Lots More With Skanda Amarnath on the Risks of Kevin Warsh

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0:17Bloomberg Audio Studios. Podcasts. Radio. News. Oh, Joe, this is cutting. This is from Neil Dutta, friend of the pod. Oh, yeah. All right. Read it out. Read it out. President Trump has picked everyone's least favorite candidate, Kevin Warsh, for the next Fed Reserve chief. I tip my hat to Warsh, who has managed to get selected after being passed over time and again. That's a remarkable achievement for him. Joe, I want a t-shirt that says Ruthless Utility Maximizer. Black gold! Let's talk about losers. Who cares? I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the U.S.

0:59Skulls Unlimited. What's the ticker for that? No, I think that like in a couple of years, the AI will do a really good job of making the Odd Lots podcast. How do I get more popular and successful? One day that person will have the mandate of heaven. We do have the perfect guest. You're listening to Lots More, where we catch up with friends about what's going on right now. Because even when Odd Lots is over, there's always lots more. And we really do have the perfect guest.

1:33I'm just going to say what I find interesting right now is that, you know, like Trump announces someone and you expect a bunch of like liberal ninnies in the media to like shake their fist. It's like, oh, this isn't good. You know, it's like there's a lot of predictable response. But it is interesting to my mind to hear someone like Neil, who is I do not associate him with liberal media groupthink or anything like that, as well as many others who are like, huh, interesting pick here. Well, I will say opinions kind of divided. So Mohamed El-Aryan tweeted earlier that he thinks Kevin's going to be a great Fed chair and he's observed.

2:15And this is a quote, having observed and interacted with Kevin during his prior tenor as Fed governor in academia and as a fellow member of the group of 30, I believe he brings a strong mix of deep expertise, broad experience and sharp communication skills. So by the way, Jason Furman, too, he tweeted, Kevin Warsh is well above the bar on both substance and independence to be chair of the Federal Reserve. The Senate should ask tough questions about his independent and President Trump should reduce the threat to it. Hopefully that will make it clear Warsh should be confirmed. So it is a mix on both sides.

2:48It is not dividing in obvious, easy ways. Anyway, Skanda, what's up? Glad to be part of this momentous day. It is a momentous day. I guess we see that, yeah, Kevin Warsh is right now the successor in waiting if he gets confirmed by the Senate. It is funny how he's part of this group of 30, which is a form of former central bankers, former finance ministers, some movers and shakers. So you see Mohamed El-Erian, Jason Furman, George Osborne, I believe, Mark Carney. Certainly not exactly the most America first kind of grouping, maybe more globalist in flavor, has definitely kind of rallied around Kevin Warsh because I think they've probably conversed with him a bunch of times and take him to be a very serious person.

3:32I, myself, am much more sympathetic to what our friend Neil has pointed out. By the way, we are talking, of course, to longtime friend of the pod, Skanda Emarnath, co-founder and executive of Employee America. So when you see like, OK, so someone like Neil and someone like yourself and you have these reservations, like what is the origin of some of these anxieties? I think there are a few different anxieties. And I think let's start with this is obviously someone who served on the Fed before. Right. He was a Fed governor. So we have like a track record. We don't have to like rely on secondhand validation.

4:05We don't have to, if we didn't know anything about Kevin Worcester, I think probably it's probably putting a little more emphasis on what Jason Furman and Mohammed Al-Ararian and those people are saying, and they seem like respectable people. Except he was Fed governor and he does have a pretty long body of work in terms of a public intellectual, giving remarks, being in the Wall Street Journal, opinion pages. And the trouble is it kind of comes back to like, who do you want in a crisis, right? So the Fed really tends to matter the most in periods of crisis. He was a Fed governor in the crisis, and he often touts it as a very qualified purpose.

4:45Yes, the 2008 financial crisis. If you go through what his views were through that whole period, what you will find is this is someone who is very eager to tout how well the financial system was performing, even as it was descending into crisis in 2007 and 2008. he was very eager to really upweight the importance of inflation in the summer and fall of 2008 until Lehman failed. So this is someone clearly who had his eye on, I'd say, the wrong ball at that time. Okay, mistakes happen. People had different views. I don't think we should be too precious about that specifically. And yet also the moment that we came into 2009 and let's say the absolute worst of the financial distress may have been behind us, but we had historically high and rising unemployment.

