What Fed Chair Kevin Warsh’s Jackson Hole Debut Means for Nervous Markets

(upbeat music) - Hi, Miriam. - Hi, tell us. - So today's show brings us to Wyoming. - Unfortunately not actually to Wyoming because we are still here in our studio in Midtown, Manhattan. - But spiritually we are in Wyoming. And that's because this upcoming week is the Jackson Hole Economic Symposium, which is, if you don't know it, it's basically Lollapalooza for the Federal Reserve, Fed officials, economists, academics. And it's Kevin Worsh's first as Chairman of the Federal Reserve. And I don't know if it's an overstatement to say that this might be one of the most looked ahead to speeches at the Fed in many years. - Yeah, I mean, usually the conversation around the Fed, the debate is, will the Fed raise interest rates or will the Fed cut interest rates or will the Fed hold steady? But this time there's an entirely different conversation that's going on, which is that Kevin Worsh wants to change the way the Fed communicates, specifically by doing away with forward guidance, which is basically telling the market what the Fed is thinking at any given time and thinking about the different things that might change the Fed's thinking and communicating that to the market. - Yeah, and so far Wall Street has not really seem to love this approach. The bond market's been pretty wild recently. - Yeah, they don't like the fact that this information is potentially being taken away from them. - Well, and maybe Wall Street's just throwing a tantrum because things are going differently. But I think what we want to talk about is that there's a lot more at stake here than just what's the next interest rate move or is Wall Street happy or not. How the Fed communicates is something that has been studied and debated for decades. It's inextricably linked to perceptions of the Federal Reserve and its credibility for fighting inflation and keeping the economy at full employment, it's so-called dual mandate. It's also just a big part of the relationship between the government and the economy. So to understand all that and to talk about the context behind it and to talk about what we might hear at checks and hold, we brought in some heavy hitters for this episode. We've got a couple of guests. The first who probably needs no introduction to our audience here at the Wall Street Journal is Nick Temeros. He is the WSJ's Chief Economic Correspondent and he covers the Fed. Nick, welcome to the show. - Thanks for having me. - And then we also have a very special guest, which is Professor Frederick Michigan. He is one of the foremost scholars of monetary policy. He's a professor of banking and financial institutions at the Columbia University Graduate School of Business. And if you're an econ major, you probably read a textbook that he wrote. Professor Michigan, welcome to the show. - It's my pleasure to be here. - Professor Michigan was at the Federal Reserve from 2006 to 2008. And you also served with a fellow by the name of Kevin Warsh during his first stint at the Fed. So let's first talk about what's been going on. So Nick, you've had a front row seat to the Warsh and Powell press conferences, literally and figuratively. Tell us what's been different about how the Fed has been communicating and how Kevin Warsh personally communicates thus far early in his term. - Well, tell us every chair is different and the room sort of adapts to them. So I started covering the Fed when Janet Yellen was chair and she gave these long, detailed, careful answers, multi-part clauses. Nobody asked a follow-up question because you were sort of getting overwhelmed with nuance. Powell was the opposite. Breezy playing short answers. Everybody started asking follow-up questions. He got burned a couple of times without the cuff answers. So he became a little bit more rehearsed and practiced. And Warsh, as we've seen is different again, he's not giving long answers. He's evasive by design. I don't mean that pejoratively. And he doesn't think it's the Fed's job, as you said, to walk them through their next move. But I think there's a lot writing on this speech in Jackson Hole because the general consensus was that this sort of tight-lipped less is more strategy that the July press conference did not pay off. And the Ford guidance in its strongest form is making promises or commitments about what you're going to do or not do with interest rates. We won't raise interest rates until X, Y, or Z. And there's a lot of agreement. I think Professor Michigan would agree that you shouldn't be doing that anymore. You don't need to do that when you don't have rates at stuck at zero and you want to provide more stimulus. And I think if that's all that Warsh was pulling back on, he'd have a lot of companies saying, good, don't do this anymore. But I think that's not the whole of what he's doing. He is declining to talk not just about where rates are headed, but also about how he sees the economy, the trade-offs, why