Kevin Warsh’s first remarks

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0:19Rob Armstrong: The most iconic week in the bond markets continues. A couple of days ago, we brought you some thoughts from the great and the good in bond markets on inflation, US credibility and all that jazz. Since then, it's finally happened. We had an interest rate decision from the US under the new chair of the central bank, Kevin Walsh. It's always kind of exciting for sad people like us when there's a changing of the guard at a big central bank. But this switchover is kind of special for a bunch of reasons. Today on the show, may the wash be with you. What do we learn about the man who, after Rob Armstrong, is now the most powerful person in markets?

1:02Rob Armstrong: This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at the FT in London, back in the basement of FT Towers after I was let out for good behaviour earlier this week. I'm joined by the big fella Rob Armstrong himself over in Brooklyn, New York. Rob, and soon I'm going to see you in real life, no?

1:25Katie Martin: It's exciting. And I think it's important to note that this will be the rare occasion where we see each other in person and a massive hangover does not ensue. I think we can grow and change. And this is...

1:43Rob Armstrong: Yeah, I'm going to New York very briefly and you are not to take me to a bar and cause me to miss my flight home. So the Fed decision earlier this week and the press conference from the new chair, Kevin Walsh, I missed this whole thing because I was doing an FT event and then I was watching the football. So you were watching it all in real time, right? Give us the highlights. I mean, the statement, the written statement was half of the usual length. So, yes, did that sort of brevity track through to the presser?

2:20Katie Martin: And this was one of the big questions coming in. Warsh has said in the past he basically wants the Fed to communicate less. He wants to go back to the Federal Reserve tradition of Alan Greenspan, where there's not a lot of talking, not a lot of sort of thinking out loud by either the chair or the other members of the open market committee, and the markets are kind of left to figure things out. And, you know, one of the questions going in was like, what is the statement going to look like? And then the statement lands at two o 'clock yesterday afternoon, and it's half the length, Like you say. Now, I don't think that is actually a particularly substantive change in the sense of like, oh, we got all this information before we didn't get.

3:13Katie Martin: A lot of kind of empty verbiage was taken out and a lot of this kind of coded talk about the future, which they call forward guidance, was taken out. I'm actually fine with all that stuff going. You know, I've spent five years, you know, writing about this stuff several times a year. And I'm not totally sure all that time wasn't wasted. Right. You know, like we can have a shorter statement. We can have less forward guidance. That is totally fine. But just reading that statement says, OK, new regime. The letter looks really different.

3:47Rob Armstrong: That's the thing, isn't it? So like on the very sort of surface of it, very boring Fed decision, no change in rates, like no fireworks. But yeah, I mean, I know it sounds like not a big deal, but like halving the length of your statement is a bit of a statement in itself. It is, as you say, it's kind of, OK, new rules.

4:08Katie Martin: And as, you know, real finance devotees know, about every other meeting when the statement comes out, the committee also releases a set of economic projections where they say, here's what we think rates need to be. Here's where we think unemployment is going. Here's how, you know, et cetera, et cetera. And the most famous part of this statement is the so-called dot plot, where each voting member of the monetary policy, no, all members, I'm sorry, of the Monetary Policy Committee put these little dots on a kind of calendar of the next couple of years showing where they think appropriate monetary policy will be this year, next year, the year after that, and so on down the road.

4:52And it was speculated, is Warsh going to put a dot?

4:57Katie Martin: And indeed, he did not. We were one. We lost a dot. And that's Warsh kind of leading by example in his campaign of making everyone shut up. I'm not going to try to predict the future out loud. I don't think that does the world any good. And so that was the second shocker, even before the press conference began, you know, 18 dots instead of 19. That's it.

5:21Rob Armstrong: So the dots are always anonymous. So do we know that the missing dot belonged to Walsh?

5:27Katie Martin: No, he confessed that he was the dot burglar in this case. And when the press conference started, this continued. He said, you know, we're not going to say much, and especially we're not going to say very much about the future. And so several times he was asked in ways both veiled and explicit. What are you going to do if this happens? What are you going to do if that happens? And he just said, all I can do is refer you back to the statement. We didn't raise rates and suck it up.

