Prof G Markets: “What Happens if the Fed is Compromised”

Guests: Scott Galloway, Ed Elson, Claudia Sahm (Chief Economist, New Century Advisors; former Federal Reserve section chief)
Date: October 3, 2025
Podcast Network: Vox Media

Overview

In this episode, Scott Galloway and Ed Elson are joined by noted economist Claudia Sahm for a deep dive into the perils and mechanics of Federal Reserve independence, the risks of political interference, and the current state of the U.S. economy. They also touch on the fallout from the largest-ever private equity deal in gaming, AI hype in markets, and Sahm’s recession indicator (“the SAHM Rule”).

Key Discussion Points & Insights

1. The Largest Take-Private in History—Electronic Arts ($55B)

• Background: Galloway celebrates his correct prediction that 2025 would see “the largest take private in history” as Electronic Arts is bought out by private equity and Gulf investors ($55B) ([03:01]).
• Market Drivers:
  • Private equity has $3T “on the sidelines” (Galloway).
  • FTC and DOJ “feckless” in reviewing deals.
  • Gulf entities seeking diversification.
  • Gaming industry’s massive reach (half the world plays video games), but ad spend is lagging (only 3% of global spending vs. TV’s 25%).
• Investment Implications:
  • “This is sort of the perfect private equity play... you figure out, okay, how do we squeeze as much cash as possible out of this thing. It probably is going to be to the detriment of the gaming experience.” – Ed Elson ([06:07])
  • Galloway notes the risks of investing based only on excitement and hype, relaying his own losses in Epic Games and his more disciplined decision-making with companies like Warby Parker ([09:12]).

2. Addictions, Affirmation, and the Power of Markets

• The hosts discuss addictive behaviors around social media, money, and public affirmation:
  • “I’m addicted to money. I think way too much about it, and it infringes on the quality of my life... And the second thing is the affirmation of strangers.” – Scott Galloway ([14:13])
• They candidly discuss how personal psychology (addiction to money and status) intersects with professional and investor decision-making.

3. The Fragile Independence of the Federal Reserve — with Claudia Sahm

a. What Is Fed Independence, and Is It at Risk?

• Definition: Independence means the Federal Open Market Committee (FOMC) — technocrats, not politicians — decides interest rates ([20:24]).
• Current State: The Fed remains independent “right now,” but this independence is “under threat.”
• Major Threats:
  • Presidential attempts to remove sitting governors (e.g., Lisa Cook case—it could set a precedent for widespread removals ([21:49]))
  • Public and political pressure via social media or direct appointment of political loyalists
  • Recent appointments and dual roles—e.g., Steven Myron serving at the Fed and in the White House simultaneously ([24:14])

“If the President is successful [in removing Lisa Cook], we’d be moving into a world where the Fed very much is controlled by the President.”
— Claudia Sahm ([21:49])

b. What Happens if the Fed Loses Independence?

• Modern examples cited: Turkey and Argentina suffered instability and inflation after politicians took control of central banks ([22:30]).
• Risks include:
  • Maintaining artificially low rates for political gain → risky booms and inevitable inflation
  • Unpredictability and chaos (“It would really be a whole new world of just what does the President want today?” – Sahm, [23:23])
  • Erosion of confidence in the Fed’s ability to respond to data vs. political whims
• The Supreme Court’s upcoming decision on removal protections is a critical fulcrum ([28:21]).

c. Additional Signs of Erosion

• Reserve Bank Presidents:
  The possibility of purging district presidents if the administration gains majority control in D.C. ([25:25]).
• Terms and Protections:
  • 14-year terms for Fed Governors meant to stagger appointments and insulate from sudden regime change.
  • Legal ambiguity about “cause” for removal—could be tested in courts soon ([28:21]).

“If the President can decide what for cause is without judicial review... that really isn’t for cause.”
— Claudia Sahm ([29:13])

4. State of the U.S. Economy

• Current Dynamics:
  • “Low hire, low fire” labor market — hiring rate is down to post-Great Recession levels, but layoffs are rare ([29:58]).
  • Job-holders feel secure; new entrants or the unemployed face challenges.
  • Immigration swings have driven significant labor force shifts.
  • Recent months: net creation of <30,000 jobs per month—very low for the U.S. ([33:09])
• Macro Outlook:
  • No current signs of recession, “but it definitely, depending on who you are as a worker, makes a big difference.”
  • Immigration crackdown is starting to show effects via lower job creation.

