Episode 11: It’s the start of a new era at the Fed. What happens next?

追加: 2026-05-28

[00:00:00]It's the start of a new era at the Fed.

[00:00:03]What happens next? Today we have my guest Nick Timmeros from the Wall Street Journal. Nick is the chief economics correspondent with the with the Journal.

[00:00:11]He's the foremost journalist expert on the Federal Reserve and has reported extensively on Chairman Powell as well as the inner workings of America's foremost economic policy organization. Nick's book, Trillion Dollar Triage, is a wild look inside the Fed during the COVID emergency. So, if you have opinions on the Fed and how the Fed operated, I highly recommend that book. It's really cool. Uh, Minuteby minute and we'll talk about that a little bit today. But, let's just jump right in. Nick, welcome to the show.

[00:00:49]>> Mike, thanks so much for having me.

[00:00:51]>> Let's start today. So, we're now recording. It's the end of the J Powell era. It's the start of the Kevin Wars era. Give me a grade on Jay Powell.

[00:01:02]>> Give me a grade. I don't do grades. Um, look, I mean, the people that I talked to, they give him probably an A for the pandemic. They give him a low grade for 2021.

[00:01:17]Um, I think the question on 2021 is, do you want a grade on a curve? because every central bank more or less um blew the transitory inflation forecast. They were setting policy on a forecast in 2021 that inflation was going to come down quickly. Um so you could give a you know a um like a gentleman's C or something lower for that. And then I think uh most people that I talked to outside of the administration give Powell high marks for how he has dealt with the last year which is sort of a very belligerent uh you know antagonistic posture from the White House. Obviously if you're more sympathetic to the Trump administration you know you won't. So that's part of why I resist grades is I'm going to upset a lot of readers uh and compromise my objectivity. Yeah. Okay. Well, that's great. I I appreciate that that context important. So, so pandemic uh the actual and the pandemic is really you're talking about that first quarter, second quarter of 2020. That's and really where your where your book really focuses a lot of the the minuteby-minute um crisis. So, we'll get dive into that in a second. Um the transitory inflation call was really the miss and then uh and and uh and now and now the big challenge is leaving uh with with Trump has been super as you put it belligerent about rates getting lower and is doing things like the uh lawsuits. There's there's some interesting potentially interesting policy questions in there. But there's some other things about Powell in the last uh 8 years and for example we didn't have we avoided recession. Did we get the soft landing like is and can we attribute that to Powell?

[00:03:15]>> Uh so first I think you're right. I mean Powell will be remembered as the crisis chair right if you go back eight years he came in he took over this plan of quietly normalizing policy. We had a long expansion after the uh global financial crisis and instead he gets in short order a trade war with China, a pandemic, the worst inflation in 40 years which uh certainly they didn't help their case there and we can talk about that and then an unprecedented pressure campaign from the president. I think the through line to all of that is that he was willing and ready to change his mind when the evidence changed. So they come in hiking interest rates slowly. He pivots at the beginning of 2019 they're not raising interest rates anymore. Uh he pivots again in 2020. Uh and then in 2021 at the end of 2021 pivots yet again. So I think the you could say that an underrated part of the legacy is they never had a recession you know a real recession co being the outlier there. That's an achievement given everything he faced. I think on the other side, you know, history will look and say, "Yeah, but inflation's been above the Fed's target this whole time." And I think there the question is, how much kind of labor market downside risk should the central bank take on to get inflation from the high twos down to two? It's a difference question when inflation's, you know, 7% or whatever we had in 2022.

[00:04:46]and Pal walks in and says he's ready to cause a recession if that's what it takes to get inflation down. But I think the the trade-offs around well, you know, how do you balance those risks when inflation's come down, but it's not all the way to 2%. That's where the historians are going to have a lot of fun.

[00:05:03]The um the correlary there is right now.

[00:05:07]So inflation is not at two, but it's in the threes and probably heading up, you know, in the next when we get the the next release of the PCE and the CPI data in the next week or so, I think. Um, and uh, so how much and and I think the labor data has been improving lately.

[00:05:33]So, so how much is the Fed right now going to focus on inflation versus labor? What's the vibe there?

