Trump Taps Warsh For Fed Chair, Furman Reacts to Rate Hold

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1:26This is Wall Street Week. I'm Michael McKee, in for David Weston, who's out on assignment. This week, the news all of Wall Street has been waiting for. President Donald Trump announcing his pick for the next chair of the Federal Reserve. Kevin Warsh, a former bank executive and Fed governor during George W. Bush's presidency, is set to take over from Jay Powell when he leaves the seat in May, pending confirmation in the Senate. On the heels of Trump's announcement, I spoke with Fed Governor Stephen Myron, who might find a like-minded colleague in the new Fed chair. Chairman Designate Warsh has a long and illustrious career in history.

2:03as a very insightful thinker on monetary policy. I think he's a fantastic pick from the president. I think he's got enormous credibility. I think he's got enormous gravitas. I think he's got enormous respect from financial markets, from economists, from everyone. I think he's going to do just a knockout job. I want to talk about your experience. You came to the Fed from the White House, and I'm sure you know people said he was just put there to do what Donald Trump told him to do. Did Donald Trump tell you to do anything in particular, And do you think he told Kevin Warsh that? And even if he didn't, how do you how did you and how would Kevin fight the perception that he's the president's man inside the Fed?

2:44Look, the president has never, ever asked me to do anything on monetary policy. He has never asked me to do any specific action on monetary policy. He's told me his views on monetary policy, but he tells the whole world his views on monetary policy. You know them as well as I do. Right. That's not a secret. He's never asked me to do anything. And I wasn't in the room with any of, you know, Chairman Designate Warsh's conversations with the president or anybody else involved in this election process. So I don't know what those conversations were like. But if they were anything like the conversations I had with the president about monetary policy, then he wouldn't have asked him to take any specific actions.

3:18Well, how do you how do you get the public to realize that? You do that by taking policy actions that are consistent with the data. And I think that, you know, I've laid out a case where the inflation measures that are consistent with supply, demand and balances in the economy, the inflation measures that are relevant for monetary policy are indicating that there's no material overheating, that there's no material inflation issues in this country right now. So by taking policy steps that are consistent with the economic data that are justified by the state of the economy, I think you're delivering the right policy.

3:52Earlier this week, David Weston spoke with Jason Furman after the Fed's decision to keep rates steady. Furman is a professor of economics at Harvard and served as chair of the Council of Economic Advisors under President Obama. So, Jason, we heard from the Fed this week, and I guess I'd say like the kid in the back of the car, are we there yet? We're looking pretty close. And they just sounded happier than they've sounded in a while. It's interesting, they didn't even talk about balance of risk. They said, we're aware of both the risks, but they both have diminished. What's happened that's given them more confidence, apparently, than before?

4:28Well, the unemployment rate ticked back down, and a lot of people are expecting maybe it'll be stable this year, and the couple-year rise we've seen will come to an end. On inflation, the numbers haven't gotten much better, but there's a real softness in them. There's a little bit of softness in the labor market. There's some quirks that have been elevating the numbers. And so I think it's reasonable to think inflation's going down, not up as well. The Fed will remain data dependent, that is to say, things could change. And so things could change for the rest of the year here. If it changed, for example, on inflation, where do you think it would come from?

5:04On inflation, it would be, first of all, inflation expectations. And different measures are saying different things. Some of them, for example, the conference board this week had scarily high inflation expectations. I think that was probably people reflecting the political situation and their general fears about the world, not a specific forecast for inflation. That's one place it could come from. Another place is if we do see a lot more tariff pass through going forward than we've seen to date. I think we're through most of the worst of it, maybe another quarter or two. But this is an unprecedented situation in terms of the way we've raised tariffs.

5:39So we can't be totally confident about how it plays out. And then the very last thing is there's a lot of tailwinds in the economy right now. There's a fiscal expansion. There's a data center expansion. There's a weak dollar. All of that will put upward pressure on the economy. Will it show up in real growth? Will it show up in inflation? No one can be totally confident of the answer to that. Do you have a theory about why we haven't seen more inflation because of tariffs so far? I mean, if we went back a couple of years, a lot of people would have predicted we would see more than we have. Why haven't we?

6:09Businesses have absorbed a lot more of it than we were expecting. Some of that may be just temporary, and eventually they'll pass it through. You look at the auto companies, and they're selling cars at a loss. They're not going to sell cars at a loss forever. So if the tariffs stay there, they're going to raise their prices. The tariffs have also just keep getting dialed back. So originally, the announcement was for an average tariff rate above 20%. Now we're tracking around 11 % or 12%. So it's maybe half as many tariffs as were originally announced. So unemployment has also stabilized, actually went down a little bit.

