B (2:53)

So Kevin Warsh was a Governor member under Ben Bernanke during the global financial crisis. He is remembered as a lieutenant to Bernanke, but he's remembered even more for In I think 2011 he voted for another round of quantitative easing. But in the meeting he said I'm going to go along but I don't think we should do this. And then he gave speeches afterwards saying he thinks it's a mistake. And so his signature from that point was I think to paraphrase, he thinks the Fed should have emergency power for the balance sheet, but the bar should be very high for using QE. And so he felt that in 2011. I'm sure he felt that post Covid in 2021 use it, use the balance sheet during emergency, but not beyond that. And he's been critical of the Fed for other things but I think the balance sheet is the thing he's best known for.

A (3:55)

He's also in some of these hearings and some of the statements and information we've gotten from him has communicated a different approach on, on inflation metrics, on communication itself. How meaningful would any of those shifts be in practice?

B (4:11)

They'll be meaningful. So let's go in order. What I think he'll do that's a little different than Jay Powell. Kevin Warship will be of the view that Fed presidents should talk less. He believes, and I agree with part of what he's saying, that the Fed has used forward guidance too much. That is it has said here's what we're going to do. The dot plot is a good example of giving people more forward visibility. And I think his worry is the dot plot boxes the Fed members in to a position and I think you may see him either get rid of the dot plot or downgrade it and encourage Fed presidents to talk less. We already talked about his views on the balance sheet. He's going to work much more closely with with Secretary Bessen to try to manage the balance sheet and I think he'll have some opportunities to do that. And then the last comment is he's been a big advocate and I agree with this argument. Just I disagree on the timing that AI adoption will be disinflationary over the horizon Chinese overcapacity, manufacturing will be disinflationary. And I think he's right that the issue he'll have at the FOMC table is at the moment, particularly because of the war in Iran, inflation readings are going north, not south. And they're going to want to be more receptive to his arguments when they see evidence of greater improvement. In headline inflation.

A (5:40)

Well, let's talk a little bit about the current policy stance and where we are. If he is confirmed, there's been a lot of discussion that it's not an easy task facing the Fed today. We have as you referred to rising energy prices, pushing up inflation. We also have some signs that the labor market is cooling. So how would you expect him to balance that dual mandate as he takes over this new position?

B (6:06)

So there's what he's going to do and then there's what would my advice be? My advice would be come into the job with a clean sheet of paper without any preconceived notions. Don't be rigid or predetermined. He argued in his confirmation and he mentioned the Dallas trim mean. You may have noticed that and I think you talked about other measures. He mentioned that the Dallas trim mean just to explain and I used to run the Dallas Fed. So we manage this indice it X's out extreme moves to the upside or the downside. So right now we've got an oil price shock and the Dallas trim mean says we're going to exit out. So he noted in his testimony that the Dallas trim mean is running more like I think 2.3 or 2.4, not 2 and 3 quarters. The danger with the Dallas trim mean is when you have an individual spike in one or two items, the Dallas trim mean will carve it out. What tends to happen with an oil spike is over the months it bleeds out into other items. So what starts as an unusual item up starts affecting 20 or 30 items. Sometimes a trim mean measure lags. And so I'd be careful. Again, I think you should look at the Dallas trim mean and other indices, but you have to look at the whole dashboard and you have to look at the trend. And so I don't know whether when it's all said and done, he will look at other indices. Overweight some versus others. I think you got to be careful about that. And I think this committee's pretty actually sophisticated about that.

A (7:43)

Well, the market seems to have a perception that Kevin Warsh is going to lean dovishly. So what do you make of that? I mean, how do you think rates could evolve over the next 12 to 24 months under him? And how much will the market prove to be right?

B (7:58)

I agree with the market that and I do believe he will argue aggressively that the Fed should anticipate not what's going to go on the next three to six months, what's going to go on over the horizon again AI Disinflation. He uses the 90s as a good example of productivity improvements and Greenspan looking through them. He'll argue that, however, the market is also saying the odds of a Fed rate cut in 2026 are basically now near zero and the first rate cut won't be till 27. And the reason they're saying that is, even though he'll argue that this committee is going to want to make sure they see visible evidence that inflation is moving back not at target, but near target. And remember, this committee is scarred by transitory and other things where they predicted what inflation would do and they were wrong and it scarred them. They want to be risk managers, not prognosticators. So there's going to be a debate and he's going to have to contend with that.