5:34He basically said this was not really a big problem, not something the Fed should be focused on, and that we actually should start to shift back towards focusing on keeping interest rates more normal, not so low. I'm worried about inflation. And so he came up with a lot of reasons why he thought inflation was going to explode, why QE was really bad, and that that would ultimately lead to first inflation, then maybe some version of asset price inflation, maybe bubbles, maybe it's backdoor fiscal policy. He came with a lot of different reasons at different times for why he really hated the fact that the Fed's balance sheet was so big.

6:05But one, those predictions weren't really true. I think they reflect a misunderstanding of what the Fed's balance sheet really does and is. It's a favorite hobby horse of his. But that's itself, he missed the whole financial crisis in a way. Aside from the absolute worst of it, everyone got on the same page in October 2008. But that's not a great badge of honor that you actually figured out that you had to sort of support the financial system at that time. I think that's the first dimension that probably is of concern. But let's say, okay, people have gone through various episodes and missed a lot of things.

6:43And you'd hope coming out of that, people kind of have learned something, expressed some humility. Okay, I missed this part of this problem, the scale of it, the duration of it, and I'll do better next time. We haven't really heard that, but okay, let's leave those missing neocultas aside. The two things that are more concerning that come out of that, though, is we see now a growing pattern of both obsequiousness and partisanship in how he orients his macro and monetary policy views. So let's fast forward to 2024, where we had, for a while, obviously, there was a sense of the Fed's going to cut rates, but are they going to cut rates soon enough, or are they going to wait longer because they want to see more progress on inflation.

7:25Kevin Walsh, for most of that year, he was pretty clearly in the camp of the Fed is risking not keeping interest rates high enough for long enough to kill inflation. But when do you think that his policy views changed? They've happened to change in November 2024, basically. And he basically did a big 180 on what are probably considered pretty hawkish views, but actually they turned dovish the moment the election changes. Now, obviously, everyone does a version of inflecting their policy views with some level of politics and partisanship, whether they can help it or not. I'm not here to say it's anyone's immune.

8:01But there is a tendency, if you look through his track record, of basically worrying about inflation and worrying about fiscal excesses during periods when it's a Democrat that's in the White House. And then it tends to flip towards deregulation and productivity growth are going to be disinflationary and that's that's why we can afford to keep rates lower when it's a republican that's in the white house i think that's been dialed up even further and this this this last call it 18 to 24 months where you've seen that sort of 180 take place yeah and i think that kind of speaks to exactly what did he have to promise to president trump to get the job it's funny you mentioned uh writing op-eds in the wall street Journal.

8:44And this is also a Dutta line, he says. And all he's done in the years since his time at the Fed is critique QE and the Fed itself, making a bunch of bad economic calls along the way and writing the same op-ed in the Wall Street Journal every year. So one thing I was reading, you know, I read some of those op-eds, but I also read a speech that Warsh made last year, and he was criticizing the Fed for being too dependent on data or focusing on data dependency, too much near-term forecasting. And it kind of, you know, it made me think like, well, if you're not looking at the data, what are you going to be looking at?

9:24Do we have any sense of what he actually prioritizes when it comes to making policy? Yeah, I mean, maybe it's vibes, maybe it's presidential preferences, but I'm obviously like sort of half kidding there. But I think it's like, What do we have if we don't have data? What do we have if we don't have a language that you can talk about facts? Obviously, data has flaws. We all know that there's limitations to what macroeconomic data releases can tell us, what various points of information tell us. We're all trying to triangulate around this fuzzy reality of macroeconomics. But it's a useful language for being able to get people from different policy preferences, different political orientations to get on something of the same page.

10:04It's a way of saying, okay, this is a fact about the data. We can say this is the reason why it's too high, it's too low, it's biased this way. We can have a discussion about it, but at least it's a way to make sure we're talking about something other than politics, something other than policy that's outside of the ambit of the Fed. I think what you actually hear from Kevin Worsh on the data dependence side is pretty worrisome because it speaks to a disinterest in being perceived as objective and lack of interest in actually doing something that can broaden legitimacy around the Fed so that people will understand, okay, the Fed made this decision because indicators moved in this direction, or they think indicators are moving in this direction.