they held rates steady in July, even though there were three people who wanted to raise them. And so explaining how you read the economy isn't the same thing as promising what you'll do about it. And by collapsing those two things into one, we're seeing some pretty unusual reactions, not just from commentators, but from so-called trigger pullers in the markets who are maybe more unsettled or confused, not by what he is saying, but by what he is not saying. Professor Michigan, you were at the Fed when many of these communications mechanisms were put in place. Why did you believe that they were important at the time? Let me step back a little bit and also re-emphasize some of the issues that Nick is talking about. There's several elements of communication. And I think the Kevin Warsh has been critical correctly of some of these elements. The other aspect of this is that I also very strongly agree that the idea of making commitments except an extremely unusual circumstances to the path of interest rates is a mistake. On the other hand, transparency, done right, is critical to successful monetary policy. And what do I mean by transparency? What's key is that the public and also the markets understand what we refer to in economics as the Federal Reserve reaction function. How does the market understand how they're going to respond depending on the course of the economy? It turns out that if you get the markets and the public to understand your reaction function, how you'll react if inflation is higher or how you react if unemployment rate goes up or so forth and so on, that actually the markets will do a lot of the work and have you lifting for the Federal Reserve. That means that the volatility of the economy will be less because the markets basically do the lift heavy lifting for the Fed beforehand. And this is one of the things that it's not clear where Kevin Worcester's going to come out on this. One of the things that gives me a little hope is that he is pointing Mervin King who, as the head of the task force, is going to deal with this issue of forward guns. And Mervin, who is a terrific economist, I know Mervin very well known him for a very long time, Mervin has come out and said, "Look, what we want "the central banks to do is to be transparent "about their reaction process reaction function "because it helps actually stabilize the markets." I don't know where he's going to come out on this. What worries me a little bit is that he talks as if he wants to go back to what was true under Alan Greenspan. - For those who weren't around at that time, what characterized Alan Greenspan? I mean, the cryptic communication sort of, just trust me, I'm the expert. I know how the fed should react. - He was very opposed to transparency. He liked the old-style central banky. Why Greenspan was a master, he was a maestro. He basically felt that if he didn't have people looking over his shoulder, it was going to be easier for him and he'd do better. And in fact, in my research, particularly with Ben Bernanke, we talked a lot about why that was not a great idea but it might work under Greenspan, but you actually want to have good institutions. So good institutions actually are very important because a good institution means that bad people still don't do a terrible job and good people do an even better job. And bad institutions are ones where even good people can do bad things. This is super important now, what's happening in the United States. There's an issue about how our institutions are going to evolve after the Trump presidency. It's super important in terms of economic growth. I've done a lot of research on this that when you look at why countries are rich and other countries report, it's all about the institutions. - Professor Mistin, it's only been three months, but so far, it sounds like Kevin Worsh wants to go more back to the '90s or early '90s Greenspan than what you and Ben Bernanke pushed the Fed to do when you were there. What do you make of what he's attempting to do by fuzzing up the framework? - Well, I think there are a lot of issues. One of the things is Kevin is one of the smartest, capable, political guys I've ever seen. He's just brilliant, he's charming. As Trump says, he's good-looking. (laughing) It's trouble, it never hurts. (laughing) I think that a lot of this is that he puts, I want to put some stamp on. He'd love to be the next down green span. He has all these task forces. I actually think the task forces are very good idea, but it's a way of his saying, you know, I'm really taking control and I'm different and so forth. I think that the people he's appointed to these task force are really top people. So I actually think that this could be a very opposite. Who knows that he's very political, he's also got a huge, huge problem, which is that he's appointed by Donald Trump. And we know that if you cross Donald Trump, you are a deep do-do, you have a big problem. And we also know that Donald Trump