[00:05:44]>> Well, let's go back 6 months because 6 months ago the Fed was cutting. They cut three times at the end of 2025 and the worry there was that the unemployment uh rate was going up a little bit. Layer market looks shaky. These things can be nonlinear. That is when the unemployment rate starts to go up by a little bit. It goes up by a lot. And so the Fed cut, I think, taking out insurance against the risk case there that the unemployment uh situation might get worse. 6 months later, what do we have? The unemployment rate has stabilized. The labor market actually looks like at the margins, maybe it's getting a little bit better.

[00:06:23]uh whether that's getting through some of the tariff indigestion of 2025 or uh some of the immigration policy changes.

[00:06:31]I'll you know I'll leave that for you know kind of specialists to get into but obviously inflation is now the problem again. Um I would say that's probably you know less of the Fed's making and more of you just have this you know kind of unanticipated shock in the Middle East. that's not something that anybody was planning for before February 28th that you know not just oil but helium isn't going to get to the chip producers in South Korea and what is that going to mean for prices and so I think there are really important questions about what it means if we're now in a world where we keep getting hit with bad supply shocks but that's kind of a question less for Powell and more for Wor right and we'll pl we have plenty to talk about for Worsh there. Um let talk to me for a minute about the and we'll then we'll wrap up on Powell and we'll move forward the um talk to me for a minute about about the political pressure. Uh you wrote in the book in your book about the history of political pressure on the Fed. It's not uncommon, but it it was kind of out of favor for 40 years. Uh so tell me about the political pressure. Should I worry about it? Is it or you know what what should I think about?

[00:07:54]>> Well, this may end up Mike being the most consequential part of Powell's legacy. I had to write sort of this retrospective a few weeks ago and it's possible that 50 years from now this is all anybody will will remember from the Powell Fed. He's staying down. Sorry.

[00:08:11]He's staying on the board as he steps down as chair. He's the first chair to do that since 1948.

[00:08:20]And if you look at the comments he made at the last press conference at the end of April where he explained his decision, he made it sound like he was concerned that the institution is under attack, under threat uh and that he isn't in a position to leave a seat to be filled by President Trump when that is still the case. So uh you know, I'm not sure people will really remember him as the chair who left interest rates higher than when he came in. I think they will he will be remembered in large part for how he stood up to a president's attempt to control monetary policy and I would add the way in which he did it there was a um there was his demeanor through all of this was sort of adult right it was it was he wasn't looking for a fight but when it came and we you know in January when the DOJ launched that investigation sent subpoena is to the Fed. He put that video out on a Sunday night. You know, he he finally did kind of respond to um this pressure, which he had tried not to do up until that point. But the you know, the Fed chair always kind of tried to comport himself in a certain way that I think you see less and less in sort of this hyperartisan Washington. And I think that'll be a part of how he's remembered as well.

[00:09:44]>> That's uh that's a fascinating challenge he has right now. And and is the lawsuit going to go away or is it gone? I the thing about the lawsuit about the the building is that >> Yeah, the building renovation. It I I guess I would say it's been suspended.

[00:10:01]Um that was a condition to get Kevin Worsh confirmed. The Senate wasn't going to approve Kevin Worsh's confirmation until the probe went away. What the US attorney for the District of Columbia has said is she will rely on an invest uh inspector general report. these government watchd dogs. Every agency has one. Powell actually asked the IG at the Fed last July to do a review of the building project. The last one had been done in 2021. So the way the investigation is ending is to have something that Pal had already asked the Fed IG to do, you know, uh to make that that work will presumably become public at some point and then the probe can uh either say, well, this shows there's been, you know, egregious expense, but nothing criminal and it's over, or maybe it kicks back up.

[00:10:54]the uh correct me if I'm wrong, but the the logic for the administration's supporters there is that the Fed is too independent that they are too Is that Is that what that's about?

[00:11:13]Well, I think I think it's about highlighting both the incompetence of the Powell Fed and the lack of accountability that central banks have.

[00:11:24]You actually see this in other countries. They've made a issue from time to time of new buildings getting built. You know, buildings are all always over budget. Uh this is sort of uh why no one wants to do these things.

