[audience clapping]

Well, thank you very much.

Uh, it's very good to be here with Jonathan.

Jonathan and I worked together both at The Boston Globe, at The Wall Street Journal, and then I elected not to follow him to Bloomberg News.

Hope that's okay.

[laughs] Um, and, uh, you know, you know you're old when people write books about a decade that's forty-five years ago, and you actually remember it.

[laughs] So I, I thank you for doing this, that service, Jonathan.

Right

Is that the sole driver behind those rising rates?

Well, there's a supply and demand thing.

So, the supply of borrowing is how much money the Treasury borrows, and the demand is how much investors are willing to pay for it.

And what's happened is the Treasury is borrowing more and more because we're running big deficits, and now there's a new player.

All these hyperscalers are borrowing a lot at the, at long maturities, 10-year, 20-year, 30 years.

And that used to be the place where the, where the, um, where the Treasury had wo- didn't have much competition.

So what's happened is we have a strong economy.

Are there any signs to back that up?

What is the rate going above 7% mean for homebuyers and the housing market?

Right.

Well, actually today, according to Bankrate, which is the daily thing, it's up to 7.2% today.

A year ago, it was 6.3%.

So on a mortgage of $250,000, that's an extra $1,800 a year in payments.

It's like having a 13th month of mortgage payments.

So it's a big deal.

thing.

What is the rate going above 7% mean for homebuyers and the housing market?

Right.

Well, actually today, according to Bankrate, which is the daily thing, it's up to 7.2% today.

A year ago, it was 6.3%.

So on a mortgage of $250,000, that's an extra $1,800 a year in payments.

It's like having a 13th month of mortgage payments.

So it's a big deal.

thing.

But

what's happened is that I think a couple of things.

One is when interest rates are low, you don't worry about how much you're borrowing.

And we went through a long period, a luxury of that.

And it turns out that even if sometimes we think our economy is a mess or the debt's a mess, It looks relatively good compared to other countries, so people kept investing their money in the U.S.

Right.

And what's frightening, so we know we could borrow more than we used to think, but when you look at the projections, and the projections are based on we're an aging society, we have low fertility rates, healthcare continues to rise faster than other things, this thing goes up and up and up, and you say to yourself, okay, this can't go on forever, and it can't.

I don't know when, either as Mr. Russell, but it's coming.

So, What should we expect? What should we be thinking about?

So in one respect, in a way, the economy made things a little easier for Kevin Walsh because there's no chance of cutting rates anytime soon.

We're at full employment.

Inflation is above target.

At least as we talk, oil prices are still high.

So there's no case for cutting rates.

So he doesn't have to make the argument to the FOMC.

Fed?

You know, he a- was actually very collegial in his approach and kind of teasing with them and being very playful, and he also said, "Look, it, we all need to work in concert to really get inflation down."

Right.

Well, I think that, I agree with Claudia that he's very disciplined and he's determined not to give very many signals.

On one hand he said inflation risk has come down, but of course a lot of that is oil prices.

On the other hand, he reiterated that we're gonna deliver price stability and anybody who thinks otherwise will be disappointed.

So a little bit for everybody there.

Um, I think, yeah, it, what we learned about his style is he's v- he's willing to poke at the reporters, he's very comfortable doing that, um, and he kept invoking how he's now one of this small band of central bankers and we were all together during the global financial crisis.

David, how do you expect the private sector to fill this void? Yeah.

Before we dive into details, what was the headline for you?

I think the headline was that Kevin Warsh is very confident.

He didn't make any mistakes, but he's very reluctant to show anything about what he thinks about monetary policy, which, as you pointed out, that nine of the 18 people who put dots on their projections, Kevin Warsh didn't, see a rate increase in the next year, in the, before the year's over.

And that's why...

And the market saw that.

So Warsh's attempt to "We're not gonna tell you what we're gonna do" was kind of undermined by the fact that they have a system where the other people are telling the markets what they think that they're gonna do.

How do you think Warsh handled that? How did he address those concerns today?

Well, the, um, the members of the e- Federal Open Market Committee who put projections down said they expect inflation to be worse than they had expected when they did it three months ago.

How do you read that divide?

Well, I think that the situation is very uncertain.

And what the Fed is saying is right now we seem to be at full employment and inflation seems to be a problem.

And I think that if inflation doesn't come down, they will have to raise rates.

But people have different forecasts about what's going to happen.

So treading water for now seems fine.

But, you know, it's interesting.

task forces.

But then to Larry's point, if things look a little bit better in a meeting or two, maybe we can start to bring back and pivot back more towards rate cuts.

The FOMC is pretty evenly divided here, and what will determine is not Kevin Warren's charisma, but what happens to the economy.

If inflation does come down, if the labor market softens, then they won't raise rates.

But it's hard to tell.

One point I think you haven't talked about yet is the sentence where they're reaffirming the policy of maintaining ample reserves in the banking system.

That is not consistent with we're going to rush to shrink the balance sheet.