10:44At the same time, we obviously have a situation where there's a lot of risk of eroding trust in the Fed when Trump has been saying that he wants his guy in who's going to do what he wants, and that he really felt burned by picking Jerome Powell. So basically that Jerome Powell was not pliant enough to what Trump was looking for. I think that that just raises a lot of risks going forward. And just to bring it back to the issue of crises, the Fed has been such an important actor in periods of crisis and divided government, right? When we think about 2008 and 2020, when periods when the White House was controlled by a Republican and there was a pretty vociferous opposition from Congress in terms of, obviously, there was a democratic house in 2020 and both chambers were democratic in 2008.

11:34How did you get to like policies that actually started to take out, like address the scale of the crises in front of them? You got there because there was some agreement and trust that the Fed could be a reliable kind of crisis broker of sorts. I think that's going to be a lot harder this time around because Kevin Morris just like track record. Obviously there's a certain obsequiousness that kind of has been very obvious from how he's done these policy 180s. He goes from Hawk at one point. And then the moment Trump wins office, he starts to shift towards being more dovish. He did a version of this in 2017, though less exaggerated.

12:07So that's something that is concerning. Layer it onto his tenure as Fed governor has this features a lot of speeches in which he's really going off script in terms of what he's talking about. He doesn't just talk about monetary policy or just financial regulation. He started to give these bigger concerns about, hey, I don't really like the way the trade policy is going under the Obama administration. I don't really like how we risked going down the wrong path on broader regulatory policy. Things that really shouldn't have been under his domain itself to focus on. And yet he kind of veered into the political and probably was speaking to a more partisan audience at that time.

12:46I think everything you've seen since 2005, 2006 kind of speaks to someone who wants to talk to one side of the partisan aisle, but it may be very different in a crisis when you need relationships across this spectrum. Thank you.

13:37You know, regardless of what people thought about Bernanke or Powell, etc., both of them, you know, were reasonably well respected across both sides of the aisle, which probably was very helpful during the crisis. I have a question. I've never actually quite known the answer to this. But even going back to 2009, 2010, et cetera, like a lot of people really liked Warsh. And you mentioned that he's in a select community of like some pretty like heavy hitters, et cetera. And I think Bernanke liked Warsh quite a bit, if I recall. What is the sort of like Warsh origin story of like how he got to be in the circles of some of the most elite and monetary policy minds?

14:18So he was one of the youngest people selected to be a Fed governor. And there was a lot of consternation even about whether he was qualified at that time. There's some good background about how there were a lot of critics, former Fed vice chairman, people who served under Ronald Reagan, expressing reservations about picking someone so young who had no real track record. He was like an investment banker at Morgan Stanley and technology media telecom. for a brief period. He's kind of known in these circles, primarily, like, I don't know how much to ascribe to this. I'm not, but I do think like it matters that probably his father-in-law is one of the big donors to the Republican party and has been a big donor to Trump.

15:01So Ron Lauder of Estee Lauder fame. So there's like certain levels of connections that have mattered. I think there's a pretty well-documented fight between Randy Quarles, who was the head of supervision appointed by Trump in his first term, and Kevin Warsh were fighting over a particular job in the the Bush Treasury Secretary Office, the Treasury Department. So he's been around in those circles. I think he's mostly been conversed with, let's call people who are, he was a visiting fellow at the Hoover Institution, which is like an intellectual hub for obviously conservative economic thought. But he's also mostly been speaking to a specific crowd, like the Wall Street Journal op-ed page.

15:39It's mostly been with those who are of his persuasion. He has managed to do a remarkable job of shapeshifting towards making sure he's heard well by President Trump. And so he has managed to kind of make that transition in a way that maybe other people have not. But that shapeshifting itself has always been an orientation towards I'm really speaking to a Republican audience. And what I wonder about that is if we run into any sort of situation where you're going to need the Fed to kind of put out a fire, or you're going to need some institution to do that or play that role, as it was the case in the CARES Act or was the case around TARP or around any of the other sort of bailouts of 2008.