[00:11:37]The Fed's independence though is rooted in two, there are two provisions of the law that make the Fed independent. What is independence? It really just means uh they have some operational autonomy. One is they are not under the congressional appropriations process. They set their own budget. They control their own real estate, their buildings. And then the second is the members of the Fed board here in Washington cannot be removed without a good cause. It can't just be I don't like how you're setting interest rates. And so those those provide the moat. And uh and you know, I think the building thing it's it was it was a it was a salient example for people who were unhappy with Powell's conduct and monetary policy to say, "Well, what can we go after this guy on?" Aha. This building project seems egregious.

[00:12:29]They're renovating two historic office buildings on the National Mall in Washington. Uh $2 billion, huge cost overruns, partly because of the inflation problem that we've had in the country. And so it was salient.

[00:12:44]>> Yeah. Fascinating. Um so so Paul's legacy may be that he was able to stand up to to political pressure which was largely aimed at trying to guide monetary policy.

[00:13:01]>> That's right. And Donald Trump has a very specific view of how interest rates should work. He sent a handwritten note to Powell last summer that outlined all of this. He looks at a list of every country's borrowing cost, their overnight borrowing cost, and he sees the United States as not number one with the lowest borrowing rate. Well, wait a minute. We are the best economy. We are the best credit. We should have the lowest rate. Unfortunately for the president, you know, that may be how it works in commercial real estate uh and corporate finance for sure. That's not how sovereign finance works. There are other factors like growth and inflation.

[00:13:42]Um and so you could actually have you could be the best economy but not have the lowest rate. But you know that isn't how the president sees it.

[00:13:51]>> Right. Okay. So of course and and one of the challenges right now for rates and and for inflation is the government spending, the fiscal side of the budget, the the the other side of how money works in the country. Uh, right. I mean, is that one of the things you see?

[00:14:09]>> That's that's right. There's, you know, there's just also the the simple fact that we've had higher inflation in the past few years in this country. And so, you know, a 4% 10-year yield, uh, you know, if you go back seven or eight years, people would have said, what's it going to take to get a 4% yield? We were, you know, could barely stay above two. uh and you know the world has changed. There's there is more demand now in the economy. There are more imbalances and there has been more inflation.

[00:14:44]>> Okay, that's really really useful. Let's switch gears.

[00:14:48]Let's talk about Kevin Warsh the next era. So he's got his first meeting on June 17, I think.

[00:14:55]>> Um that's right.

[00:14:57]>> And inflation's coming in hot.

[00:15:01]um and likely going to have another hot report between now and that meeting. Uh Worsh got hired uh because he was promising lower rates.

[00:15:13]What's Tell me about what I should be thinking about the Worsh era as we know it now.

[00:15:19]>> Well, every Fed chair gets tested early on. You know, Greenspan famously had to deal with the Black Monday uh stock crash in October 1987, just three months after he came into office. And it looks like Worsh is going to face a test early on as well. Um the week that he takes office last week, you see 30-year bond yields hitting, you know, two decade highs. Um, so yes, the the the the case for cutting has evaporated, you know, between the time he was announced as the president's pick at the end of January and when he gets the job in the middle of May. I think the issue, you know, if you could tell me one thing that would help me understand what is going to happen with interest rates this year, it would be when does the straight of Hormuz open? I mean, it it looks, you know, as we record this um May 26th, it looks like there's a deal coming together to try to get commodities moving again through that allimp important shipping corridor. Um but if that doesn't happen, and there's been optimism before, that just makes it harder. The longer things can't move through the supply chain, the greater the risk of of higher inflation. And even once things reopen, I think the prospect that this thing could now easily be cinched back up again by the Iranians or whoever wants to cause trouble in the region, you can't unsee that. So to me, that's the that's the first order challenge. Worsh is walking into a job where he can't easily deliver what he was hired to do, and that could be the central tension of his chairmanship from day one.

[00:17:04]Do do uh you know it's funny as you're talking about the straight of hormuz and and the supply shock there. That sounds to me like a transient view of inflation.

[00:17:19]>> Uh >> transitory the t word, right?

[00:17:21]>> Transitory. Yeah, transitory view.

