing that, on top of everything else, here's central casting. So what can we expect from the Fed with Walsh at the top?

2:55Donald Trump:Kevin Walsh might seem a slightly peculiar choice for Donald Trump to be making as his nominee for Fed chair.

3:03Kevin Warsh:Archie Hall is our US economics editor.

3:07Donald Trump:In some sense, he's a very classic choice. He used to be a Fed governor. He sort of looks like a stereotypical Wall Street banker from a 1980s movie. someone who has lots and lots of experience dealing with crises and working with colleagues around the world. On the other hand, Trump wanted someone to cut rates. And while Walsh recently, during the audition process, has sounded very, very keen on cutting interest rates, historically, he was famously a huge hawk, very worried about inflation, generally wanted to keep rates high, avoid stimulus. And so it'll be interesting to see whether the Walsh we get is a Walsh that has pivoted recently to being a keen rate cutter or someone who's a lot more cautious about that.

3:47Kevin Warsh:So Archie, for those for whom Kevin Walsh is not a household name, just tell us a bit more about him.

3:54Donald Trump:He was first put on the Fed by George Bush in 2006. So he's someone who's been around for a while. He's someone who, while he's now connected to Trump world, is not a traditional Trump character. He's more of an old guard Republican in that way. He was a bit of a controversial pick by George Bush. He was put on the Fed board at the age of 35, which was one of the youngest ever if not the youngest ever and potentially they were worried about his inexperience at the time. He then stayed on for about five years and was Ben Bernanke who was Fed Chair at the time, his ambassador to Wall Street. Wall Street's experience before then was as a banker a little bit of the White House so he became the guy who helped work with the banks, orchestrated a lot of the bailouts and as that time went on he notably became a bit more disillusioned with the trajectory the Fed was taking.

4:39Donald Trump:He worried a lot more than most of the Fed governors about the scale of Fed's interventions and particularly about how persistent they was, how even as the crisis went on, even as the economy started recovering, the recovery is quite sluggish. And so the Fed continued with its bond buying programs in a way that Walsh was very, very uncomfortable with. And that eventually culminated in him leaving the Fed in 2011. And since then, he's been in the private sector.

5:04Kevin Warsh:So he's got the credentials to be Fed governor, but it sounds from what you were saying earlier, like the crucial element is this flip-flop over inflation. Just explain that.

5:16Donald Trump:So anyone who Trump was going to nominate for this job was going to be someone who is willing to cut interest rates, because that's very, very clearly what Trump has been berating Jerome Powell about for pretty much the entire duration of his second presidency, and very, very clearly what Trump wants. And historically, that's not who watches. more recently. He's been making claims that are superficially perfectly plausible. He's been saying things like there's going to be a vast disinflationary wave from the coming boom in AI technology. There's going to be a huge, this is probably slightly less plausible, disinflationary effect of the deregulatory policies that the White House is pursuing.

5:55Donald Trump:But I think there's a deeper political question behind that of does he really believe that or is that what he's saying because he needs to do well in this convoluted years-long audition process to get Trump's nod. And then the difficulty going forward is that Trump complains about regularly. He picks someone to be Fed chair. This happened with Powell. They don't do what he wants, and he can't fire them because Job is supposed to be independent. And so with Walsh, how much do we get this more loyalistic, this more political version of him that we've seen over the past few years? And how much do we get a bit of a reversion back to who he was in the 2010s and the late 2000s, when he was last in the Fed.

6:33Kevin Warsh:Okay, so where do you come down on that? What is the Fed going to look like under Walsh?

6:38Donald Trump:It's a difficult question. I'd start with interest rates. That's what Trump really wants to get down. He's been pushing and pushing and pushing for big cuts to interest rates, to pull down mortgages, to pull down the cost of government borrowing and so on. There, I struggle to see Walsh making that much of a difference. It's totally possible that he has some persuasive power as the Fed chair. And on the margin, he might be able to sway the rest of the committee that set interest rates to slightly err on the side of keeping them a little bit lower. But those really big cuts that Trump's been demanding are going to be quite hard to push through a 12-voter committee where Walsh is only one vote and has very, very few allies and certainly very, very few out-and-out Trumpists on that committee.

7:22Donald Trump:And so there I struggle to see Walsh making a huge difference to what we'd have otherwise, outside maybe a big crisis where there might be scope to have more excuse to cut a lot.

7:32Kevin Warsh:But he doesn't just do interest rates. What about the rest of his program?

7:35Donald Trump:The place where Walsh really could make a difference, I think, is in the structure of the Fed and its balance sheet. So on the structure of the Fed, Walsh has called for a regime change. It's not entirely clear what that means, but there are a few hints. There was a lot of consternation in Trump world that the Fed went woke under Biden. And specifically, they focused a bit too much. they would argue on things like ESG and climate, things like inequalities, and veered away from their really core, keep inflation down, keep unemployment in the right place, bits of their mandate. That's mostly now gone anyway, but that might go further and that could well be an excuse to do things like lower the number of economists at the Fed, reshape the structure, change the personnel and so on.

8:19Donald Trump:The other area that's probably more consequential is the balance sheet. And so this is how many bonds the Fed holds as a result of its quantitative easing programs. And that's what, if you recall, Walsh pretty much resigned over when he was last at the Fed and has been veying against it. It's something he genuinely does really care about and something that's a bit technical enough that he's probably not going to get as much pressure or pushback from the president as on interest rates. and also something where he agrees with Scott Besson to the Treasury Secretary on the prescription, which is the US Fed should be holding a lot fewer bonds, the balance sheet should be a lot smaller, and quantitative easing should be deployed a lot less as a sluggish economy fighting tool, because it's something that in their view distorts the economy, also increases inequality, and causes the Fed to have a footprint that's much bigger than it should be in the rest of the American economy.