16:18How do you muster that together when this person has been pretty consistently partisan and ideological in some ways? Ideological maybe more so when it's not Trump at the helm, but it's just something that becomes very hard to trust. And we kind of take that for granted in terms of like macro and finance about how the Fed is supposed to step in when there's a crisis. But like the Fed steps in in the crisis when they get the backing from both Congress and the White House. That may not exist. Just going back to things that Warsh has said previously. So we talked about he's been very critical of the Fed's balance sheet, expanded balance sheet and QE and things like that.

16:56Assuming that he figures out a way to do what he wants at the Fed and somehow gets support of the Fed board or does something else. How dramatic could his tenure at the Fed actually be in terms of monetary policy? Because I'm thinking, you know, there's been some chat or some suggestion that Warsh would like to radically redesign the way monetary policy interest rates are actually implemented. Yeah, that's always been a bit fuzzy to me because he's been very eager to criticize, but the nature of the criticism has always had to continuously adapt. to what I'd call somewhat failed predictions. First, it was that there were a lot of people who said QE is going to increase the money supply and mechanically increase inflation.

17:41And that was the case that people said this like 2009, didn't quite pan out that way. Then people kind of said like, it's going to lead to asset price inflation slash bubbles. Like maybe there was asset price inflation, but there wasn't really like an obvious bubble that transpired from it. And then it's sort of, some of the criticisms shifted towards, well, it's actually doing something on fiscal policy. So I think you have to have a career in view of what you actually think the Fed balance sheet does. If you ask me, ordinary vanilla treasury QE is not really doing much. It's mostly an asset swap of two risk-free assets, which is a view actually that another person at Hoover Institution, John Coffrey, would probably abide by.

18:13So there's not really any distorting effects that people are really, the way people are saying. And yet he sort of has made this a big bugbear that this is like the big thing that needs to shift. He comes at a very awkward time because what's been happening is that money markets have been basically giving the signal that actually the balance sheet is getting to a place where if you try to run it down from here and run it down too abruptly, you might get more dysfunction, kind of similar to what we saw in like September 2019. So we might get into a situation where repo rates spike because there's just not a lot of, relative to the banking system and the financial system's needs, you do need to have some amount of liquidity available.

18:51And that amount of liquidity is meaningfully more than it was prior to the financial crisis. That's probably like one part regulation, one part supervision, and one part bank risk management practices. But this stuff is kind of like actually hard to pin down how much of each. And so he's big. This is like big concern. I suspect he's probably going to have to swallow his pride a bit and be more supportive of like gradual balance sheet expansion during this period, because money market conditions are basically signaling that things have tightened up quite a bit in terms of if you look at where the Fed funds rate or money market interest rates are relative to the interest that the the Fed pays on reserves or the interest rate that the Fed pays for money market funds to the reverse repo facility, those have been converging.

19:35Those money market interest rates have been kept going up relative to those rates set by the Fed. And that is also a sign that you got to have more malleability and it's not exactly the case that, oh my God, this Fed balance sheet is this big problem or that it's something that if you lower the balance sheet, that's how you get lower interest rates. These views are all kind of incoherent, but I think that especially now that he might be in a position where he has to deal with those hard realities, I suspect his views may force to change. It'll be interesting to see what happens. Let's just talk, you know, so we know Trump wants lower rates.

20:08Kevin Warsh just talked about we need lower rates. So there's alignment there. Other candidates who were like the sort of finalists also talking about that. So Christopher Waller, who I think, you know, many people would say perhaps has the best track record of the last five years of anyone having correctly identified the inflationary turn and then also recognizing when the inflationary turn was coming to an end. And he also wants lower rates. So presumably, no matter who was going to come in, was going to have this lower rates now view. That being said, does the actual execution of lower rates in the short term, setting aside crisis, does it change at all the dynamics when he's just one of multiple voting members if that message is coming from Kevin Warsh versus if it were coming from a Christopher Waller?