So it'll be really interesting to hear how Kevin Walsh talks about the balance sheet if he does in the press

I don't think the statement is

Should this be a non-event event?

It will not be a non-event, uh, because everybody will wanna see is he really starting to change anything.

Will he put in the dot? Will he not talk about the dots? But I think Steve's point is a good one.

It's, it's really hard to appreciate how much power your words have when you stand up at that microphone.

And even though you're prepped for it or something, there's nothing like actually having...

All of a sudden, Kevin Warsh is in a position where his opinions really matter.

For 15 years, he's been ranting about the Fed, and some people listened and some people didn't.

And, and I do think that getting inflation to target at this point, given the cumulative increase in prices, is, is, shows accountability to voters given how, uh, disenchanted they are with, with the last five years.

David, if I were going to press the point a little bit, and I'm tempted to, I would say, well, defending the Fed's independence, is that kind of easy? You know, is it kind of easy to say, you know, I will not bow to pressure from the president when maybe he perhaps doesn't feel any real pressure, while at the same time their real job was to make sure inflation didn't happen and that score he was asleep at the switch?

No, I don't think they were asleep at the switch.

I think they misread the economy.

And when they realized they had misread it, they reacted very swiftly, much faster than anybody thought.

And they got inflation down without a recession.

So I associate myself with Dennis's remarks.

I don't see how you can say it is easy when you're in the gun sights of Donald Trump.

And yet I would be sympathetic to the idea that if you tighten in response to an oil price, a supply shock, you could make the economy a lot worse.

So what is your sense of when he might feel satisfied that things, as he puts it, things have calmed down, that he can step down?

Well, the US attorney has said that she's waiting for a report by the Fed's inspector general, which actually is something that Powell himself initiated several months ago.

My guess is that for the next few months, Powell will stay there.

He says he's gonna keep a low profile, and that sometime later this year, the IG will report, and the IG will say, "Eh, it wasn't well managed, but there were no criminal charges, or no criminal wrongdoing." And at that point, Powell will go.

That's my guess.

They have, they can move the board, but all the board members have to vote on the changes and the policy.Based on the current board makeup, are there people there who will disagree with Warsh, who would push back on some of these changes?

Absolutely.

And remember, monetary policy's made by a committee, the seven governors in Washington and five of the 12 Reserve Bank presidents out in the region.

Mm-hmm.

Uh, he would come out...

He came off very much as an inflation hawk.

He didn't even mention the Fed's mandate to maximum employment in his opening statement.

And the second thing was he seemed to be performing for an audience of one, Donald Trump.

He would not agree that tariffs raised inflation.

He would not agree that the president's f- flippant demand that we cut interest rates to 1% would lead to, uh, higher prices.

Yes.

Mm-hmm

...

the President on CNBC this morning does not sound like he's backing off on this building thing.

Uh, and so it may be a while before Kevin Warsh gets there.

I think that Kevin Warsh believes that he's so good at managing up and so articulate that even though he can't cut interest rates as fast as President Trump wants, he can somehow talk him down and make him quiet down, and, "You gotta understand, Mr.

President, I'm doing the best I can." And I think that's naive, that Washington is littered with bodies of people who thought they could calm down Donald Trump.

So I think, as I said in my piece in the Times, Kevin Warsh is gonna be judged by how he responds if the President attacks him, as I personally expect he will.

What would be your, your best guess right now as to how this all plays out in the next few weeks?

What should we know about Kevin Warsh?

Well, Kevin Warsh is actually a lawyer.

He's not an economist.

He's a very ambitious guy who has been an excellent networker.

He was appointed to the Federal Reserve Board by George W. Bush at age 35, younger than anybody else.

Um, he, he is a man who understands the markets.

He's very good with people, I think that'll serve him well, and he has sort of changed his stance on monetary policy over the years.

Can Kevin Warsh deliver those?

So he would probably say, you know, he's argued both sides of this for longer than people are giving him credit.

Well, I think, first of all, you can't ask somebody to hold the exact same views on monetary policy today that they did 10 years ago because the world is different.

So let's give the guy a bit of a break on that.

But he has turned more dovish as he's been campaigning, as he has for the last decade, to be the next Fed chair, and he's succeeded.

I think the big question is, which Kevin Walsh will arrive as chair of the Fed? Will it be an independent-minded guy who has some strong views about the balance sheet, who thinks that the economy is able to grow faster without inflation than we used to think because of AI and will do things guided by the Fed staff that's really independent of the president's wishes? Or will he be susceptible to the kind of criticism that Trump will undoubtedly give him that he's not cutting rates low enough, fast enough? And we don't really know yet.

That's the big question.

But do you think that's the right expectation, David, that that's a lever they're going to use?

Well, I think they've already begun to use it.

He said that if the president alone can determine whether somebody can be removed for a cause, and what that cause is, that that could, quote, "Weaken, if not shatter, the independence of the Fed." Why is the independence of this body so important?

