Lots More With Skanda Amarnath on the Risks of Kevin Warsh

UKG. Their HR pay and workforce management tools help business leaders empower their people, because when work works, everything works. Learn more at UKG.com/work. Bloomberg Daybreak is your best way to get informed first thing in the morning right in your podcast feed. Hi, I'm Karen Moscow. And I'm Nathan Hager. Each morning we're up early, putting together the latest episode of Bloomberg Daybreak US Edition. It's your daily 15-minute podcast on the latest in global news, politics, and international relations. Listen to the Bloomberg Daybreak US Edition podcast each morning for the stories that matter with the context you need. Find us on Apple, Spotify, or anywhere you listen. Bloomberg audio studios. Podcasts, radio, news. Oh, Joe, this is cutting. This is from Neil Dutta, a friend of the pod. Oh, yeah. All right. Read it out. Read it out. President Trump has picked everyone's least favorite candidate, Kevin Warsh, for the next Fed Reserve Chief. I, my hat to Warsh, who has managed to get selected after being passed over time and again, that's a remarkable achievement for him. Joe, I want a t-shirt that says ruthless utility maximizer. Black gold! Let's talk about losers. Who cares? I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the US. Skulls unlimited. Oh, what's the ticker for that? No, I think that like, in a couple of years, the AI will do a really good job of making the outlawed's podcast. How do I get more popular and successful? One day that person will have the mandate of heaven. We do have the perfect guest. You're listening to lots more, where we catch up with friends about what's going on right now. Because even when the oblots is over, there's always lots more. And we really do have the perfect guest. I'm just going to say what I find interesting right now is that, you know, like Trump announces someone and you expect a bunch of like liberal ninnies in the media to like shake their fists. It's like, oh, this isn't good. You know, it's like, there's a lot of predictable response. But it is interesting, to my mind, to someone like Neil, who is a, I do not associate him with liberal media group think or anything like that, as well as many others who are like, huh, interesting pick here. Well, I will say opinions kind of divided. Yeah. So Mohamed Al-Aryan tweeted earlier that he thinks Kevin's going to be a great fed share and he's observed. And this is a quote, having observed and interacted with Kevin during his prior tenor as Fed governor in academia. And as a fellow member of the group of 30, I believe he brings a strong mix of deep expertise, broad experience and sharp communication skills. So by the way, Jason Furman, too, he tweeted, yeah, Kevin Worsh is well above the bar on both substance and independence to be chair of the Federal Reserve. The Senate should ask tough questions about his independent and president Trump should reduce the threat to it. Hopefully that will make it clear, Worsh should be confirmed. So it is a mix on both sides. It is not dividing in obvious easy ways. Anyway, scandal, what's up? Glad to be part of this momentous day. It is a momentous, we see that. Yeah, Kevin Worsh is right now the successor in waiting if he gets confirmed by the Senate. It is funny how he's part of this group of 30, which is a form of former central bankers, former finance ministers and movers and shakers. So you see Muhammad Ali and Jason Furman, George Osborne, I believe, Mark Carney, certainly not exactly the most America first kind of grouping, maybe more globalist in flavor has definitely kind of rallied around Kevin Worsh because I think they've probably converse with him a bunch of times and take him to be a very serious person. I myself am much more sympathetic to what our friend Neil has pointed out. By the way, we are talking, of course, to longtime friend of the pod, Skanda Marnath, co-founder and executive of Employee America. So when you see like, okay, so someone like Neil and someone like yourself and you have these reservations, like what is the origin of some of these anxieties? I think there are a few different anxieties. I think let's start with this is obviously someone who served on the Fed before, right? He was a Fed governor. So we have like a track record. We don't have to rely on second hand validation. We don't have to, if we didn't know anything about Kevin Worsh, then I think probably it's probably putting a little more emphasis on what Jason Furman and Mohameda Larian and those people are saying and they seem like respectful people. Except he was Fed governor and he does have a pretty long body of work in terms of a public intellectual, giving remarks, being in the Wall Street Journal, opinion pages, and the trouble is it kind of comes back to like, who do you want in a crisis, right? So the Fed really tends to matter the most in periods of crisis. He was a Fed governor in the crisis and he often touts it as some other great financial success by purpose. Yes, the 2008 financial crisis. If you go through what his views were through that whole period, what you will find is this is someone who was very eager to tout how well the financial system was performing even as it was dissenting into crisis in 2007 and 2008. He was very eager to really up weight the importance of inflation in the summer and fall of 2008 until Lehman failed. So this is someone really who had his eye on, I'd say, the wrong ball at that time. Okay, mistakes happen. Like, people had different views. I don't think we should be like too precious about that specific way. And yet also the moment that started, we came into 2009 and let's say the absolute worst of the financial distress may have been behind us, but we had