6:46What is the cause for that? Because on the one hand, we hear businesses don't have the same certainty. They're a little more reluctant to hire. I think there's a consensus. They're not hiring as robustly. At the same time, we don't have more unemployment. How much of that is because we just limited the supply because of immigration? Most of it is because we limited the supply because of immigration. We just don't need that many jobs to keep the unemployment rate constant. We haven't been adding that many jobs lately. But in an economy with an aging workforce, with low fertility rates, absent immigrants, we wouldn't necessarily need any jobs to keep the unemployment rate constant.

7:22The Fed decision and this conversation was not the only news of interest to Bloomberg viewers, listeners, watchers, readers this week. We also had a lot of talk about the U.S. dollar. The dollar has weakened rather significantly. And we had President Trump say, yeah, sure, it'll seek its own level, which is not normally what I expect to hear out of the President of the United States. Yeah, you know, whenever I hear a Treasury Secretary say we believe in a strong dollar, there's a part of me that's sort of bothered by that. First of all, it's not like up is always good and down is always bad. It depends what you want the dollar to be.

7:54Moreover, it's not clear why markets should care when a Treasury Secretary says that. So in a way, I found it actually quite refreshing. that President Trump, first of all, is open to a weaker dollar, and second of all, actually said the correct thing, which is the market's going to decide. It's not going to be words from him, Scott Besant, or anyone else that's going to decide where the dollar goes. So I sort of found that statement slightly charming. At the same time, the president explained why, in part, he liked that, because he said, we get to sell more. It really helps our exports, which I think is true.

8:25It was lower price, essentially, to the rest of the world. But he didn't capture the other part of it, we could be having higher prices for what we have here. It could, could it not exacerbate inflation? Absolutely. And I think it might be the right thing for the U.S. economically. We have too large a trade deficit, we still do, and a weaker dollar would help redress some of that imbalance in the United States, some of those global imbalances, but it would do it at the expense of American consumers. Higher prices would drive consumption down. Historically, it's actually quite unpopular to have weaker currencies.

9:00In fact, in countries around the world, you've seen governments toppled when the currencies weaken precipitously. I don't think it's going to be as dramatic in the United States because we don't trade as much as many other countries do. But on balance, my guess is this might be good economically, but bad for him politically. We also this week had a fair amount of turmoil, volatility, I guess we'll say, in the Japanese government bond market. What is going on there? Is that simply an adjustment of the economy coming off of a zero inflation base, zero rate base? Or might there be something more profound?

9:34Look, for a long time, there were the laws of macroeconomics that applied to every country on Earth except Japan. And then there were a separate set of rules for Japan. And this week looked to me like the normal rules of macroeconomics applying in Japan too. So the only thing that was unusual about it was that it was normal. And we've gotten just so used to Japan being anything but normal. At the same time, Japan has a fairly high ratio of borrowing to its GDP. Certainly, I think the highest in the G10. They don't have as much fiscal headroom to deal with things. And part, I think, of what happened with the JGPs was when Prime Minister Takeichi said, you know, we're going to suspend some of these taxes.

10:14And they explained how she's going to pay for it. How much flexibility do they have? Could it be an early example of sort of pressures on governments, including the United States government, of having such high debt to GDP ratios? Yeah, I mean, you think about when Liz Truss made her announcement and the huge blowback against the pound. This was a bit smaller than that, which makes sense. Japan is a bigger economy and has a larger base of domestic saving relative to the UK. But it's not quite at U.S. level of exorbitant privilege. And even if it were, it's way above U.S. levels of debt and way above U.S.

10:49levels of borrowing. Now that you also have inflation there for the first time in a while, there's, I think, good reason for investors to want to be compensated more for lending to Japan than historically they had demanded. You, of course, are an economist. But geopolitics can hit economics at the same time. We are seeing a back and forth of the United States and its traditional allies about exactly who's on whose side and are we together or not. What effect could that have as apparently maybe some boundaries start getting built? Yeah, so so far, one of the surprises to me last year was that most countries in the world did not retaliate to U.S.

11:29tariffs. Canada did. China did. most everyone else prepared plans, put them on the shelf, and they're still sitting there on the shelf. The question is what happens this year? With Greenland, it seemed like there was a more credible threat of retaliation, and that was part of why the president may have backed down on that. Are you going to see more of that? And I think to some degree, it'll depend on the direction of travel for our tariffs. If we start peeling them back, making exceptions and reducing them, then maybe other countries will stay quiet. But we try to do another round on top of what we've already done.