6:02Rob Armstrong: So Rob, before we get into some of the nitty gritty about what Walsh said and didn't say, I'm interested, what was his manner like? Did he seem at ease with the press? Did he seem to like the questions? Did he seem nervous? Did he seem overconfident? You know, what were the vibes?

6:20Katie Martin: His tone was, I would describe it as polite, but firm. I wouldn't say overconfident. But there was a new sheriff in town vibe there, where, you know, from question number one, And from his opening comments, he was setting down some lines. And he was doing that in a friendly way, but he was really representing firmness and projecting firmness. This is not a negotiation between me and the press. You know, I'm going to answer the questions politely, but there are, for me, there are lines in place that shall not be crossed. And this actually crossed over into policy and effects on policy. He very, very firmly and plainly said several times, inflation is too high.

7:22Katie Martin: Inflation is a matter of monetary policy. In his famous phrase, inflation is a choice. And we will put a stop to this. And that last point was a change in tone from the way Powell discussed it, where he said... Yeah, his predecessor, Jay Powell, yeah. Jay Powell, the predecessor, would always say things like, the committee remains firmly committed to satisfying our dual mandate, or similarly, like, aspirational lines. And the message from Warsh was, we will achieve price stability. Period. Not we're trying, we're we're doing. It's going to happen.

8:06Rob Armstrong: OK, good luck, Kevin. This is the contradiction that is at the heart of all this, isn't it? So the assumption, and it's a reasonable one, is that he has been put into this seat, effectively, by Donald Trump to cut interest rates. And Trump has made a lot of noise about what a numbskull and a moron Jay Powell was for not cutting rates, you know, before now. And he's been just like lashing out at the Fed at every opportunity to say it needs to cut rates, it needs to cut rates. Walsh comes along on his first meeting. He does not cut rates, which seems to be the sensible thing to do. And all of a sudden Trump is saying, well, you know, whatever.

8:46Rob Armstrong: I'm sure he's made the right decision. But ironically, the message that came from Walsh was surprisingly hawkish, right? It was pointing in the direction of taking a tough line on inflation, which all things equal implies higher interest rates, which is the opposite of what Trump has been talking about forever. Maybe you've been right all along, Rob. And, you know, Walsh has said, you know, yes, sir, no, sir, absolutely. I will cut interest rates to get the job or implied something of that flavor. But once you're in the seat, you just do the job properly.

9:17Katie Martin: I hope that's true. I don't think we got conclusive evidence that that is true. It's not like Warsh ripped his applying for the job mask off, laughed maniacally and announced that rates were heading up. Right. But he did make that firm statement. Inflation is too high. That's our fault. Things are going to change around here and we're going to get it under control. and he was backed up, by the way, by a committee, everybody else did submit one of those dots that we talked about. So that was the kind of double whammy hawkishness of this meeting. Warsh sending the, it's our fault and we're going to fix it message and the committee going 50 % in on a prediction of a rate increase this year.

10:04Rob Armstrong: Okay. Yeah.

10:06Katie Martin: I don't think that's quite conclusive. Certainly the market read this as very hawkish. The two-year treasury yield, which responds to expectations, market expectations for Fed policy, gave a quite significant and dramatic leap after the meeting. But I don't think this performance as a hawk was totally convincing. And I'll give you the most important example of why, which is his answer to an excellent question by our colleague, Claire Jones, who is at the press conference representing the FT. And she asked the following extremely straightforward question. If inflation is too high and inflation is always a matter of bad monetary policy, why are you not at this meeting raising rates?

10:54Katie Martin: This is a tremendously straightforward question and not about the future, by the way. And Warsh, pretend it was a question about the future. I can't answer that. We'll meet again in six weeks. No more four guns, but no. So now he's not answering questions about the present and the past too, right? That's the whole point. But she's not asking about the future. She's asking about the past. Why didn't you do it? Why did you do this thing in the past? And so Warsh's refusal to speak to the future actually extends to the present and the recent past, as it turns out. And I think we deserve an answer to that question.