wants lower interest rates, right? And we also know that Donald Trump is a real estate guy who has always wanted lower interest rates. The tax that Donald Trump has made on the Fed are unprecedented. One of the things that changed in terms of monetary policy is a very positive way, which really was codified by Robert Ruben under Bill Clinton, which says that, in fact, don't criticize the Fed. Let them do their business because if you try to influence the Fed, it's just going to end badly. People are going to get worried that, in fact, you'll keep interest rates low. You're going to get inflation and so forth. Donald Trump completely abandoned this because the tax on Jay, first the verbal attacks, he's crazy, local, stupid, whatever. I don't think he ever gave Jay a nickname. That's what it usually does. But he didn't give him a nickname. Too late. He gave him a nickname. Oh, yes, that's right. Too late. And Jay, by the way, was a master politician, and a small peep politician. He was just terrific. He established very, very strong relations with Congress, but he realizes that Jay basically staps over relationships, and as a result of that, the Fed was able to withstand this. And of course, then Trump got even more aggressive with the Lisa Cook potentially wanting to fire Lisa Cook and not for cause, that the whole outrageous attack from the Department of Justice investigating Jay Powell with no evidence at all. And by the way, this has been done before, we've seen the consequences, but Kevin Worse is still in the tough position because if he pisses off Trump, you know that Trump is going to go after him like gangbusters, because remember that Jay Powell was appointed by Donald Trump. And what happened was that eventually he didn't like what Jay Powell was doing. And then he started his attacks, which escalated further. And interestingly, Jay has gotten his revenge. He's actually sitting on the Board of Governors. This is really unprecedented, and this is an FU to Trump. And generally, by the way, it's not a great idea for the previous chairman to stay on the board. In this case, I think the Jay is doing and saying, look, I got to make sure that there are no more investigations that are the bogus investigations and so forth. All right. Hold that thought. We're going to take a quick break when we come back more with WSJ Chief Economics Correspondent Nick Timoros and Columbia University Professor Frederick Mishkin. Welcome back. So inflation. Let's talk about that because we've talked so far about what Kevin Worse isn't saying. But there are some things he is saying. And specifically about inflation and inflation targets. Nick, what has Kevin Worse said is his mission at the Fed so far? What is he made clear about what he does want to do? What he was very clear in his first press conference and his second press conference that 2.0% inflation is our target. We're going to hit our target. He said, you know, in July, I want to disabuse people of this idea that we've accepted a little bit higher than 2% inflation, no, we mean 2% inflation. I think where he got into trouble later in that same press conference, he was asked, well, what's your target? And he said, well, there are really two answers. He provided the measure that the Fed uses, which is the personal consumption expenditures price index. He's talked about this for over a decade that the Fed focuses too much on the right side of the decimal point. And we should really focus on the left. And some people hear that and they say, well, wait a minute. Does that mean you'd be okay with changing the target with, you know, 2.5% being good enough because the left side of the decimal point has a two in front of it? And so I think there are some questions there around, well, is Kevin Worse really bought in to the inflation targeting regime that has, you know, the Fed has been operating under for the last 14 years? One of the things I think that's this understanding is what's important is not that the inflation measure is perfect. So to give you an idea, Alan Greensfield, people don't know this. You can read the transcripts but not quite get it. There was a starting to be a push for inflation target in the Fed. And I think it was 1997, Greensfield said, let's have a debate. And in fact, he organized a debate which was between, he had Janet Yellen on one side and then the president of the San Francisco Fed, a written note of hawk on the other side. And the debate did not go the way he liked. Janet, he thought was, you know, soft on inflation that she would never agree to this. And Janet basically in the discussion said, as long as you're not fanatic about hitting it exactly all the time, a 2% number is really good. And then if you look in the transcripts, you can't quite see it, you have to be there. Greensfield said it would be rather unfortunate if it got out that there was a 2% number. The body language was, if you do this, I will kill you. And Greensfield, by the way, was very