historically high and rising unemployment. He basically said this was not a really a big problem. Not something the Fed should be focused on and that we actually should start to shift back towards focusing on what keeping interest rates more normal, not so low. I'm worried about inflation. And so he came with a lot of reasons why that inflation was going to explode, why Huey was really bad. And that that would ultimately lead to first inflation. Then maybe some version of asset price inflation, maybe bubbles, maybe it's back to our fiscal policy. He came with a lot of different reasons at different times for why he really hated the fact that the Fed's balance sheet was so big. But one, those predictions weren't really true. I think they reflected misunderstanding of what the Fed's balance sheet really does and is. And it's still like a big, it's a favorite hobby horse of his. But that's a selfless, like he kind of missed the whole financial crisis in a way, right? Like aside from like the absolute worst of it, everyone got on the same page in October, 2008. But that's like kind of like not like that's not a great badge of like of honor that you actually figured out that you had to start to support the financial system at that time. I think that's the first dimension that probably is of concern. But let's say like, okay, people have gone through various episodes and missed a lot of things. And you'd hope coming out of that, people kind of have learned something, express some humility. Okay, I missed this part of this problem, the scale of it, the duration of it. And I'll do better next time. We haven't really heard that, but okay, let's see those like missing me a cult was aside. The two things that are more concerning that come out of that though is we see now a growing pattern of both of sequ seriousness and partisanship in how he oriented his macro and monetary policy views. So let's fast forward to 2024, right? Where we had for a while, obviously, there was a sense of like the fence going to cut rates, but are they going to cut rates soon enough? Or are they going to wait longer because they want to see more progress on inflation? Ken was for most of that year. He was pretty clearly in the camp of the fence is risking not keeping interest rates high enough for long enough to kill inflation. But when do you think that his policy views changed? They've happened to change in November, 2024 basically. And he basically did a big 180 on what were probably considered pretty hawkish views, but actually they turned dovish the moment the election changes. Now obviously, like everyone does a version of inflicting their policy views with some level of politics and partisanship, whether they can help it or not. Not here to say it's like anyone's immune. But there's a tendency if you look through his track record of basically worrying about inflation and worrying about sort of physical excesses during periods of when it's a Democrat that's in the White House. And then it tends to flip towards deregulation and productivity growth are going to be disinflationary. And that's why we can afford to keep rates lower when it's a Republican that's in the White House. I think that's been dialed up even further. And this this last call it 18 to 24 months, where you've seen that sort of 180 take place. Yeah. And I think that kind of speaks to exactly what did you have to promise to President Trump to get the job? It's funny. You mentioned writing op-eds in the Wall Street Journal. And this is also a data line. He says, and all he's done in the years since his time at the Fed is critique QE and the Fed itself making a bunch of bad economic calls along the way and writing the same op-ed in the Wall Street Journal every year. So one thing I was reading, I read some of those op-eds, but I also read a speech that Warsh made last year, and he was criticizing the Fed for being too dependent on data or focusing on data dependency, too much near-term forecasting. And it made me think, well, if you're not looking at the data, what are you going to be looking at? Do we have any sense of what he actually prioritizes when it comes to making policy? Yeah, I mean, maybe it's vibes, maybe it's presidential preferences, but I obviously have kidding there, but I think it's like, what do we have if we don't have data, right? What do we have if we don't have a language that you can talk about facts? Like, obviously, data has flaws. We all know that there's limitations to what macroeconomic data releases can tell us, what various points of information tells. We were all trying to triangulate around this fuzzy reality of macroeconomics, but it's a useful language for being able to like get people from different policy preferences, different political orientations to get on something of the same page, right? It's a way of saying, okay, this is a fact about the data. We can tell it, say, this is the reason why it's too high, it's too low, it's biased this way, you can have discussion about it, but at least it's a way to make sure we're talking about something other than politics, something other than policy that's like outside of the ambit of the Fed. I think what you actually hear from Ken Moore some of the data dependence side is pretty worrisome because it kind of speaks to a disinterest in being perceived as objective and lack of interest in actually doing something that can broaden legitimacy around the Fed so that people will understand, okay, the Fed made this decision because indicators move in this direction or they think indicators are moving this direction. At the same time, we obviously have a situation where like, there's a lot of risk of eroding trust in the Fed when Trump has been saying that he wants his guy in who's going to do what he