20:58I think it definitely matters because at least with Chris Waller, honestly, with all of the front runners outside of Horsch, I can point to a tangible example where that person supported the case for lower interest rates outside of a very Trump inflected electoral context. And I'm including even Kevin Hassett here. And so Rick Reeder, Chris Waller are people who have made the case for rate cuts at various times, even when Trump was not in office, even when Trump wasn't clamoring for lower interest rates. In the case of Kevin Hassett, he went on the record in October 2024, I believe, basically defending the Fed's 50 basis point rate cut in September.

21:38Back when Kevin Warsh and Scott Besant and Steve Myron were up in arms about the idea that the Fed could cut rates and thought it was the most politically motivated decision ever. So you get people who have actually pre-registered their views and can show an ability to make judgments outside of that sort of presidential context, will come with more credibility. Because in the end, as you rightly point out, the FOMC, which is made up of seven Fed governors and a set of regional Fed presidents, they are not just presidential appointees, certainly not of this current president. And even those who were appointed by the president in the previous administration, I think to a large extent, I'm talking about Michelle Bowman or Chris Waller or Jay Powell, have shown a capacity for independent judgment and assessment.

22:27Will someone like Kevin Warsh be able to bring more people on board is going to be a real challenge, right? Can he be persuasive? Can he be persuasive? And especially if he's someone who doesn't really take a lot of stock in data. One of the nice ways that you can be persuasive is being able to point to an indicator and saying, I think this is going to happen in this way. Then if it does happen this way, you get more credibility in the next meeting to say, things are going the way I suspected, and therefore we really need to take policy in the direction I think is right. Data has a way of helping keep people accountable in discussions.

22:59Not always, but it's better than nothing at all, or better than the substitute. And so I think regardless of who was going to be the Fed chair, there was going to be a persuasive constraint. We're kind of seeing from the Supreme Court that Trump can't just fire everyone on the Fed that he wants. At least those are the tea leaves we're getting. And so you're going to have to work with the people who are already on the Fed, on the FOMC. And if that's the case, persuasive power matters. And what's the reason you're really expressing this view? Are you expressing this view because you believe it or because you think it satisfies what the president wants?

23:33Unfortunately, over the course of the last, I'd say, two decades, Kevin Walsh's views kind of have like a strong like political correlation to them look everyone's got some political correlation in their views i suspect but uh his more predominantly and especially if he wasn't making arguments rooted primarily in data i think he may find it harder to persuade his fellow colleagues and there will be a high level of suspicion about just how what exactly are the true intentions behind his agenda just going back to the speech that warsh made last year he talked about the need for regime change at the fed and he said that would involve, quote, breaking some heads.

24:09So I imagine the first FOMC meeting might be a little awkward. He's got to come in and the first thing he says, he's like, guys, I didn't mean that literally. He's got to come in and say, I wrote that, but I don't want you guys to mean I said it literally. He's got to say that. Real quickly, Skanda, if you were at that meeting, what would be the one question or the first question that you asked Mr. Warsh? Oh, I think it would be good to get a sense of just what he even thinks about where interest rates should be right now. Because I think part of what he doesn't quite... He talks a lot about Fed policy in the abstract, the need for regime change, we need reform, we need more credibility, more, fewer mandates or something along those lines.

24:51It's all vague and can sound substantive, but I think it's a little substance free because it ends up blurring exactly what he thinks about the macro economy right now. Inflation right now is about a percentage point above the Fed's target. Now, that might be freezes that are temporary. That might be freezes that are more persistent. It'd be good to understand what he thinks will happen, why. We don't really know much about that beyond just thinking like, okay, this person's probably going to be for lowering rates because he got the job from Trump. The reasoning seems very light at this point.

25:21I think there's good reasons to be dovish and maybe good reasons to be hawkish. But can he identify those as someone who would be on the FOMC or Fed staffer. Like, we're actually, there's more of a black box here because maybe you could have told yourself a story of how he was actually a very hawkish person, especially in 2009 and 2010 and some of his Wall Street Journal columns afterwards. But especially ever since we've had Trump in office, like his views have definitely shifted more dovishly. And you just want to wonder like how much, what is he putting a high weight on? And if that's something that can be trusted.