[00:17:24]And so does when they're inside the Fed making making interest rate decisions and policy decisions, do they uh do they look at that? Do they look at the straight of her moves or are they really just looking at the you know the PC numbers coming through?

[00:17:48]So the standard central bank textbook response would be to look through in other words ignore this by the time you change monetary policy if this is a you know one-time hit in the price level and if it takes monetary policy 12 to 18 months to react by the time you've reacted the shock has come and gone. The problem of course is that this isn't just if this is a one-off event, it's coming on top of the tariff and imig and immigration policy changes of 2025 which affected uh labor market demand and goods prices respectively. It's coming on top of Russia Ukraine uh commodity disruptions of 2022 which came on top of pandemic disruptions of 2021 and uh Fed Governor Chris Waller who was also in the running to be Fed chair gave an important speech in Europe um the day that Worsh was sworn in at the White House on May 22nd where he basically says look if we if we know these are things we should look through individually but if they sort of accumulate and they always hit from one side. you start to have to worry that even if the public is confident the Fed is going to bring inflation down and we can talk about just how important inflation expectations are to central bankers that after a while you have to worry well if the public even if the public thinks these are going to be one-offs if you keep getting hit from one side you know I think about the the great Gilda Rener Rosanne Roseanne Dana sketch it's always something if that always something now is, you know, pushing up prices.

[00:19:33]That's hard. So these ultimately, Mike, these are judgment calls that the people in these chairs have to make. You could say, of course, we shouldn't react to this. It's going to go away. You know, it's going to push up prices for a time, but it's an increase in the price level, not year after year price increases, which is what inflation is. You have people on the other side who are going to say, "Uh-uh, we keep saying that."

[00:19:57]And businesses are now learning how to pass along price increases. They have excuses to do it. They can say, "Well, it's tariffs. Well, it's oil." Um, and consumers are accepting it because nominal demand growth is steady around five or 6% nominal GDP growth. And you know, so what the Fed is there to do is to police the second round effects, price uh higher prices feeding into wages, changing expectations. And and the question is when do you have to get worried that if you don't do anything, you're sort of uh implicitly allowing those second round effects to take hold.

[00:20:35]on the downside of the Ford uh the the Fed governors, the I think it was Stephen Moran was like the one who was angling for a cut recently, like the one person in the cut.

[00:20:51]Do you have insight about what his logic is there and whether that changes next meeting?

[00:20:59]>> Well, so he's he's spoken a lot about his view. Part of it that restricting immigration and population flows, you get some housing disinflation.

[00:21:08]Um, he's actually off of the board now because his seat was the only seat available for Kevin Worsh. So, he won't be at the next meeting unless some seat comes open. He'd have to get back on the board. So, he's not there. He had dissented for easier policy at every policy meeting that he went to since September. If the Fed cut, he voted for a bigger cut. if the Fed held, he voted for a cut. Um, and he was not really moving um the the debate in his favor once you began to see uh higher prices and uh and so the inflation problem I think you know they're no longer debating whether to cut. They're debating well do we need to talk about raising?

[00:21:53]>> Yeah. Okay. There are you mentioned housing and housing uh deflation disinflation in there. Well, we've got some housing topics to to get to because I'm re like there's some really interesting stuff here and of course for our audience, we'll want to talk about how the Fed thinks about housing and and how those mix into all the policy. Uh I've got some other things about questions about about Worsh. Um he's mentioned I think that he wants to do less guidance on what the Fed's thinking and where it's going.

[00:22:28]What? Tell me about that.