12:06And I think we'd see a lot of retaliation. But then again, I thought we'd see retaliation last year and I was wrong then. Coming up, David Weston brings us the stories of Trump-style state capitalism, how changes to the food stamp program work through the U.S. supply chain, and the U.S. sports business that's even bigger than the NFL. All that's still ahead.

12:37What's driving the markets this week? What's on investors' minds as they look ahead? Find out on the Markets Podcast from Goldman Sachs. A breakdown of market moves and macro signals in 10 minutes or less. The Markets Podcast from Goldman Sachs. Listen now.

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13:38This is a story about what happens when the referee decides to play in the game. The Trump administration has not been shy about taking ownership interests and otherwise participating directly in businesses that we otherwise thought were in the private sector. Our colleague Michael McKee brings us up to speed on what's been done so far. My administration will offer GM and Chrysler a limited additional period of time. It isn't a new practice. The government took stakes in auto and insurance companies during the great financial crisis. But it is a shift. At that time, the idea was to provide funding backstop to keep the companies alive.

14:15Both General Motors and Chrysler were effectively insolvent, facing collapsing sales, frozen credit markets, and imminent bankruptcy. The U.S. ended up owning about 61 percent of GM and 10 percent of Chrysler. When they returned to health, the government sold its shares, in both cases at a loss. Today the Trump administration is taking significant equity stakes in a number of American companies. 10 percent in chipmaker Intel, a 15 percent stake in rare earths firm MP Materials that came with a government guarantee on product prices and sales, shares in companies such as Lithium Americas and Trilogy Metals, a so-called golden share in Nippon Steel.

14:58This time, the goal isn't to prevent bankruptcies, but to make a profit and theoretically strengthen supply chains for American manufacturers. Administration officials insist national security is at stake. China, Russia and other malevolent competitors cannot be allowed to get a strategic advantage in energy, defense production and AI. The government backing can certainly help. MP materials shares rose 224 % last year. Critics say the government should not be picking winners and losers or influencing outcomes in the private sector. The government's goals may not align with the company's and lead to misallocation of capital.

15:39Ownership may reduce competition and innovation. State capitalism is a slippery slope away from free markets. It's not as if the U.S. government has never taken ownership interest in private companies before, but this time is different. I think a number of things are different. First of all is simply the number of situations. He's done everything from a golden share in U.S. steel to stock in Intel to what you might call an export tax on chips to China. It's just all over the place. There doesn't seem to be any particular rhyme or reason to it. Steve Ratner is chairman and CEO of Willett Advisors, which invests the personal and philanthropic assets of Bloomberg founder and majority shareholder Michael Bloomberg.

16:25Ratner served as the point person for President Obama for restructuring the U.S. auto industry during the great financial crisis. When I was in the government and we thought about taking stock in Chrysler and General Motors, we went through a whole process of what we called the U.S. government as shareholder, and how would this work and what would we do and what were the guardrails, and a lot of thought went into it. This just seems to be the opposite. And so it's a hodgepodge of things, and it feels as much the president is just doing this because he can. He kind of keeps forgetting he's not in the private sector anymore, and he sees money on the table and he just goes and tries to get it.

16:59We took the interest in the auto companies not because we wanted to, but because we had to. I'll never forget when we went to the White House and basically said, the only way we can save General Motors is to in effect nationalize. It takes 60 % of the equity. There was a lot of pushback, as you would imagine, and eventually everyone realized it was the only choice. So it was a last resort, not a first resort. Adding to the ad hoc nature of the administration's intervention is it's targeting individual companies rather than entire sectors. Sarah Bowerly Dansman is Associate Professor of International Studies at Indiana and a Senior Fellow at the Atlantic Council's Geoeconomics Center.

17:38We're a market-based economy, and the idea is that we want markets to pick winners, not governments. And what we're seeing in the current administration is much more willingness to pick particular winners. And the Trump administration has used the device of taking interest in order to overcome political resistance to deals that it believes will be good for the economy overall. Like when it took a so-called golden share in U.S. steel. I do think the case of U.S. steel is a little bit different. It was a very controversial merger. I personally thought it was perfectly fine. Steel is not a national security commodity these days.

18:20You can buy steel anywhere in the world. People would love to sell it to you. But it was politically a very tough one. And that one I would actually give the White House some credit, that it was a clever way to get past the political opposition. It does not involve any ownership. I doubt they will ever exercise it. So, yeah, I'd put that in a different bucket than saying that NVIDIA has to pay an effective tax on sending chips to China. Whatever the justification, when the government becomes an owner, even a partial owner, in private business, it necessarily changes market dynamics, injecting factors beyond simply supply and demand and economic performance.