11:33Katie Martin: Right. Given his other statements, why doesn't the committee think we should be raising rates? Why doesn't he think? I thought that was a legitimate question. We did not get an answer, which means there may be a dove back there somewhere.

11:47Rob Armstrong: Yeah. What is the future? Time is a flat circle. So I gather he was talking about no fewer than five task forces to look at Fed. how the Fed communicates, how the Fed does its job. Why not just, here's an efficiency gain. Why not just have one task force and get it to do five things? But anyway, what's going on with these task forces?

12:16Katie Martin: He really did back up the task force truck and dump it on the audience. And it became a bit of a joke by the end of the conference. Every question he would answer, well, we have a task force for that.

12:27Rob Armstrong: Amazing.

12:28Katie Martin: And look, I think institutions need reform. whether you're a company or a newspaper or a central bank.

12:36Rob Armstrong: But not a podcast. We can't change anything.

12:38Katie Martin: We will never change. We will never be reformed. But every once in a while, other things besides this podcast, you know, you need to sort of take all the sheets out of the cupboard and shake them around and, you know, bash out the rugs. And so I think that's all fine. To my eye, by far, the most important of this phalanx of committees is the one that will be devoted to deciding what is to become of the Fed's multi-trillion dollar balance sheet.

13:08Rob Armstrong: So this is the big pot of money that the Fed has accumulated as part of its efforts over the years to save the financial system from disaster has basically been to buy loads of bonds. And now it's sat there with a huge pile of bonds and it's thinking, huh, what do we do with this stuff? and different central banks are dealing with this issue differently. But as you've pointed out on this show before, like Walsh is like that guy who's been like, you know, throwing little bits from the peanut gallery for years saying, you've got to cut your balance sheet, you've got to cut your balance sheet. And now he's in the hot seat and it's like, okay then, Kevin, let's see how this is going to work out for you.

13:45Rob Armstrong: What do you got to do? Exactly.

13:46Katie Martin: And of course, the reason the balance sheet is important is because the bonds on the Fed's balance sheet, The other side of that coin is cash inside of the financial system. So when the number of bonds the Fed holds goes up and down, you're basically shoving liquidity into the financial system or taking liquidity out, which is a sensitive business. When there's not enough cash floating around the system, accidents happen. People worry about it. The money markets freeze up. You have sell-offs, et cetera. So it's not just like, la, la, la, we're going to just sell all these bonds into the market and it'll be fine.

14:25Katie Martin: So everybody knows it's a tricky business. But he's been hating on this for 15 solid years. He's been complaining. Big balance sheet is bad. It causes inflation. You know, we can have an argument about whether he was right or wrong. Parenthesis, he's wrong. But so that was probably the biggest question on my mind or one of the two biggest questions coming out of my mind was, what's he going to say about the balance sheet? And that question was largely answered in the statement itself. The second sentence of the committee's statement reaffirmed the committee's commitment to an ample reserves regimes.

15:01Katie Martin: That is a reference to the reserves of that cash that the Fed pushes into the financial system when it buys bonds. And it was saying, we're not going to mess with the balance sheet right now. So we will be saved, reformed, sanctified, free of sin at some later date, is what we learned.

15:21Rob Armstrong: What is it? Which I think... Lord, make me virtuous, but not yet kind of thing.

15:26Katie Martin: But not yet. And we are not virtuous yet. And I think, by the way, that is exactly the right decision. Even if you hate the big balance sheet, you do not want to sneak up on the market at this point. You want to make sure everybody sees any changes to this coming a mile away and has plenty of time to prepare for whatever you're going to do.

15:45Rob Armstrong: Yeah. I mean, the Bank of England knows this very well, right? So unlike other central banks, which just let these bonds sort of mature and die and then doesn't buy anymore, the Bank of England is doing what's called active quantitative tightening, which means that it's actively selling the bonds that are sitting on its balance sheet. And on the margins, that does weaken the bond market and pushes up government borrowing costs and everybody else's borrowing costs with it. But it is marginal. But that's because, as you say, everything is so well flagged. There are zero surprises here. The process is incredibly transparent.