wants and that he really felt burned by picking Jerome Powell. So basically that Jerome Powell was not planned enough to what Trump was looking for. I think that that just raises a lot of risks going forward and I just bring it back to the issue of crises. The Fed has been such an important actor in periods of crisis in divided government, right? When we think about 2008 and 2020, when periods when the White House was controlled by our public and there was a pretty vociferous opposition from Congress in terms of obviously there was a Democratic House in 2020 and both chambers were a Democratic in 2008. How did you get to like policies that actually started to take up like address the scale of the crises in front of them? You got there because there was some agreement and trust that the Fed could be a reliable kind of crisis broker source. I think that's going to be a lot harder this time around because Kevin Morse just like track record, obviously there's a certain obsequiousness that kind of has been very obvious from how he's done these policy 180s. He goes from hawk at one point and then the moment Trump wins office, he starts to shift towards being more dovish. He did a version of this in 2017 though less exaggerated. So that's something that is concerning. Lay it on to his tenure as Fed governor has this like features a lot of speeches in which he's like really going off script in terms of what he's talking about. He doesn't just talk about monetary policy or just financial regulation. He started to give kind of these like bigger concerns about hey, I don't really like the way that trade policy is going under the Obama administration. I don't really like how like where we risked you going down the wrong path on broader regulatory policy. Things that really shouldn't have been under his domain itself to focus on and yet he kind of veered into the political and probably was speaking to a more partisan audience at that time. I think everything you've seen since 2005-6 kind of speaks to someone who wants to talk to a one side of the partisan aisle but it made me very different in a crisis when you need relationships across the spectrum. UKG their HR pay and workforce management tools help business leaders empower their people because when work works everything works. Hey, there a lot of listeners. As we come into 2026 we are realizing that one thing we're constantly thinking about on the show is how companies actually get built. Not just like the headline version of that story but the messy operational reality of it. Right, we love messy operational reality of things. The never ending question dive deeper how companies make it big, what causes one company to succeed while others fail. I have good news. 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So go check out the acquired podcast you can find them wherever you get your podcasts. You know regardless of what people thought about Bernanke or Paul etc both of them you know were reasonably well respected across both sides of the aisle which probably was very helpful during the crisis. I have a question I've never actually quite known the answer to this but even going back to 2009 2010 etc like a lot of people really liked Worsh and you mentioned that he's in a select community of like some pretty like heavy hitters etc and I think uh Bernanke liked Worsh quite a bit if I recall what is this sort of like Worsh origin story of like how he got to be in the circles of some of the most elite and monetary policy minds. So he was one of the youngest people selected to be a Fed governor and there was a lot of consternation even about whether he was qualified at that time there's some some good background about how there were a lot of critics or referred to the vice chairman people who served under Ronald Reagan expressing reservation is about picking someone so young who has had no real track record. He was like an investment banker at Morgan Stanley and technology media telecom for a brief period. He's kind of known in these circles primarily like I don't know how much to describe to this but I do think like it matters that probably his father-in-law is one of the big donors to the Republican Party and has been a big donor to Trump so Ronald LaDaire of Estee LaDaire fame. So there's like certain levels of connections that have mattered I think there's pretty well documented fight between Randy quarrels who was the head of supervision appointed by Trump in his first term and Kevin Worsh were fighting over a particular job in the Bush Treasury secretary office the Treasury Department so he's been around in those circles. I think he's mostly been conversed with let's call people who are I think who was a visiting fellow at the Huber institution which is like an intellectual hub for obviously conservative economic thought but he's also mostly been speaking to a specific crowd because of the Wall Street Journal op-ed page. There's mostly been with those who are of his persuasion. He has managed to do a remarkable job of shapeshifting two words making sure he's heard well by President Trump and so he has managed to kind of make that transition in a way that maybe other people have not but that shapeshifting itself has always been with an orientation towards I'm really speaking to a vulgar audience and I have what I wonder about that is if we run into any sort of situation where you're going to need the Fed to kind of put out a fire or where you're going to need some institution to do that or play that role as it was the case in the CARES Act or was the case around tarp or around any of the other sort of bail outs of 2008. How do you like muster that together when like this person has been kind of been pretty consistently partisan and ideological in some ways