18:57The concern is that the more that the U.S. kind of pushes in this direction of picking specific winners and therefore losers in industries, so that it distorts markets, right? And we, as a market-based economy, we have a long track record of seeing that when market actors are the ones that are generating and evaluating information and then making capital allocation decisions on the basis of commercial preferences and commercial interests, that we tend to see over the long run that that leads to more innovation, more wealth, more economic development as a whole. And the concern is that the more that the government gets involved in individual business decisions, the more we are kind of breaking that kind of market-based understanding of how information is generated in an economy and how companies and how investors make decisions.

20:00And that is an important distinction because when the government is taking direct stakes in companies, the concern is that now that company is going to be pressured to not always make the best business decisions on the basis of kind of commercial concerns, but now also political concerns. The free market purist would say that the government should never get involved as an owner in American business. But does the performance of China in advancing rapidly in important sectors argue for some move away from purely private ownership? If you talk to anybody in China, they would tell you that the state-owned enterprises are almost universally less well-run than the purely private companies.

20:47On the other hand, when Xi Jinping says our strategic priority is to develop a chips business, everybody marches toward developing a chips business. And lo and behold, they make enormous progress. And so it's a very tough balancing act. I think on balance, my view would be better to do less than more or none rather than some because I think the chances of getting it right for a government are relatively low. Does the experience with China so far actually almost require the United States to revisit the balance between the government and the private sector? I think that China is a very different country with a different political culture.

21:27It's organized in different ways. When you have so many workers who are integrating into a formal economy and through formal work and factory work with very long hours, it's very hard to see how that translates into the type of economy that would work in the U.S. and that citizens in the U.S. would actually feel good about. So I think that we want to be careful to not become China in our kind of quest to ensure that we're able to compete in the global economy in which China is doing very well right now. That said, there are specific areas of the economy that the Chinese model, and in particular concerns over Chinese oversupply, need more than just an uncoordinated market response to that.

22:23Whether it's semiconductors or steel or rare earth minerals, the Trump administration has justified its actions most often on the ground of national security needs. What role, if any, does national security play in this? Does that make it a more persuasive, if not compelling case for a government to have an ownership interest? Well, of course, it first of all makes the politics of taking stakes like this more tenable because national security concerns have bipartisan support. Congress should be part of the discussion around, you know, how much are we going to allocate in terms of funding to support these kinds of interventions into specific companies?

23:09How are we going to decide what are the strategic priorities? How are we going to ensure that the process through which companies are determined to be eligible for these kinds of programs is done in a way that is not about corruption and graft? We've looked around the world over the years and said a lot of countries are corrupt because of what the relationships are between private interests and government interests in various industries. What are the risks here, even of the appearance of corruption, as these investments are made in companies that often have some connection to the Trump family?

23:50I think we're past the point of appearance of corruption. I think we're fully in corruption. I think this administration, and I don't mean to sound like a partisan, but I've never seen anything like it in my entire life. People have said, for example, that Lyndon Johnson sort of tilted the board in favor of getting a bunch of television licenses in Texas that made him wealthy. Okay, maybe he did, maybe he didn't. But that was then, this is now, that was one thing, this is like everything. Whether you want to talk about meme coins, whether you want to talk about rare earth minerals, whether you want to talk about real estate developments in the Middle East, whether you want to talk about Jared Kushner raising$5 billion, of which virtually all of it, 99 % of it, came from the Middle East.

24:33This administration knows no bounds. Setting aside the potential morality of it, what does it do to the economy? I mean, we've thought for a long time that actually a free market economy served us well in terms of growth, in terms of jobs, in terms of standards of living. What are the threats, potentially, to the very foundations of our economy? Well, let's put it in a few different buckets. First of all, I think the corruption that we just talked about, as distasteful as it is and I find it reprehensible, it's small potatoes in the great scheme of an economy that's 20 plus trillion dollars. I mean, right, let's be serious.

25:06I think the government taking some of these equity interests or putting these like taxes, if you want to call them that, on things, also relatively small potatoes in the great scheme of things. I think the most worrisome thing, which may not fall exactly into the corruption bucket, is the fact that companies feel like this is an administration that will reward its friends and punish its enemies. The CEO of Exxon said the other day, for example, that Venezuela was uninvestable. It seems like an obvious statement to me. The president immediately said, well, I'm not going to pick Exxon to be my partner of choice in Venezuela if we actually get hold of any of this oil.