A (9:05)

And what do you think, Rob? Do you think that the market's right, that we're going to be on hold?

B (9:10)

Yeah, I do believe that the Fed right now, you've heard me say before, pre war was at neutral. The real fed funds rate is 3/4 to 1%. Add the inflation rate, that gets you to 3 1/2, 3 1/4 pre war. If anything, the war is going to push rates up. I Learned from my 11 years being at the Fed or associated with the Fed that it's a lot easier to forecast labor market developments than it is inflation. And so I have a healthy respect for how hard it is to forecast. I would be reluctant to move until I saw demonstrable improvement in headline inflation. Only then would I be receptive to the argument about anticipating. I don't disagree with the argument, but I disagree with the timing.

A (10:01)

I mean, leading up to all of this, though, was a general feeling, if we just take a step back for a moment, that the Fed was in danger of becoming less independent because President Trump clearly picked Kevin Warsh in part because he did have dovish views in some areas. Is that a valid concern as we stand here today with him poised to take over the Fed chair role?

B (10:22)

So I would remind people, as I've said on regulatory reform, that's not politically pendant. It hasn't been politically independent for the last 20, 25 years. And on working more closely with the treasury on the balance sheet, I think that'll be a little bit more gray. I think that's fine, actually. I think that's a good development. But to your point on the Fed funds rate, I do believe that he may lean to try to argue for disinflation. They may lean dovish, but he's got to get seven votes. And I think he won't have seven votes wired. He'll have to persuade. And so I think very quickly the job of the Fed chair, the Fed chair, I don't believe, can credibly be a dissenter. The Fed chair, his job is to, he doesn't get to do that. He has to manage the group. And so he's going to have to get himself in the middle of the debate. He's going to have to cajole, he's going to have to push. And so I think he will be politically independent. He'll have a leaning, but I think he'll be politically independent. And the fact that he's got a diversity of folks, first governors and then presidents who aren't going to be quickly replaced, they have longer terms, at least for the next two or three years and longer, he'll have to persuade. And I think that'll be a good thing for him. It'll be a good thing for the Fed.

A (11:42)

And do you think that'll also be the case when it comes to the balance sheet, as we've talked about? He has some clear views there, but you think changes would be gradual and

B (11:50)

he's got to convince, well, so on that he'll have more power. And so let's just explain the Fed. The balance sheet ran as high as 9 trillion. They've now run it to 6 and a fraction. I thought the last 2 trillion of QE they shouldn't have done. I argued at the time was overdone, but they've now walked it back. Okay, so regulatory reform, liquidity ratio changing, supplementary leverage ratio changing will allow the banks, I think, to own fewer reserves. If the banks don't need to hold as much reserves, the Fed balance sheet can be smaller. And so I think there actually will be opportunities working with Besant to run further down the balance sheet. But I don't think Besant or Warsh are going to want to run it off so quickly that they put more upward pressure on rates. Our problem right now is the curve has moved up. The 10 year is over 430 and I think they're going to be reluctant to do anything abruptly that could cause rates to inch up. And so that will be the governor on how quickly they move, I would guess when it's all said and then they'll be more deliberate.

A (13:04)

Okay, last question, Rob, then. So as Warsh takes over, what are you most focused on? What are you watching? What are you most worried about? I hear some inflation worry in some of your answers already.

B (13:15)

So let's go back to where we are pre war we thought, as you know Jan Hatzius believed in our team we were going to have 2.5% growth and inflation might start to cool in the last half. Unfortunately, the oil price shock has put a dent in GDP forecast closer to 2.1.7% for the second half of this year. That's a big step down and prices are stickier. The probability of central banks cutting has been pushed out. That's why the curve has moved up. And so we still have to analyze the demand impact and the price impact of this war. But in order to do that, got to stop and the strait has to get open and we need to begin the healing process. Until we do, we're very much in the fog and the Fed will do, I think nothing but keep analyzing, keep trying to understand they're a spectator a little bit to events that are out of their control and so we'll have to see how these events in the Middle east unfold.

A (14:16)

Thanks as always for joining us.

B (14:18)

Rob Good to talk to you.

A (14:19)

Alison thank you all for listening to this episode of Goldman Sachs Exchanges, which was recorded on April 27, 2026. I'm Alison Nathan. If you enjoyed this show, we hope you'll follow us on Apple Podcasts, Spotify, YouTube, or wherever you listen to your podcasts and leave us a rating and a comment.

C (14:40)

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