So the ar- argument is that politicians, if they set interest rates, will tend to set them too low in order to get more growth now, and mo- and at the cost of more inflation later.

And so the US and other major capitalist democracies have decided it would be better to have an independent central bank that is insulated from that political pressure.

The Fed has a mandate set by Congress, maximum employment and price stability, and Congress has said, "You guys decide what's the best interest rate to achieve that goal."

Are they all of a piece, or should we be looking at them separately?

Um, they are definitely all of a piece.

I mean, as Amy pointed out, the court has a hard time here to explain why the Fed is special.

I can argue why the Fed is special, but I don't have to make a legal argument.

I mean, what do you think the response should be to those who feel that there's no independence to be lost because there wasn't any independence there?

I think they're wrong.

I think we have seen that over the last several years, the Fed has made some mistakes, but they've done it all in service of achieving their goals of maximum employment and price stability.

I think President Trump is upsetting the apple cart.

He is challenging the notion that the economy works better when the Fed can set rates independent of political pressure.

That's something that almost every modern developed country agrees with.

It's served us well for the last several decades with some hiccups.

But could Powell then make the case that that he's acting politically by sticking around?

So, what does that mix say about the economy and President Trump's stated desire to rebuild domestic manufacturing?

Well, in the good news department, we did see that private sector employment was steady and it's actually increased, the pace has increased a little bit through, since the summer.

Manufacturing, as you point out, continues to lose jobs, despite all the President's promises to bring it back.

I think that has to do, some of it has to do with tariffs, some of it has to do with automation.

And so what it suggests is that the economy is a little bit un-, it's un-, very uneven.

Healthcare, education, social services, they've been strong, but the private sector, manufacturing, and other service jobs have not been.

How much is that weighing on the overall jobs picture?

Well, we lost 168,000 jobs at the federal level in, over the last couple of months.

How much does speculation, David, over Powell's successor kind of overshadow the meeting or does it?

I think it does a little bit.

I think it gives Fed Chair Jay Powell just a little less clout than he would have had six months or a year ago.

I think you see he'll probably be able to get some people who are uneasy about a rate cut to go along just to stand behind him.

But I do think the Fed bank presidents are trying to send a signal that they're not going to be a pushover for Kevin Hachette or Scott Besson or whoever else takes Powell's job.

Do you have any intellectual problem with that?

Me, personally, no.

I mean, look, they're running a regime of what they call ample reserves.

allegations?

We know lots of little things and we don't have the whole picture.

Uh, at the time she did all this, interest rates were very low.

Might not have been any advantage to say it was not your primary residence.

Um, as you say, she's provided, her team has provided, obviously, to the press these documents that say she told him it was a vacation home.

It's a condo in Atlanta, which she doesn't appear, from her financial disclosures, to be renting out.

So, we have a lot of shreds of information.

Looking ahead, if the Fed cuts rates tomorrow, as expected, what does that mean for everyday Americans?

David, your thoughts?

Um, yeah, I basically agree with the letter writer.

I just wanna challenge Allison a little bit.

So, coffee prices are up almost 15% year over year, so we are beginning to see the effect of the tariffs.

Um, look, the Fed has two goals.

One is maximum employment and one is price stability, and it ha- when everything's pointing in the same direction, you or I could set interest rates, right? This is where judgment really matters, and they have to decide which goal are they further away from? And until now, they've been able to say, "Look-...

inflation is coming down gradually, we're a little worried about what the tariffs will do, the job market is very strong, we're gonna sit tight.

And so, I mean, David, when we talk about how Americans are feeling in this moment, what are you hearing?

So this was the Bureau's biggest revision in jobs numbers since 2000, so what's going on here? I mean, it seems like they got it pretty wrong.

Yeah.

Well, it was an unusually large revision, although economists at Goldman Sachs predict that the final numbers, which we get in February, will actually reduce the size of the error.

But here's how it works.

The Bureau of Labor Statistics surveys a sample of 120,000 employers each month to produce the jobs report, but they don't all respond on time, so it revises the numbers as more of them do respond.

Then, once a year, it compares those monthly tallies to the unemployment insurance records, which cover nearly all employers, not just a sample.

And that's the data we got yesterday.

So what, if anything, does this tell us about the state of the economy?

What are the risks? What are the implications?

I think we're wearing out the word unprecedented in this administration.

This is just another move by the president to assert control over every single aspect of the federal government.

Uh, he clearly wants to get control of the Federal Reserve Board, the seven governors in Washington, because he would like to see lower interest rates.

Importantly, there are... monetary policy is made by these seven governors, but also the presidents of five of the 12 Reserve Banks.

All 12 Reserve Bank presidents are up for reappointment at the end of February.

They are subject to be removed by a vote of the Federal Reserve Board.

They did block one of President Trump's picks back in his first term, but do you see that happening in a second term? Would Republicans push back on a nominee they view as partisan or someone who's not qualified for the role?