Joe: President Trump has picked everyone's least favorite candidate, Kevin Walsh, for the next Fed Reserve chief. I tip my hat to Walsh, who has managed to get selected after being passed over time and again. That's a remarkable achievement for him.

Joe: We do have the perfect guest.

Joe: You're listening to Lots More where we catch up with friends about what's going on right now because even when Odd Lots 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 hear someone like Neil who is uh I do not associate him with liberal media group think or anything like that as well as many others uh who are like huh interesting pick here. Well, I will say opinions kind of divided. So,

Joe: Mohamad Alaran tweeted earlier that he thinks Kevin's gonna be a great Fed chair and he's observed and this is a quote, "Having observed and interacted with Kevin during his prior tenure 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,

Joe: by the way, Jason Ferman, too. He tweeted, "Kevin Wars 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, Scond, what's up?

Skanda Amarnath: Glad to be part of this momentous day. It is a moment. I guess we see that. Yeah, Kevin Worsh is uh right now the successor in waiting if uh 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 Alien, Jason Ferman, George Osborne, I believe Mark Carney, certainly not exactly the most um America first kind of uh grouping, maybe more globalist in flavor, has definitely kind of rallied around uh Kevin Worsh because I think they've probably conversed with him a bunch of times and take him to be a very serious person. I myself am much more sympathetic to what uh our friend Neil has pointed out. By the way, we are talking of course to longtime friend of the pod Scanda Emmerath, co-founder and executive of Employee America. So when you see like Okay, so someone like Neil and and someone like yourself and you have these reservations like what is the origin of some of these uh anxieties?

Skanda Amarnath: I think there are a few different anxieties and 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 like rely on secondhand validation. And we don't have to is if if we didn't know anything about Kevin Worst, I think probably it's probably worth putting a little more emphasis on what Jason Ferman and Mohammed and those people are saying and they seem like respectable people except he was Fed Governor and he does have a pretty long body of work uh 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

Joe: qualified purpose.

Joe: Yes. The the 2008 financial crisis.

Skanda Amarnath: 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 the financial system was performing even as it was descending into crisis in 2007 and 8. He was very eager to really upweight the importance of inflation in the summer and fall of 2008 until Lehman failed. So this is someone clearly 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 specifically. And yet also the moment that sort of 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 really a big problem, not something the Fed should be focused on and that we actually should start to shift back towards focusing on keeping uh interest rates more normal, not so low. I'm worried about inflation. And so he came up with a lot of reasons why he thought inflation was going to explode, why QE 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 backdoor 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 reflect a misunderstanding of what the Fed's balance sheet really does and is. And it's still like a big um it's a is a favorite hobby horse of his.

Joe: But that itself is 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 um of of honor that you actually figured out that you had to sort of 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 expressed 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 leave those like missing mialas aside. The two things that are more concerning that come out of that though

Skanda Amarnath: is we see now a growing pattern of both obsequiousness and partisanship in how he orients his macro and monetary policy views. So let's let's fast forward to 2024, right? where we had for a while obviously there was a sense of like the Fed's 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. Kevin Worsh for most of that year he was pretty clearly in the camp of the Fed 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 happen 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 doubbish the moment the election changes now obviously like everyone does a version of inflcting their policy views with some level of politics and partisanship whether they can help it or not here to say it's like any 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 fiscal excesses is during periods when it's a Democrat that that's in the White House and then it tends to flip towards deregulation and productivity growth that are going to be disinflationary and that's 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 in this this this last call it 18 to 24 months [snorts] where you've seen that sort of 180 take place.

Joe: Yeah. And I think that kind of speaks to exactly what did he have to promise to President Trump to get the job.

Joe: It's funny you mentioned uh writing op-eds in the Wall Street Journal. And this is also a da 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, you know, I read some of those op-eds, but I also read a speech that Worsh 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 kind of, you know, it made me think like, 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?

Skanda Amarnath: Yeah, I mean maybe it's vibes, maybe it's presidential preferences, but obviously like sort of halfkitting 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 like limitations to what macroeconomic data releases can tell us, what various points of information tell us. We're all trying to triangulate around this like 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 say this is the reason why it's too high, it's too low, it's biased this way. You can have a 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 Kevin War on the data dependent side is pretty worrisome because it kind of speaks to a a disinterest in in being perceived as objective. A 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 moved in this direction or they think indicators are moving this direction. At the same time, you 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 [laughter] what he wants and that he really felt burned by picking Jerome Powell. So basically that Jerome Powell was not pliant enough to what Trump was looking for. I think that that just raises a lot of risks going forward. And I just to bring it back to the issue of crisis, the Fed has been such an important actor in periods of crisis and divided government, right? When we think about 2008 and 2020 when periods when the White House was controlled by a Republican and there was a pretty viciferous 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 out like address the scale of the crisis 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 of sorts. I think that's going to be a lot harder this time around because Kevin Morris's 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 doubbish. He did a version of this in 2017 though less exaggerated. So that's something that like is concerning. Layer 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 the trade policy is going under the Obama administration. I don't really like how like we risk 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 20056 kind of speaks to someone who wants to talk to one side of the partisan aisle, but it may be very different in a crisis when you need relationships across the spectrum.

