What Happens If Kevin Hassett Becomes Fed Chair?

0:08I guess a potential Fed chair is here too. I don't know who's allowed to say that. Potential is a respected person that I can tell you. Thank you, Kevin.

0:27I'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 already shaped the global economy, and what on earth is going to happen next.

0:44This week, we're asking what happens if Kevin Hassett gets the top job at the Fed. Well, for those who haven't been following the apprentice-like competition for the next chair of the US Central Bank, here's a quick summary. The current chair of the Fed, Jerome Powell, his term as chair ends in May next year. There are five candidates on President Trump's shortlist to replace him. We're expecting the president to name his pick in the next few weeks. And last week, Bloomberg reported that it was looking very likely to be Kevin Hassett, the current director of Donald Trump's National Economic Council.

1:23Well, things might change, of course, we are talking about President Trump. But right now, we thought it was worth asking, indeed, what a Hassett Fed might need for markets, for the US economy and long term for the Federal Reserve. whether the worriers about this are right to fret about having a Trump loyalist as the chair of the world's most important central bank. Well, if you're a dedicated listener to this podcast with a good memory, you might remember that our chief US economist, Anna Wong, has thought for a while that President Trump was most likely to pick Kevin Hassett, with whom she worked in the first Trump administration on the Council of Economic Advisors.

2:03We'll hear exactly why she thought Kevin Hassett was the most likely in a moment. But I might point out that Kevin Hassett seems to have a good opinion of Anna Wall. And that might be one reason why he was willing to sit down for a 45-minute conversation with her at a recent Bloomberg event we had in Washington. You could look it up on YouTube. I would say it is, in some parts, quite a nerdy chat between two economists. But on the subject of the Fed, Kevin Hassett did make the point that it's not anything new to have a member of the president's team move over to a senior role at the Fed. I think the idea that government service makes it less likely that you'll pursue an independent Fed basically rejects the evidence of, what is it, the five Council of Economic Advisors chairs that went on to be independent Fed people.

2:52And so I think it's a very common path for people who have worked in the White House to go on and to work well at the Fed and to do so independently. Well, Anna is joining me now from our New York office, as is senior Washington reporter Soleil Mohsen, who was the one who reported last week that Hassett was now top of the president's list. Anna, Saleh, great to have you. Good to be here. Good to see you.

3:19Now, Saleh, obviously you can't reveal what led you directly to write your story the other day. He's clearly been high on most people's lists for a while. Why did you press the button on saying you really thought it was looking like him? It's been an interesting year when it comes to just the Fed chair selection process, if we just narrow that lens right there. So Bloomberg News has been ahead of the curve on this reporting. In June, one of our colleagues, Nancy Cook and Katerina Sarajeva, reported that Kevin Hassett had a great interview with Trump. They discussed the Fed inside the White House, the chairmanship role.

3:56And that's when things started to kind of shift. The other part of the narrative is that Trump does not like that there are agencies that are outside of executive branch control. And now he's been looking for many, many months and you could say years at how he can exert some control over the Federal Reserve. Now, traditionally, that is done through personnel. Any sitting president has the ability to choose who fills the Fed board of governors, including the chair. And Trump is using those ways into the Fed to put a loyalist in. We're speaking now on Tuesday, the 2nd of December. It's been around nearly a week since you wrote that Kevin Hassett was looking very likely.

4:38Has anything happened in the last few days? Any of the comments from the president that we've heard made you change your mind or think the grime might be moving again? If anything, the public perception matches my own perception, which is that I feel like our report is even more accurate. This past Sunday, Kevin Hassett was on CBS's Face the Nation. And at the end of that interview, he was asked directly if the Bloomberg report was accurate. And he had a big smile on his face. How did yours go? You know, I am not sure that Bloomberg has the story right. I'm really honored to be amongst a group of really great candidates.