ideological maybe more so when it's not Trump at the helm but it's just something that's good and it comes very hard to trust and we can't take that for granted in terms of like macro and finance about how the Fed is supposed to step in when there's a crisis but like the Fed steps in in the crisis when they get the backing from both Congress and the White House that may not exist. Just going back to things that Warsh has said previously so we talked about he's been very critical of the Fed's balance sheet expanded balance sheet and QE and things like that assuming that he figures out a way to do what he wants at the Fed and somehow gets support of the Fed board or does something else. How dramatic could his tenure at the Fed actually be in terms of monetary policy because I'm thinking you know there's been some chat or some suggestion that Warsh would like to radically redesign the way monetary policy interest rates are actually implemented. Yeah that's always been a bit fuzzy to me because like he's been very eager to criticize but the nature of the criticism has always had to like continuously adapt to what I'd call somewhat failed predictions. First it was that there were a lot of people who said QE is going to increase the money supply and mechanically increase inflation and that was the case that people said this like 2009 didn't quite plan out that way. Then people kind of said like it's going to lead to asset price inflation slash bubbles. Like maybe there was asset price inflation but there wasn't really like an obvious bubble that transparent transpired from it. And then it's sort of that some of the criticisms shifted towards well it's actually doing something on fiscal policy. So I think you have to have a career in view of what you actually think the Fed balance sheet does. Like if you ask me ordinary vanilla treasury QE is not really doing much it's mostly an asset swap of two risk free assets which is a view actually that another person who would institution John Cochrane would probably abide by. So there's not really any distorting effects that people are really the way people are saying and yet he sort of has made this a big bug bear that this is like the big thing that needs to shift. He comes at a very awkward time because what's been happening is that money markets have been basically giving the signal that actually the balance sheet is getting to a place where if you try to run it down from here and run it down to abruptly you might get more dysfunction. Kind of similar to what we saw in like September 2019. So we might get into a situation where repo rates spike because there's just not a lot of relative to the banking system and the financial systems needs. You do need to have some amount of liquidity available and that amount of liquidity is meaningfully more than it was prior to the financial crisis. There's probably like one part regulation, one part supervision, and one part bank risk management practices. But this stuff is kind of like actually hard to pin down how much of each. And so he's big this is like big concern. I suspect he's probably going to have to swallow his pride a bit and be more supportive of like gradual balance sheet expansion during this period because money market conditions are basically signaling that things have tightened up quite a bit in terms of if you look at where the fed funds rate or money market interest rates are relative to the interest that the fed pays on reserves or the interest rate that the fed pays for money market funds to the reverse repo facility. Those have been converging right those are basically even those those money markets rates have been kept going up relative to those rates set by the fed and that kind of is also a sign that like yeah you got to have more malleability and it's not exactly the case that like oh my god this fed balance sheet is like this big problem or that it's something that if you if you lower the balance sheet that's how you get lower interest rates. These views are all kind of and coherent but I think that especially now that he might be in a position where he has to deal with those hard realities. I suspect his views may be forced to change. It'll be interesting to see what happens. Let's just talk you know so we know Trump wants lower rates. Kevin Worsh has talked about we need lower rates so there's alignment there. Other candidates who were like the sort of finalists also talking about that. So Christopher Waller who I think you know many people would say perhaps has the best track record of the last five years of anyone having correctly identified the inflation return and then also recognizing when the inflationary turn was coming to an end. He also wants lower rates so like they're presumably no matter who was going to come in was going to have this lower rates now view. That being said you know does the actual execution of lower rates in the short term set aside crisis. Does it change at all the dynamics when he's just one of multiple voting members if that message is coming from Kevin Worsh versus if it were coming from Christopher Waller? I think it definitely matters because at least with Chris Waller honestly with all of the front runners outside of Worsh. I can point to a tangible example where that person supported the case for lower interest rates outside of a very Trump inflected electoral context. And I'm including even Kevin Hassett here. So Rick Reader, Chris Waller are people who have made the case for rate cuts at various times even when Trump was not in office even when Trump wasn't clamoring for lower interest rates. In the case of Kevin Hassett he went on the record in October 2024 I believe basically defending the fed's 50 basis point rate cut in September back when Kevin Worsh and