Joe: You know, regardless of what people thought about Bernanki 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 Bernani liked Worsh quite a bit if I recall. what is the sort of like war origin story of like how he got to be in the circles of some of the most elite you know monetary policy minds.

Skanda Amarnath: So he was one of the youngest people selected to be uh 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, former Fed Vice chairman, people who served under Ronald Reagan expressing reservation. It's about picking someone so young who was had no real track record. He was like an investment bank at Morgan Stanley and technology media telecom for a brief period. He's kind of known in these circles primaril like I don't I don't know how much to ascribe to this. I'm not, 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 Ron Laauair of Estee Lauder fame. So there's like certain levels of connections that have mattered. I think there's pretty well doumented fight between Randy Quarl who was the head of supervision appointed by Trump in his first term and uh Kevin Worsh were fighting over a particular job in the Bush Treasury Secretary office, the Treasury Department. So he's been around Yeah. in those circles. I think he's mostly been conversed with let's call people who are like he was a visiting fellow at the Hoover Institution which is like an intellectual hub for obviously conservative economic thought but he's also mostly been speaking to a specific crowd like the Wall Street Journal oped page has mostly been with those who are of his persuasion. He has managed to do a remarkable job of shapeshifting towards 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 shape-shifting itself has always been with an orientation towards I'm really speaking to a Republican audience. And I 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 you're going to need some institution to do that play that role as it was the case in the car's act or was the case around TARP or around uh any of the other sort of bailouts of 2008. How do you like muster that together when like this person has 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 becomes very hard to trust. And we kind of 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

Joe: that may not exist. Just going back to things that Warsh has said previously.

Skanda Amarnath: 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? cuz I'm thinking, you know, there's been some chat or some suggestion that Worsh would like to radically redesign the way monetary policy interest rates are actually implemented.

Skanda Amarnath: Yeah, that's always been a bit fuzzy to me because 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 in like 2009 10 didn't quite pan out that way. Then people kind of said like this going to lead to asset price inflation/bubbles like maybe there was asset price inflation but there wasn't really like an obvious bubble that transpired from it. And then it 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 at Hoover institution John Cochran 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. It 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 too 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 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. That'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 he's made this his 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 um pays for money market funds to the reverse repo facility. Those have been converging, right? those are basically been those those money market interest 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're going to have 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 it's something that if you if you lower the balance sheet that's how you get lower interest [clears throat] rates. Um these views are all kind of incoherent 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 Wars just 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 5 years of anyone having correctly identified the inflationary turn and then also recognizing when the inflationary turn was coming to an end. He also wants lower rates. So like there presumably no matter who was going to come in was going to have this lower rates now view.

Skanda Amarnath: That being said, you know, does the actual execution of lower rates in the short term setting 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 Walsh versus if it were coming from a Christopher Waller? I think it definitely matters because at least with Chris Waller, honestly with all of the front runners outside of Borch, I can point to a tangible example where that person supported the case for lower interest rates outside of a very Trumpinflected electoral context. And I'm including even Kevin Hasset here. So Rick Reer, 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 Hasset, 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 Bessant and Steve Steve Myin were up in arms about the idea that the Fed could 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 can show an ability to make judgments outside of that sort of presidential context will come with more credibility because in the end as as you rightly point out the FOMC 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 were appointed by the president in the previous administration. I think to a large extent I'm talking about Michelle Bowman or Chris Waller or Jay Powell have shown like a capacity for independent judgment and assessment. Will someone like Kevin Wars be able to bring more people on board is going to be a real challenge, right? Can he be persuasive? Can he 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 suspected and therefore we really need to make take policy in the direction I think 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 it's better than nothing at all or better than the the substitute. And so I think regardless of who was going to be the Fed chair, there was going to be a 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 gonna have to work with the people who are already on the Fed on the FOMC. 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 the 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 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.

Skanda Amarnath: 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 FOMC meeting might be a little a little awkward.

Joe: He's got to come in and the first thing he says is he's like, "Guys, I didn't mean that literally." [laughter] Like if he's like try, you know, he's got he's got to come in and say, "I wrote that, but I don't want you guys to mean I said it literally." He's got to say that real quickly. Scanda, if you were at that meeting, what would be the one question or the first question that you asked Mr. Walsh?

Skanda Amarnath: Oh, I I I think it's it would be good to get a sense of just like what he's uh what he even thinks 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 in the abstract, the need for regime change, we need reform, this need 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 is 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 we don't really know much 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 doubish, there's maybe good reasons to be hawkish, but can he identify those like as a someone who would be on the FOMC or a 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 in 2009 and 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 doubbishly and you just want 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 actually be an effective head chair. I think it'll be remains to be seen. Scander, we're going to let you go, but uh this is not going to be the last time we talk about Kevin Wars with you and many others. So, I appreciate your time.

Joe: Thanks. Thanks for having me.

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