5:17Excellent moment for the person who wrote the Bloomberg report. He had a big smile on his face and he said, no, I don't know that that report is completely accurate. But then he points to the positive market reaction. And if you look at the market response to that, it was very, very positive. We had a great treasury auction. Interest rates went down. And so I think that the American people could expect President Trump to pick somebody who's going to help them, you know, have cheaper car loans and easier access to mortgages at lower rates. He had key bullet points on what happened in markets once that story hit the wires.

5:50And the one question around Hassett and whoever Trump may choose for Fed chair has been, can this person maintain credibility with markets but still be able to cope with a President Trump who is also in the world and who could be calling him a stubborn ox or a bonehead at any given point? Things that Trump has done to Jay Powell, the current Fed chair. That moment on Face the Nation and the fact that the White House and our story on the record, there was no pushback. It was just, well, Trump's going to pick who he's going to pick when he's ready. It sounds like he was even trying to make sure there wouldn't be any change of mind and try and remove any last bit of doubt from President Trump's mind.

6:31I mean, Anna, I mentioned you've always said you thought that the most likely pick, knowing your experience you'd had in the Trump administration and knowing the various candidates as you did. Why did you think he was always the most likely? Yeah. So the candidates we have in the pool of people auditioning for this role are Kevin Hassett, Kevin Warsh, Chris Waller, Bowman. But our criteria, my criteria for Trump's pick is number one loyalty, as you said, Salih. And on that count, Kevin Hassett scored the highest amongst this entire pool of candidates because he has a long working relationship with Trump.

7:17And he delivered some of the key legislation that Trump is most proud of, the Tax, Jobs, and Cuts Act. That is a major kudu point to Kevin Hassett. He not only helped craft it, he also messaged it. He also marketed it. He also fought for it. And afterwards, he also defended it. And also during the coronavirus, Kevin Hassett came back and partly reflecting his loyalty and also patriotism, maybe, because the reason why he left CEA was because he was working long hours. This was all detailed in his 2021 memoir, The Drift. So in that book, he talked about how he was working 60, 80 hours every day in CEA.

8:03And then he suddenly felt this heart tightness in the chest. Well, he drove himself to the hospital and turned out he was having some kind of heart attack. And that was why he has to, you know, exit. The reason why he quietly drove himself to the hospital was he also didn't want to attract any fanfare. He wrote in the book how like the media would have so much to write about if they caught wind of him, you know, having this episode. So fast forward to the second Trump, he also helped message this one big, beautiful bill. And the role of National Economic Council director is more influential than a CEA chair in the sense that you're actually helping to create an usher, do policy.

8:48Whereas CEA, oftentimes the chair was, it serves more like a think tank within the White House. Bit more academic. Yes, yes. So in a way, for any economist who dreamed about having influence over how policies are crafted, this has its role. His role is definitely more elevated in the second Trump, which suggests to me that he, in Trump's mind, he is also, his status as an economist is also much higher. I suspect that his book is going to be rising in the Amazon charts, given the recent stories. Everyone's going to be reading that. I was not aware of that story. But it does make some sense out of one of the exchanges you had in this conversation at Bloomberg at the Washington offices a few weeks ago, where you talked about how he would maybe have fewer hours if he went to the Fed.

9:38But you talked about a lot of things in that conversation. He talked about tariffs, talked about the budget. He was very on message, you would say, from a sort of Trump perspective. Did anything he say make you change your view of what a Hassett-led Federal Reserve would look like, how he might affect the Fed? I think one of the biggest issues facing the next Fed chairman and the Fed overall is to determine whether we are indeed going through a productivity boom. Because productivity boom does not show up in macro data cleanly. It just doesn't. And in the 1990s, it takes several years and after rounds of revisions before it became apparent.

10:16And in that conversation with Hassett, he seemed very aware of that. In fact, I thought he went a little bit way too enthusiastic about accepting that the productivity boom is already here. One of the interesting puzzles is that, you know, first we're having a productivity boom that is really unprecedented in the following sense that when I worked with Alan Greenspan back in the 90s, it was just at the dawn of the computer age, really. Whereas, in fact, I think it is a very polarizing issues among economists, because if you survey all economists, half of them would say there's no productivity boom.