Scott Bessent and Steve Steve Myron were up in arms about the idea of the thick of cut rates and thought it was the most like politically motivated decision ever. So you get like people who have actually pre-registered their views and are not I can show an ability to make judgments outside of that sort of presidential context will come with more credibility because in the end as you rightly point out the FLMC which is made up of seven fed governors and a set of regional fed presidents they are not just presidential appointees certainly not of this current president. And even those who are appointed by the president and the previous administration I think to the large except I'm probably a Michel Bellman or Chris Waller or Jay Powell have shown like a capacity for independent judgment and assessment will someone like Kevin Worsh be able to bring more people on board is going to be a real challenge right can you be persuasive can you be persuasive and especially if he's someone who doesn't really take a lot of stock in data like one of the nice ways that you can be persuasive is being able to point to an indicator and saying I think this is going to happen in this way and if it does happen this way you get more credibility in the next meeting to say I've things are going the way I suspect it and therefore we really need to make take policy in the direction I take is right like that's kind of the data has a way of like helping keep people accountable in discussions not always but like it's better than nothing at all or better than the substitute and so I think regardless of who was going to be the fed chair there was going to be persuasive constraint we're kind of seeing from the Supreme Court that Trump can't just fire everyone on the Fed that he wants at least that's those are the tea leaves we're getting and so you're going to have to work with the people who are already on the Fed on the FMC and if that's the case like persuasive power matters and like what's the reason you're really like expressing this view are you expressing this view because you believe it or because you think it satisfies what the president wants unfortunately over the course of last I'd say two decades Kevin Worsh's views kind of have like a strong like political correlation to them look everyone's got some political correlation in their views I suspect but uh his more predominantly and especially if he wasn't making our arguments rooted primarily in data I think he may find it harder to persuade his fellow colleagues and there will be a high level suspicion about just how what exactly are the true intentions behind his agenda just going back to the speech that Worsh made last year he talked about the need for regime change at the Fed and he said that would involve quote breaking some heads so I imagine the first uh FMC meeting might be a little a little awkward he's got to come in and the first thing he says he's like guys I didn't mean that literally like he's like you know he's got he's got to come in I wrote that but I don't want you guys to be and I said it literally he's got to say that real quickly Skonda if you were at that meeting what would be the one question or the first question that you asked mr. Worsh oh I I think it's it would be good to be a good sense of just like what he's uh what do you even think about where interest rates should be right now because I think part of what he doesn't quite he talks a lot about fed policy and the abstract the need for regime change we need reform this we're the more credibility more fewer mandates or something along those lines it's all kind of vague and can kind of sound substantive but I kind of think a little substance free because it ends up blurring exactly what he thinks about the macro economy right now like inflation right now is about a percentage point above the fed's target now that might be freezes that are temporary that might be freezes that are more persistent it'd be good to understand like what what he thinks will happen why I really don't really know what's about that beyond just thinking like okay this person's probably going to be for lowering rates because he got the job from Trump the reasoning seems very light at this point I think it's uh there's good reason to be dumbfounded maybe good reason to be hawkish but can he identify those like as someone who would be on the fmc or fed staffer like this we're actually there's more of a black box here because maybe you could have told yourself a story of how he was actually a very hawkish person especially 2009-2010 and some of his Wall Street Journal columns afterwards but especially ever since we've had Trump in office like his views have definitely shifted more damagedly and you just want to wonder like how much what what is he putting a high weight on and if that's something that can be trusted ultimately he's going to have to figure out how to build up more persuasive power and trust among the committee to be actually be an effective fed chair I think I'll be remembering to be remains to be seen scoundler we're gonna let you go but uh this is not going to be the last time we talk about Kevin Worsh with you and many others so I appreciate your time thanks thanks for having me lots more is produced by Dashville Bennett, Kermin Rodriguez and Kale Brooks please rate review and subscribe to all lots and lots more on your favorite podcast platforms and for even more beyond lots more go to Bloomberg.com/odlots and chat with fellow listeners in our discord discord.gg/odlots and don't forget that Bloomberg subscribers can listen to all of our podcasts absolutely at free all you have to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there thanks for listening. 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