First rate: Kevin Warsh’s Fed debut
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What is the main topic discussed in this episode?
The Economist. Hello and welcome to the intelligence from The Economist. I'm Jason Palmer.
And I'm Rosie Blore.
Today on the show, Germany's left-wing De Linke wins over the young and a selection of our readers' hacks for managing managers.
First up though.
President Donald Trump put Sharpie to paper yesterday inking the long-awaited and much touted deal with Iran. With that, a reminder that for all the power plays and posturing, he always has his eye on markets and money.
I didn't want to see Economic catastrophe. If you kept this going, that could have happened. But all I know is every time we talked about the possibility of peace, the stock market shut up like a rocket ship.
You know who must have been glad Mr Trump was preoccupied with Iran? Kevin Warsh, freshly minted chair of the Federal Reserve. It was rate setting time yesterday, his first. What to expect from this lifetime hawk who got all dovish when angling for the job? From the next chair who should expect relentless Trumpian pressure to lower rates?
As you saw a few moments ago, the committee decided to maintain the target range for the Fed funds rate at 3.5 to 3.3 quarters percent.
He held firm. Not the most exciting news. But as so often with fed shares, there were more tea leaves to be read.
In some ways the least interesting part of the Fed meeting yesterday was what happened to interest rates.
Archie Hall is our US economics editor.
They stayed flat. Everyone expected them to, and Kevin Walsh managed to push that through. What was much more interesting was everything else. His communication style, his plans for federal reform, and everything that it said about how he's going to handle the next four years.
So let's start with what might otherwise have been the big news, the decision on interest rates.
Kevin Walsh came in with a claim that he was going to be a crusading interest rate cut, or at least that's what he pushed for during his campaign to get Donald Trump to actually nominate him for the job. And we've argued that was always a dubious proposition that was never really quite in line with, frankly, either his prior reputation or certainly where the American economy was at the moment. Well, the more pressing issue is that actually since he was nominated in late January, the American economy has shifted pretty decisively. So inflation's now up a decent bit because of in part the Iran war, but also in part investment in AI and so on generally is looking firmer than it was at the start of the year.
The lay markets, if anything, look a bit stronger as well. So all that pushes in the direction of higher interest rates. And it's become clear that the notion that water was Pushing during the campaign that AI would be a disinflationary force and push inflation down, while maybe plausible in the long term, certainly doesn't seem to be biting in the short term when we have data centers and show on showing up and really pushing demand into the American economy. So it was always going to be hard to cut interest rates. We're also at a stage, frankly, where inflation is above target, but not devastatingly so. May well come down given some of the news from the Iran war side. And so holding on, waiting and
seeing was a pretty sensible thing and seems not to have been terribly controversial.
But you said that was in fact not the interesting thing. In particular you mentioned his communication style. What do you mean by that?
Central bankers sit on a spectrum. Some of them like to talk and like to explain what they're doing pretty closely to markets and the public. And they think that means they're better understood, they're treated as more legitimate by the public, and also markets are more likely to know what they're going to do and therefore be less volatile around central bank meetings. There's another school of thought, which is much more where Kevin Walsh is, which is basically that central bankers' job is to set interest rates and really not do very much else. And that a lot of the communication that's going on is a distraction.
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Chapters
5 chapters
1
What is the main topic discussed in this episode?
0:03–7:26
2
Why did Kevin Warsh keep the Fed funds rate unchanged at his first meeting?
7:26–11:09
3
How does Warsh’s communication style differ from his predecessors?
11:09–16:20
4
What reforms and task forces is the new Fed chair proposing?
16:20–21:15
5
How might the Iran war and AI investment affect future U.S. inflation?
21:15–24:52