5. AI Mania, Concentration Risk, and Market Fragility

• Market Concentration:
  • 10 companies = 40% of S&P 500 market cap; >70% of earnings growth ([36:37])
• Risk Analysis:
  • Historical analogies—transformative technologies often overhyped (like railroads, electricity).
  • Eventual corrections (drawdowns) may be sharp and could trigger recessions, especially in a low hiring environment.
  • “If there were to be an event that called into question the wisdom of some of the investments being made in AI, it probably would be sufficient to destroy enough wealth quickly enough to cause a recession.” — Claudia Sahm ([39:19])

6. The SAHM Rule: Recession Indicator

• Rule:
  • “When the three month moving average of unemployment is 0.5 percentage points above its 12-month low, that signals early recession.” ([39:44])
• Significance:
  • Simple, transparent; designed for triggering automatic stabilizers (e.g., stimulus checks) if written into law ([40:12]).
  • Reliable in most past recessions, but triggered false positive last year because of shifts in labor force post-pandemic/immigration.
  • Not currently signaling recession: “[The indicator] is nowhere near triggering, but... it probably given what’s happening with the labor force won’t be the first indicator of a recession.” ([43:34])

Notable Quotes & Timestamps

• On M&A Mania:
  • “We have basically a feckless FTC and DOJ that don't offer review of anything... It just kind of all adds up—we were going to see a big deal in gaming.” — Scott Galloway ([03:41])
• On Private Equity in Gaming:
  • “...your gaming experience is going to be kind of inundated with ads now as we see on social media.” — Ed Elson ([06:15])
• On Investment Lessons:
  • “It is still possible to lose money in an amazing company. Just as important as the underlying asset is the price you're paying.” — Scott Galloway ([09:00])
• On Addictions of Market Participants:
  • “I’m addicted to money... and the second thing is the affirmation of strangers.” — Scott Galloway ([14:13])
• On the Threat to Fed Independence:
  • “We right now have an independent Federal Reserve... And yet we are at a moment where that independence is under threat.” — Claudia Sahm ([21:22])
  • “If the President is successful [removing a governor], we'd be moving into a world where the Fed very much is controlled by the President.” — Claudia Sahm ([21:52])
• On Market/Hiring Fragility:
  • “If something were to happen in the world that pushed up the layoff rate… you would be laying off workers into an environment that has a depressed hiring rate.” — Claudia Sahm ([32:09])
• On AI and Market Concentration:
  • “If... something called into question the wisdom of some of the investments being made in AI, it probably would be sufficient to destroy enough wealth quickly enough to cause a recession.” — Claudia Sahm ([39:19])
• On the SAHM Rule:
  • “Even small increases in the unemployment rate can often be bad news... once it gets past that threshold, it just keeps going.” — Claudia Sahm ([41:15])

Important Timestamps

• 03:00 – Galloway’s prediction on mega M&A comes true.
• 06:00 – Private equity approach to gaming, ad spend thesis.
• 14:13 – Galloway on money and affirmation as addiction.
• 19:47 – Claudia Sahm joins: the state and meaning of Fed independence.
• 22:30 – What happens if the Fed loses independence; modern historical examples.
• 25:25 – Threats to Reserve bank presidents and further politicization.
• 28:21 – Supreme Court’s crucial pending decision on governor removals.
• 29:58 – Sahm on the “low hire, low fire” jobs market.
• 36:37 – S&P concentration and AI mania.
• 39:44 – The SAHM rule: background and application.
• 43:34 – The SAHM rule now: not (yet) signaling recession.

Tone

The tone is conversational, sharp, at times irreverent, with candid admissions from the hosts about their investments and personal vices. Claudia Sahm brings expert clarity and measured concern about central bank independence.

For New Listeners

This episode compellingly illustrates why Fed independence matters, how economic signals and tech mania intersect with market stability, and how even seasoned investors fall prey to hype and human frailty. The conversation with Claudia Sahm is especially insightful for anyone concerned about the intersection of politics and monetary policy, and for understanding how to gauge genuine warning signs of recession amid noisy, shifting data.