10:56So I think that it could be very quite likely be that Kevin Hassett is right, that a productivity boom is happening unbeknownst to many macroeconomists. But I think it's also important for a future Fed chair to acknowledge the lack of evidence and try to bridge together a consensus amongst people who think differently. It was an interesting moment in that interview. He said, you know, there's nothing particularly special about having a political, you know, it's obviously it is a political appointment and you've had economists move over from the White House to run the Fed before, which is absolutely true.

11:38But in the past, that hasn't been after a very, or not in recent times, that hasn't been after a very public row between the White House and the Fed or a disagreement that the White House has had about Fed policy, which the candidate has actively sided with the president on. And I just wonder, Salia, from your perspective, I mean, you talk to people across the economic world and markets as well as Washington. How tainted do you think Kevin Hassett's arguments are going to be when he puts these kind of lines that support, in effect, the president's desire to have lower interest rates? That's an interesting question.

12:17I would have assumed that when Stephen Myron was nominated to take the short-term slot that opened up on the Fed board when Adriana Kugler resigned, I thought that markets would have a big tantrum and that the Senate Banking Committee would also have a big tantrum over Stephen Myron going straight from the CEA to the Fed on leave from the White House for that role. And there was not a blink from anyone, really. There was a couple of tense moments in the Senate during the hearing, right? Nothing really. Markets were also fine with it. So we're seeing that either the Fed is like in a too big to fail category where like it's not possible that we start crushing their credibility because the world cannot handle it.

13:02Therefore, we just will keep rolling with it. And so Hassett gets through the Senate. Mark Warner, a senator on the banking committee, was at the Bloomberg Washington office recently. and this is before we knew that Hassett was a frontrunner and he did remark that I have a good relationship with Kevin Hassett. Warner is a Democrat, right? So Hassett has relationships on both sides of the aisle. The Senate does like to respect any president's wishes when it comes to personnel. He has the right to, he or she has the right to choose who should be nominated. They vet everyone. Now, the Senate has failed in certain events because we're seeing that there's some ethics scandals that keep kind of popping up at the Fed and maybe the Senate hasn't grilled candidates enough.

13:43There's questions around other Fed appointees from the Biden era of who ended up at the Fed and if they were fully qualified. Things like that are coming up in the ether. But if we have Kevin Hassett become Fed chair, that means markets have now absorbed it, right? He was right to point out there was no big reaction. That's a big plus for him. Now it's up to the Senate to properly vet him. But his credibility is there. Once he's in the chair seat, he has a whole FOMC board. There are defense mechanisms at the Fed in place to deal with any kind of efforts to politicize the Fed. Now, Trump is a very strong adversary on that front.

14:25But now we are testing those defense mechanisms across the United States, across democracy, across the Capitol. And now it's making it to the Eccles building. And you make the point, his is only one voice. It's a very consensus-based organisation, Alan knows well, and you don't tend to have a lot of dissent, but his will only be one vote. So I guess one of the key things that people are looking at is whether the president, either directly or indirectly, gets to change the broader makeup of the board. And there, Obviously, we have this important case coming up or a judgment coming up for the Supreme Court.

15:06So just remind us where we stand on that, because there's a sort of key aspect of quite how many slops the president might end up being able to fill. Right. So the summer, like I said, was really interesting. In June, it was the OK, Hassett has a great, you know, knock it out of the park interview with Trump. In July, we see the Bill Pulte, the FHFA director, for some reason, he comes out with comments against Powell saying that he should be tried in the courts or rejected from his job for the way that the Fed has spent on some of the renovations. And then by early August, Pulte had made public some very old mortgage documents belonging to Lisa Cook, a Biden appointee to the Fed board, that there are some discrepancies in there.

15:54And then Trump puts out a post on Truth Social that says, I'm firing Lisa Cook for cause because she should not have this job if she has been violating mortgage laws. And it turns out that there are some intricacies there. The purported violations happened before she was Fed governor and that maybe they were actually above board. So that case has gone to the Supreme Court. Trump right now is not able to block her and remove her from the Fed. We have a hearing in January, mid-January, where the Supreme Court will hear oral arguments. We're going to hear a little bit more about that. The other very exciting thing that happened in August, around the time that the Lisa Cook attempt at firing happened, was that Adriana Kugler, also a Biden appointee to the Fed board, resigned abruptly.

