A (3:02)

Let me actually dig into that a little bit more because I know our listeners tune in every day to hear a lot about government meetings. But this is a case where that really matters, because I think there can sometimes be a misperception around the power of this position. It's both one of the most public, important positions in the world of finance, and yet, as you mentioned, it is overseeing a committee where the majority matters. And so can you take us just a little bit inside those discussions? I mean, how does the Fed Chair interact with their colleagues? How do they try to convince them and persuade them to take a particular course of action?

B (3:34)

Great question. And you're right. I sort of spent a bunch of time there at the Fed. I started when Greenspan was chair. I worked under the Bernanke Fed. And of course, for the end of that, Janet Yellen was the vice chair. So I've worked with her. Jay Powell was on the committee the whole time. So the cast of characters, quite familiar, and the process is important. So I would say a few things. The chair convenes the meetings. The chair creates the agenda for the meeting. The chair directs the staff on what the policy documents are that the committee is going to get. So there's a huge amount of influence, let's say there. But in order to actually get a specific outcome, there really is a vote. And we only have to look back a couple weeks to the last FOMC meeting when there were two dissents against the policy decision. Dissents are not super common. They don't happen at every single meeting, but they're not unheard of by any stretch of the imagination either. And if we go back over the past few years, lots going on with inflation and how the economy was going, was uncertain. Chair Powell took some dissents. If we go back to the financial crisis, Chair Bernanke took a bunch of dissents. If we go back even further through time, Paul Volcker, when he was there trying to staunch the of the high inflation of the 1970s, faced a lot of resistance within his committee and reportedly threatened to quit if he couldn't get his way and had to be very aggressive in trying to bring the committee along. So the chair has to find a way to bring the committee along with the plan that the chair wants to execute. Lots of tools at their disposal, but not endless power or influence. Does that make sense?

A (5:11)

That makes complete sense. So maybe my final question, Seth, is this is a tough job. This is a tough job.

B (5:18)

You mean your job and my job.

A (5:20)

Or not at all? The chair of the Fed. It seems especially tricky now. Inflation is above the Fed's target. Interest rates are still elevated, certainly mortgage rates are still higher than a lot of Americans are used to over the last several years. Asset prices are high. The valuation of the equity market is high. The level of credit spreads is tight. You could say, well, financial conditions are already quite easy, which can create some complications. I am sure Kevin Warsh is receiving lots of advice from lots of different angles. But if you think about what you've seen from the Fed over the years, what would be your advice to a new Fed chair and to navigate some of these challenges?

B (6:02)

I think first and foremost, you are absolutely right. This is a tough job in the best of times, and we are in some of the most difficult and difficult to understand macroeconomic times right now. Noted interest rates being high, mortgage rates being high. There's very much an eye of the beholder phenomenon going on here. Now, you're younger than I am. The first mortgage I had was 8.5%. I bought a house in 2000 or something like that. So by those standards, mortgage rates are actually quite low. So it really comes down to a little bit of what you're used to. And I think that fact translates into lots of other places. So inflation is now much higher than the committee's target. Call it 3% inflation instead core inflation on PCE rather than 2% inflation target. Now, on the one hand, that's clearly missing their target, and the Fed has been missing their target for years now. And we know that tariffs are pushing up inflation, at least for consumer goods. And Chair Powell and this committee have said they get that, they think that inflation will be temporary and so they're going to look through that inflation. So again, there's a lot of judgment going on here. The labor market is quite weak. We don't have the latest month's worth of job market data because of the government shutdown. That'll be delayed by a few days. But we know that at the end of last year, nonfarm payrolls were running well below 50,000. Under most circumstances you would say that is a clear indication of a super weak economy. But if we look at aggregate spending data, gdp, private domestic final purchases, consumer spending, capex spending, it's actually pretty solid right now. So again, that sense of judgment, what's the signal you're going to look for? That's very, very difficult right now. And that's part of what the chair is going to have to do to try to bring the committee together in order to come to a decision. So one intellectually coherent argument is the main way you could get strong aggregate demand, strong spending numbers, strong GDP numbers, but with pretty tepid labor force growth is if productivity is running higher and if productivity is going higher because of AI, for example, over time you could easily expect that to be disinflationary. And if it's disinflationary, then you can cut interest rates now, not worry as much as you would normally about high inflation. So the result could be a lower path for policy rates. So that's one version of the argument that I suspect you're going to hear. On the other hand, inflation is high and it's been high for years. So what does that mean? Well, history suggests that if inflation stays too high for too long, inflation psychology starts to change. The way businesses start to set their own prices can get a little bit loosey goosey. They might not have to worry as much about consumers being as picky because everybody's got used to these price changes. Consumers might become less picky because, well, they're kind of sick of shopping around. They might be more willing to accept those higher prices. And that's how things snowball. And so I do think that the new chair is going to face a particularly difficult situation in leading a committee in particularly challenging times. But I've gone on for a long, long time there. And one of the things that I love about getting to talk to you, Andrew, is the fact that you also talk to lots of investors all around the world. You're based in London. And so when the topic of the new Fed Chair comes up, what are the questions that you're getting from clients?

A (9:31)

I think that there are a few questions that stand out. I think a dominant question among investors was around the stability of the US Dollar. You could say a good development on the back of Kevin Warsh's nomination is that the market response to that has been the price action you would associate with more stability. You've seen the dollar rise You've seen precious metals prices fall, you've seen equity markets and credit spreads be very stable. So I think so far everything in the market reaction is to the point that you raised, consistent with this still being orthodox policy. Every Fed chair is different, but still more similar than different. Now, I think where it gets more diversion in client opinions is just what are we going to see from the Fed? Are we going to see a real big change in policy? I think that this is where there are very different views of Kevin Warsh from investors, some who say, well, he's in the past talked about fighting inflation more aggressively, which would imply tighter policy. And he's also talked more recently about the productivity gains from AI and how that might support lower interest rates. So I think that there's going to be a lot of interest when he starts to speak publicly, when we see testimony in front of the Senate. I think the other, the final piece, which I think again, people do not have as fully formed an opinion on yet, is how does he lead the Fed if the data is unexpected? You mentioned inflation and Morgan Stanley has this forecast that, well, owner's equivalent rent, a really key part of inflation, might be a little bit higher than expected, which might be a distortion coming off of the government shutdown and impacts on data. But there's some real uncertainty about the inflation path over the near term. In short, I think investors are going to give the benefit of the doubt for now. I think they're going to lean more into this idea that it will be generally consistent with the Fed easing policy over time for now, generally consistent with a steeper curve for now. But I think there's a lot we're going to find out over the next couple of weeks and months.

B (11:36)

Yeah, I agree with you, Andrew. I have to say I'm glad you're here in New York. It's always great to sit down and talk to you. Let's do it again before too long.

A (11:45)

Absolutely. Seth, thanks for taking the time to talk and to our audience. Thank you as always for your time. If you find thoughts of the market useful, let us know by leaving a review wherever you listen and also tell a friend or colleague about us today.

C (11:58)

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