9:10Donald Trump:There I can imagine Walsh really getting somewhere. The question is that if he goes too far too fast and starts really trying to get rid of the Fed's bond holdings, which would mean trying to sell those bonds to someone else potentially, or at least not buying new ones, that could push up long-term interest rates and therefore push against what the President's trying to achieve and cause difficulties there.

9:32Kevin Warsh:We were speaking during the process of discussions about the new Fed chair about the independence of the Fed in the future. With Walsh at the helm, is that still going to be a concern?

9:44Donald Trump:Walsh has claimed consistently that he's a believer in the independence of the Fed. He actually gave a speech when he was last at the Fed, called an ode to independence. On the other hand, his behaviour during the audition process for this job has very much been an impressed Donald Trump. So that's very traditionally not what the Fed chair is supposed to do. It's a much more political version of the job than we've seen earlier. And so while markets seem somewhat reassured by Walsh, not least, I mean, a number of very big names in the global economic central banking world have come out in favour of him.

10:19Donald Trump:He's going to be under a lot more political pressure than almost any Fed chair in recent memory. And he's someone who at least over the past year or so has very much bent that political pressure. Archie, thank you so much. Thank you.

11:05Donald Trump:Thank you. formed and in control of your home from virtually wherever you are. When every second counts, count on ADT. Visit ADT.com to learn more. There's one place for the newest drops in wellness and performance and the biggest sale of the year. It's the drop by GNC, curating the best of what's new, handpicked by the pros who know what works. And right now, get it all, buy one, get one 50 % off during the semi-annual LiveWell sale. From crushing workouts to leveling up your nutrition and everything in between, get the best deals on the latest innovations. All the newness is all on sale right now during the Live Well Sale on The Drop by GNC.

11:57Donald Trump:I am at a mall in a middle-class part of Bangkok, and the People's Party is holding a rally here. I traveled to Thailand in advance of its election, coming up on February 8th. Around the world, young people are making their voices heard on the street and at the ballot box. But they often play at the fringes of politics, calling for socialism or alt-right policies. Thailand is a rare example of a youth-led movement calling for free markets as well as more liberal politics. Thailand's People's Party is the latest vehicle for the country's young liberals, and it is currently leading in the polls.

12:32Kevin Warsh:Erin Connolly is our Asia Diplomatic Editor.

12:42Donald Trump:At the People's Party rally in Bangkok, there were a lot of young people, some older people too. Most of them were wearing the party's color, orange, and its triangle logo.

12:56Donald Trump:And on stage was Pita Alam Jarenrat, the former leader of the party, who's a bit of a rock star.

13:05Donald Trump:In 2023, Pita and his party won a plurality of seats in the lower house, but he was blocked from forming a government by the Thai Senate, whose members had been appointed by the army. Pita's party, then called Move Forward, was dissolved by the courts. Most of its members, however, regrouped into what's now known as the People's Party. Though unable to run for election again himself, the successor party has asked Pita to campaign heavily in the final fortnight before the election, when the People's Party hopes that it can win a majority in the lower house.

13:36Kevin Warsh:Aaron, there's a lot of context to fill in here for us. Thai politics is very complicated. Explain why Peter's party was dissolved and why he can't stand this time.

13:47Donald Trump:Well, it all goes back to Thailand's strict Les Majestés laws that criminalize any criticism of the monarchy. And Peter and his party move forward had pledged to reform these laws. And the constitutional court ruled in 2024 that that campaign promise to reform these laws amounted to a violation of the Constitution. As a result, he was banned from politics for 10 years and his party dissolved.

14:11Kevin Warsh:So this replacement party, the People's Party, how are they doing?

14:16Donald Trump:Well, the People's Party can't campaign anymore on reforming the Les Majestés law, but they're currently leading in the polls and they're asking voters to give them a majority this time so that they don't need to make any compromises in terms of forming a coalition. And in theory, that would give them a chance to form the government because for the first time in about a decade, the Senate will no longer play a role in choosing the next prime minister. But they're not doing as well as they did in 2023. To give you an example, before he was banned, Pita was favored by around 45 % of Thais as their next prime minister.

14:50Donald Trump:But his successor, Nhatapong, is favored only by around 29%. The bigger problem for the People's Party is that many Thais now doubt whether a liberal party will ever be allowed to form government in Thailand. The courts have now dissolved three versions of this party and banned 27 of their leaders. And so some disillusioned Thais may still support the People's Party and its agenda, but they've lost the level of enthusiasm that they had in 2023.

15:18Kevin Warsh:Let's pull out for a minute. What's really going on? What are the fault lines in Thai politics?

15:23Donald Trump:The fundamental cleavages in Thai politics are really about the monarchy's role in the economy and in politics. the monarchy actually plays a really big role in the economy in Thailand. And it is repeatedly intervened in politics to favor conservative parties. So at this point in Thai politics, you really have a three-corner contest. On the one hand, you have those young liberals of move forward and now the People's Party. And the second group is a populist party called Pue Thai that actually formed government over most of the last three years, but it was very badly damaged by some scandals that they endured in government.

15:58Donald Trump:And then the third group is that conservative bloc, which tends to be very pro-monarchy and pro-military.