16:39So that is the slot that Steve Myron has taken that expires end of January, early February. And if it is Hassett who gets the nomination for chair, that is probably the slot that he gets is the seat that now Steve Myron holds. And then we have the excitement of Jay Powell because his chairmanship ends in May. But his term as a governor, he has two more years on it. Now, traditionally, usually, you will see a chair just completely step down. Powell has been through a lot. He has publicly been called names by the president of the United States. It's not an easy thing. I think it's taken a toll on him and maybe even his family.

17:21He has refrained from saying whether he will step down. And you just have to wonder, is he just waiting to see who is the pick? and how does those first few weeks or first few months pan out before he decides I'll leave. Or he could say, I'm just a governor. I'm not going to head up any committees. I'm in my office and I'll show up when I need to go to a FOMC meeting and deal with Hassett.

18:01Anna, you mentioned it in the piece you wrote about what a HACET Fed would look like. You highlight that there are more significant shifts of direction of Fed that you could see if you saw a further step down this road, which is a potential change in the regional Fed governors. Yes. So regional Fed presidents, they get reappointed by the board of governors. So there are seven individuals on the board of the governors and there are 12 regional presidents. And the deadline usually is by the end of February of every year that ends either 2026 or 2031 in five year increments. So there's an opportunity for Trump if he wants to, you know, if he somehow could get at least four people on the board of governors to reject the reappointment of some of these regional feds.

18:58The opening is 2026 February. So this is why the timing of that Lisa Cook case is extremely important. So if the hearing happens in mid-January, as Zaleha said, then the ruling likely will come way after January, after the deadline for this reappointment, which means that likely Lisa Cook will stay in place until at least February of 2026. So regardless of what the Supreme Court does, just because the ruling will happen after February, it's unlikely that Trump will have the four votes on the board to be able to remove regional Fed presidents. So, Soler, there was one thing that you've been talking about that I thought was interesting, and it's very much part of the president's kind of modus operandi, that he will spot something where some opinion is kind of quietly changing behind the scenes, but he takes it further.

19:58You've been spotting a bit of that when it comes to the Fed and the possible future direction of the Fed. Yeah, you know, we are at a point in American history where the public's trust of public institutions is at historic lows. And whether the average American thinks about the Fed very often, hopefully they don't, the Federal Reserve is part of that low, that lack of trust. And some of that has to do, of course, with just the continued hangover from the global financial crisis that, oh, everyone got these golden parachutes, the Fed bailed everyone else out except for the average man, and we're still stuck in the muck.

20:32And they had one job, which was to prevent inflation, and they failed on that. Well, let's talk about that one, because we are at a point where a whole generation, My generation didn't know what it was like to face inflation because the last time was around the time I was born in the early 80s. You have a generation that has never seen this. And then you have policymakers who at the time it was Janet Yellen, the Treasury Secretary under Biden, and Jay Powell. You had Janet Yellen speaking as a Treasury Secretary but sounding like a Fed official, a Fed chair, saying this is transitory. And Powell also saying this is transitory.

21:05And what that means is that the family at the grocery store checkout that has to decide, do we complete our food shopping or do we buy another pair of cleats, soccer cleats for our growing teenage boy? We can't afford both. When someone says transitory, they're saying your pain is going to pass. It's not a big deal. So trust plummeted even more. And so it is natural for elected leaders to take a look and say, what went wrong here? How can we do better when it comes to trust in this institution that is so important to America's economic well-being and the world's economic well-being? So Trump has picked up on this angst and this unhappiness with how this is working, but in his own way, which ends up being belligerent, is trying to fix it.