good at this. You know what he did to Alan Blinder. That I saw an internal thing, I'm meeting where he sliced up Larry Lindsay. And it was very similar to one of my favorite scenes of the movie, which is when Lucy Liu fights Oma Thurmond and Kill Bill. And there's a sword fight that all the pieces fall down. That's what Greensfield could do to people. He was a terrific, I like Alan Blinder personally, but he was a master of power. So Greensfield's comment was, well, which, to flight, which price index should you use? And Janet didn't even answer, it turns out it doesn't matter very much. And the reason it doesn't matter very much is if you think about what the appropriate inflation is, anything between 1% and 3% is probably good enough. You don't want to go too low because then you can deflation. You don't want to go too high because it interferes with the Greenspan definition of price stability, which is people don't worry about inflation too much. So somewhere in there, as long as you pick a number and you credibly get people to believe that number, then in fact, if the measurement is not quite right, you're off a little bit, that's not a big deal. But for now, decades, for many years, we're all used to knowing that 2% PCE is the target and the measure. Nick, how disruptive do you think it would be for Kevin Washington to keep pursuing this line of thinking and say, well, I don't really like PCE, or maybe the measure should be something different. I mean, that seems like that is something that has the potential to really upset the apple cart of how markets think about the Fed and react to the Fed. Well, I think there's a danger of conflating two things. I'm not sure he's talking about changing the target, but he is clear that he doesn't love the whole apparatus of these government statistics and in the newspaper or in the markets, we pay so much attention to whether the core PCE prints it 0.23 or 0.26. Just an attitude of, come on, guys, this is just not that, you can't fine tune it like that. But I guess I think it comes back to trying to understand which economy we're in right now. I mean, I want to ask Professor Michigan, core PCE, which is what the Fed pays a lot of attention to, it's been above 2% for five plus years. There were three people who dissented in July because they wanted to raise interest rates. It was a real argument that AI is creating more demand. I mean, Professor Michigan, do you think the hawks have it right here? Should the Fed, having missed the target for so long, be on their front foot, ready to raise rates? Yeah. I mean, it's yes. Maybe Warsaw get lucky. But there is nothing right now, as I say, the economy does not have slack with full employment. It's true that the job growth is weak, but again, we've shrunk the labor force because of all this issues of immigration, something that I don't think is beneficial to the economy, but that's just the way life is. And so in this context, if you're really committed to getting inflation back to 2%, and convincing the markets and average person that that's what's going to happen, then you've got to take the measures to do that. So, I'm not saying that necessarily he will be wrong because the economy may weaken and inflation will come down. That could happen. That's what he's hoping is going to happen, because if then if he doesn't have to raise rates, it keeps Trump off his back. And note, one of the things that's really interesting. to me is even though Kevin Worsh does not talk about lowering rates, Trump has let him alone. I think Trump said something like "Kevin's a smart guy, he knows what to do." He's given him at least a little bit of Lee's share. Yeah, I think a lot. I've been actually so far, you know, generally except for the issue about the transparency issue, I think Kevin's statements are pretty reasonable. He said that inflation is job number one. He's right to say that one of the things to understand how you do inflation targets successfully. In fact, we always refer to this as flexible inflation targeting. Not inflation targeting is that you don't have a target where you try to hit it exactly. And I guess you think that Kevin Worsh is right, that the fact that you're, you know, that it take up a little bit of a slightly off doesn't mean that you then should club in the economy. I think Kevin is very reasonable on this if you interpret what he's saying in one way, it's basically a call for flexible inflation targeting. It seems though that that that's for the market though is and Nick tell me this is what you're seeing, you know, the market is maybe not willing to kind of assign the trust that it might to say, "Okay, we know when you say 2%, it doesn't mean 2.0, but we get what you're saying." Without a clearer reaction function or even I mean Kevin Worsh has sort of said, "Oh, we're debating the tools we can use and all that." Nick, do you think that he needs to do something to bolster the credibility that he's still committed to