16:19Rob Armstrong: It's as boring as possible. They like to just make sure this whole thing happens without ruffling the market. But again, you know, if Walsh were to ruffle the US government bond market, then we've all got a problem on our hands. It's not in his interest to do that.

16:33Katie Martin: I think this is going to be perhaps even more than increasing or decreasing interest rates. This might be the grand narrative of the beginning of his chairmanship, because we have a delicate financial situation in the United States where the government is running a huge deficit. All those treasuries have to be that the country issues in order to pay for its deficit spending have to be bought by somebody. And if at the same time as that is happening, you're giving lots and lots of government paper the market to buy. If the Federal Reserve starts pushing government paper into the market at the same time, investors might start to choke on all this stuff.

17:22Katie Martin: And, you know, we've had moments that looked like that was happening before. And, you know, can we have a small balance sheet and a big government deficit at the same time and a stable market at the same time? People have described that as the Fed's trilemma. You can have nice, calm markets, you can have a small balance sheet, and you can have big deficits, but you can't have all three at once, you know? And so how he juggles, how Warsh, as it were, keeps those three balls flying in the air is going to be one of the great narratives of this chairmanship.

17:54Rob Armstrong: Yeah. So the big narratives so far are make me virtuous, but not yet, but also like cut the comms, say less.

18:03Katie Martin: There may be some arcane rule in the Fed that describes this, but I don't think the Fed chair can make the other, like the regional heads of the Federal Reserve Banks, who are the people who are always making speeches about this or that and what they think about rates. Can he tell them to be quiet and sit in the corner? I don't think so. So it's a test of his leadership. I mean, he can shut himself up. He sort of did that in the meeting yesterday. He did it by erasing his thought. But can he make other members of the monetary committee shut up? I don't really know. Can he make Jay Powell shut up?

18:35Katie Martin: Is everybody going to play nice? I don't know.

18:37Rob Armstrong: Speaking of shutting up, let's do exactly that and come back in just one second with Long Short.

18:53From globalization to innovation, sustainability to market volatility, there's always more than one side to a story. Explore different perspectives on today's most important business and economic issues with the Flipside podcast from Barclays Investment Bank. Hear two research analysts in a lively debate and get insights from every angle to further inform your view. Listen to the Flipside on your favorite platform.

19:22Rob Armstrong: okie doke it is time for long short that part of the show where we go long a thing we love or

19:27Katie Martin: short a thing we hate rob what you saying i am short ai model revenues at least in the near term it seems to me we're getting a lot of stories about how companies are like whoa this stuff is expensive. And so we got the big one was from Uber, who was like, you know, we blew through our AI budget in the first couple of months of the year, we're going to use cheap AI models and only use the really fancy ones, the frontier models once in a while. And I think in general, so there's this little trickle, this little drumbeat of like, man, this stuff is expensive. I wonder if, you know, we had this wild growth in revenues at the model builders like OpenAith and Anthropic.

20:12Katie Martin: I wonder if we're hitting a little bump in that road and i'm guessing that we are thrillingly yet

20:18Rob Armstrong: another pronunciation by rob of anthropic it's just every every day i know i have an infinite number and anthropic is it now i wish to reiterate my short of these confounded smart glasses that are just everywhere. Everyone is launching a new type of smart glasses. The reason I'm reiterating my opposition to these ugly, awful glasses is there's a new set of ugly, awful glasses that's come out of the Snapchat people, Evan Spiegel. They're ugly as hell, these glasses. They make you look like a thunderbird. And I just, what are we doing here? Like, this is madness. We're just down with this sort of thing.

21:06Rob Armstrong: We're just developing a surveillance state out of nowhere for no good reason whatsoever. It's a golden age for perverts and weirdos and I don't like it and I wish these things to be banned. I've made this lecture before and I will make it again. I hate these things.

21:23Katie Martin: I welcome the golden age of perverts and weirdos. These are my people.

21:30Rob Armstrong: Looking forward to seeing you, Rob, in New York in a couple of days. Listeners wish me luck. We will be back in your ears on Tuesday, so listen up then. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forehead. Special thanks to Laura Clark, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free and a 30-day free trial is available to everyone else. just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.