21:51Anna, obviously the irony of this, quite positive reading of how you might interpret the direction the president's taking. he's not just belligerent. He's trying to push for lower rates in an environment where people have lost their faith in the central bank, in large part because of their failure to control inflation. So this just, it seems like a potential recipe for not answering those concerns, and actually, if anything, making it worse. I believe President Trump has mentioned he He wants rates to be cut down to 1%. When you put 1 % in one of your models, what does that do to inflation? Just remind us.

22:34So first of all, you will have a temporary boom through 2027. So 2026 and 2027, more than 3%, 4 % GDP growth. Inflation probably will most likely will exceed 3%, probably rising to 3.5%. on that trajectory. And by 2028, it could be that inflation expectations would unanchor a little bit and you'll see credit spreads all rising and inflation compensation on the longer end of the yield curve probably would rise. And all that would lead to, if the Fed has not even get in front of this deterioration, it will probably means the Fed will have to raise rate but even more in order to get inflation expectations back in control.

23:27So that would be the boom and bust cycle, classic boom and bust cycle. But the bust that you've just described would be, just thinking about the electoral cycle, would be, I mean, probably after the president has left. Some time around there. But I also have to say, Stephanie, that that assumes productivity didn't pick up tremendously. And I think one view that Kevin Hassett would be carrying with him into the Fed would be his conviction that a productivity boom is happening. You know, we had this conversation around the impact of tariffs a couple of weeks ago, and we made the point that AI and big AI investments had in some sense protected the economy from some of the negative effects or offset some of the negative effects of tariffs.

24:14But, you know, Kevin Hassett would say they pointed to a real productivity turnaround that was going to support the economy and make it possible to have faster growth and lower inflation, even with lower interest rates. So how much credence do you give in that scenario, that kind of positive AI revolution scenario? I think most likely what we will see if there is going to be a productivity boom would be weak employment for a couple of years. Because a labor productivity boom implies you have higher output per worker. So you could have higher output and reduced need for workers, which is what we are seeing already, reduced need for entry-level workers.

24:57And in fact, I just came back from a roundtable today and I saw some very compelling data that shows the rise, slowdown in employment growth for entry-level people in their 20s. That kind of jobs slowed exactly around the time where chat GBT was introduced. So I think my own forecast is that likely in the next year, we will see pretty weak nonfarm payroll growth every month. And I think that will give an opening for the Fed to keep cutting rates because as part of the productivity, the process of increasing productivity, There will be a first slowdown in employment. And only afterwards when, you know, firms have increased profits from this productivity growth, they would invest more.

25:47So far has been very concentrated in AI. We will need a broadening of this investment boom into many other sectors in order to be convinced that it's really a total factor productivity boom. And even that is not a sure thing because in the 1990s, real wages actually stagnated even amidst this productivity boom. So I just think that the AI element will play a key role in determining the path of the Fed funds rate the next couple of years. Continued AI enthusiasm, but weak employment growth could potentially enable the Fed to cut more than we currently expect in the first half of next year. But do you think, going back to my original point about credibility, do you think that Kevin Hassett, if he were coming into his first meeting in June as chairman of the Federal Reserve, that he could get the majority of the board to support a rate cut?

26:51Well, if Kevin Hathor does enter the Fed in January, first as a governor to take over the position that Steve Myron vacate, then he has about five months to prove himself to the Fed staff and FOMC members to build his soft power. Because ultimately, the most important trait of a Fed chairman is soft power. The FOMC has oftentimes been divided in the past. So the division that people talk about today and for this FOMC meeting next week, for example, where half of the committee wants to cut, half of them do not want to cut. Well, that kind of division we have seen before in the 1990s, in the 1995, during the Greenspan era.

27:38And we also saw it last year, September 2024, when the committee was split between cutting 50 bips versus 25 bips. And the common denominator there is you need a chairman who can shepherd everyone toward the view he prefers. And in Kevin Hassett's case, if his colleagues were to view him with skepticism or view his every action as a covert, as he being a proxy for Trump, they are not going to go along with him. And so ultimately, it is soft power that matters. And by the way, many of the governors and also regional Fed presidents will be staying around until the 2030s, well after even the Trump administration.