this target and we'll do what is necessary to get there? Well, you know, if you listen to the other people on the committee, even though Worsh didn't really state a reason for holding steady at the July meeting, other people did, right? They've made the argument, the show me the money, I mean, look, wage growth is consistent with 2% inflation, we're being hit with these shocks that keep pushing us away, but, you know, there's an argument, credible case as the way Chris Waller put it, that you can still get inflation down without raising. So I think the question for Worsh that Jackson Hole is, are you going to start to lay out that theory of the case or do you see something else happening in the economy, shocks hitting more often AI that would suggest, you know, that we're still in this period of watchful thinking, I think, is how he put it. Before the other place I think where he could get into trouble is in Syntra, in early July, he said, markets understand what we're doing yields have come down. They see that we're serious about getting inflation down. Then when yields had gone up by the end of the month, he said, well, higher yields are evidence of the markets doing our work for us, so that might substitute for some tidings that we have to do now. There's a little, you know, people were saying, well, maybe there's an inconsistency here. If yields are down, you know, it's good news because the Fed's credible, but if they're up, then it's good news because the Fed doesn't have to move, well, you know, what are you going to do after three more months of this? All right, we're going to take one more quick break and then we're going to come back for a little more conversation with Nick and Professor Michigan. Welcome back. So Nick, what's your sense of what we might hear from Warsh at Jackson Hole? Will he give his reaction function and say, here, you all wanted this, here's some framework or do you think he will keep pursuing the kind of Greenspan-esque? I'm not going to tell you exactly how we make decisions. I just want you to know that we are going to do what's right. How do you think he might tack in this first big, big speech? I mean, I think it's more likely to be the latter. You know, if you're expecting like specific answers, kind of the teacher's edition of the textbook, you know, I think you'll be disappointed because he just hasn't shown any interest in doing that this far. So he was asked about the speech in July. He said it was a blank piece of paper. He hadn't decided whether he would do, you know, there were kind of two ways these speeches go. One is a traditional setup. Last four months of the year, here's how we're looking at things. And then the other way to go would be 30,000-foot view broad strokes, you know, he talked about, I could frame the big questions around productivity and demographics and aging. Go back and look at the first Jackson Hole speech from Bernanke, from Janet Yellen, from J. Powell. They gave different speeches. Bernanke's drew on history, scholar of the Great Depression, very relevant for his eight years. Yellen's drew on the dynamics of the labor market at the time, which was very important for her four years of trying to kind of nurse a full employment recovery. J. Powell talked about how difficult it is to do monetary policy under uncertainty. You don't ever really know. You're guiding by the stars, these kind of unobservable estimates that economists pay so much attention to inside the Fed. And so I think that's the opportunity for Kevin Worsh. So most of the committee is in the room for this speech. They are going to be loosening for some kind of sense as to how he's going to lead them through these difficult decisions. They may face, even if he's not going to say, you know, here's where we're going to, here's how we're going to run the play. And so it's an opportunity for him, I think, to reveal something broader about how he's approaching the four years or more that he's going to be leading this institution. Professor Miskin, what do you want to hear from Kevin Worsh at Jackson Hole? What I'd love to hear is that, which is not going to happen, which is that we are very serious about our commitment to 2% over the medium term so that it's not immediate. And that's why, you know, it's a little higher, that's okay, but as long as we're getting there. And here's what we're going to do, if in fact, things don't work out as well as I hoped in terms of what's going on. I mean, look, you know, he made this AI argument initially before he was confirmed. And the part of the argument, I think, is true, but the timing is not. This being the argument that AI will lead to a productivity boom that will be created. I think that I could lead to a very big productivity boom. This could be transformational, it could be great for the economy. I'm not a job of apocalypse kind of guy. In the short run, it could be problematic in terms of job, but not in the long run. But in the other hand, in the timing, that's very long run. There's again a lot of research on this, but I'm going to talk about why AI may be different. The research is when you get what's called a transformational technology, i.e., technology that basically affects everything, that an electricity is the classic example. It could take a very long time to see the productivity benefits. I think AI could be different because AI is being adopted so incredibly rapidly, but even then, five years would be really fast. From that viewpoint, we know that AI has had tremendous positive demand effects in terms of people wanting to build these data centers and so forth and so on, and CAPEX is very, very high, that in the short run, it's going to be inflationary. He made this argument, but I again felt that was extremely political, but he's not political in the bad sense. He's political in the good sense and managing the politicians in a way that's beneficial for the Federal Reserve. And we'll have to see. So, I think that the issue right now is that for substantial period of time, markets are going to be very skeptical about Kevin. We're already seeing a mini-inflation scare with these long-bound rates go up. Some people talk about the fact, which is not unreasonable, that this is also the fact that we have completely irresponsible Congress, as I said, there's only one really bipartisan thing in Congress, which is that neither party cares about budget deficits. And so, that could be a factor there, but that's always been around. So, to me, when we see these rates going up right now, this is because people are not sure about Kevin Worsh, just that they were not sure about Alan Greenspan when he first became chair. And of course, Alan Greenspan was extremely successful in getting inflation down and convincing the markets that he was serious about controlling inflation. And this is one of the reason why I think transparency is extremely important, because I want the markets to say, you know, it doesn't matter who's the chair of the Fed. The Fed will do a reasonable job. And just one last thought, you know, as we're speaking today, the Treasury Department made an announcement about how it's going to be dealing with kind of long-term bonds in the market, you know, Kevin Worsh is not the only person who speaks on these matters, and the Fed isn't the only actor here. How would you rank the importance of what Worsh, you know, isn't going to say here versus other things that are happening in the markets right now as to the kind of, you know, where interest rates head from from here, you know, for the near future? Well, I think the sell-off at the long end, which was happening before the last Fed meeting, it's continued because you have all of these, you know, hyperscaler, capex announcements, term premiums are a little bit higher now, and maybe that's by design. So I think, you know, this could be the first test of the worst lead Fed. How are you dealing with a different economic backdrop from the one we've had? And of course, you know, Kevin Worsh has talked a lot about trying to shrink the Fed's balance sheet, and I think there are questions now over, well, how are you going to do that? Are you going to sell duration or put more duration back into the market when you're seeing a, you know, a 30-year bond at 5.3%, the Treasury Secretary coming in and saying, we could do much larger buyback operations and yields did come down a little bit after that. So, yeah, it's a very interesting time to be the Fed chair or to be following the Fed. Well, and Professor Michigan just to wrap up, do you think there's a chance he's the right chair for this inflationary era? Kevin could be extremely successful, Federal Reserve chair. He's a very smart cookie. Again, a really good politician. He may be able to sort of Trump whisper on this, that to alleviate some of the pressure that comes from Donald Trump, which, you know, doesn't help the markets when Donald Trump basically goes into this phase of extremely critical wild statements about what a central bank should do. So the answer is he, hopefully, he's going to be another Alan Greenspan. That's by hope here, but it could also turn very sour. So let's wait and see, and let's, you know, my view is, give the man a break. Well, that has been a really fascinating discussion. I look forward to reading Nick's recap of Jackson Hole and Kevin Warsha's comments. Thank you both so much for joining us, Nick Timoros and Professor Frederick Michigan. I pleasure. And that's everything you need to know to take on your week. The show is produced by Alexis Moore and Michael Laval. Michael Laval is our sound designer. He also wrote our theme music. Aisha Allmousleem is our development producer. Chris Sinsley is our deputy editor. For even more head to WSJ.com, I'm Miriam Gottfried. And I'm Tellus Temos. Until next time. We're listening to our producer. Sorry, just one second. Yeah, that's not a problem. I know. Listen, you got to sell loose papers.