[00:22:33]>> So if you look at the Fed over the last 25 years, one common change has been they communicate more about what they're doing and why they're doing it. Before 1994, the Fed didn't even announce a policy change after they made it. You had to wait a couple of meetings for the for it to come out in the minutes. But in in February 94, Greenspan says, "We're raising rates. We want everybody to know what we're doing, so I should put out a statement." Um, the first time the Fed actually put out a statement at a meeting where they did not change interest rates was in May of 99. That's important because they thought they were going to raise interest rates at their next meeting or that they might, and they did. Um, and so they put out a statement basically saying, "We now think if we move it's going to be a rate increase." Um, and ever since then, you now have more public communications, you have an inflation target. And why do they do this? The whole reason uh they they began to do this, there was a Fed governor in 2003, Ben Bernani, this was before he became the chair. and he tells his colleagues at an FOMC meeting that, you know, ambiguity has its uses in poker games, but monetary policy is a cooperative endeavor. We want to get the markets on our side because they can do some of the work for us. If we tell people, so this is kind of how the Fed has operated ever since, and Bernanki has sort of built the scaffolding where they do this. If we tell people how we see the economy that we're going to be really worried if the economy grows and that's going to cause us to raise rates or maybe we're not maybe we're not going to be worried but we tell people what how we're going to respond. Uh Fed watches call this the Fed's reaction function how they will react to a set of data. If we tell them our reaction function then when the data comes out and bond investors go and trade they're actually doing the Fed's work for. And so that's why you now see this dance in the markets where the Fed explains and the market reacts. And the better the market understands the Fed's reaction function, the more immediate the transmission of monetary policy is to the economy. Worsh is just he is not bought into this. You you it's it's a common theme from his speeches over the last 10 years. He thinks the Fed talks too much. He's worried that if you communicate but your forecast is wrong the way it was in 2021 and the market is overly anchored to a bad forecast um that you actually cause more problems than you solve. So where does that take us today? I think you're going to see a real uh challenge here where Wars is going to try to row back a little bit on some of the innovations that we've had in this post Greenspan Fed. And the question I have, the honest question I have is how far is he going to get with colleagues who um you know, everybody will will say there are things we should change about our communications. It's obviously far from perfect, but I I hear still a fair bit of support for a lot of the general idea that, you know, that Bernanki poker analogy relates uh for why the Fed does, you know, does it the way that they do it. does um so less communication would that imply things like the dot plot goes away?

[00:25:59]>> Yes, I think the dot plot is something to watch. What is the dot plot? This is the interest rate projections that they release four times a year. You know, it it it was birthed into this world in 2012 or the end of 2011 when when uh there were a lot of questions about how soon would the Fed raise interest rates off of zero and they wanted to show everybody put down your dot and we'll just show them that we're not raising interest rates for a long time. We're we're not in that world. So there, you know, the dot plot can can help or can confuse depending on the moment we're in. Um there had been a run I think last year Powell had been looking at do we really need to do this and he kind of gave up or he put it on the too hard pile because there just wasn't strong consensus. I think the problem with all of these things that you're not going to do a press conference war said you know he's not a big fan of the press conferences. I think the problem is when you take something away that you've been providing now it looks like you're removing transparency or accountability.

[00:27:02]So I think the challenge is going to be what can you do in its place that uh that on net you're still being as transparent and accountable to the public because these are 19 unelected people who go into a boardroom privately every 6 to 8 weeks and set the overnight price of money. So there's a you know there's a challenge there and I think there are there are some people who feel like Powell doing a press conference after every meeting. He needed to be so well prepared for those or he wanted to be so well prepared for those press conferences that they locked in what they were going to do at the meeting days ahead of time and you know that limits your flexibility. On the other hand, doing that press conference that's you know you're you're showing everybody your work. You're explaining how you got to the decisions that you made. Um, and that's the trade-off.

[00:27:53]>> Yeah, it it feels like less transparency, less accountability, but but I I understand the argument which is uh which is that it locks us into expectations.

[00:28:12]We've talked about these things publicly and it less allows us to be less nimble in policym.

[00:28:19]>> Right. That's right. That's the trade-off right there. And um well, it'll be fascinating to see are there are there examples of nimleness, absence of nimleness that that uh that they've run into recently like they >> where they should have acted faster and they couldn't because of that.

[00:28:43]Well, the clearest example was, and this is what Worsh I think would cite, is in 2021, the Fed had this sequence. They came up with their guidance uh before there was a vaccine in September 2020. So, they said, "We're basically going to hold our hands to the mass. We're not going to raise interest rates until the following conditions are met." Then they got hit with the the so-called transitory inflation. not what anybody expected when they laid out that guidance, but they really didn't want to go back on it because if you break your word, then it's not going to mean as much in the future. And then they had this order of operations that said before we raise interest rates, we're going to pull back on the MBS and the treasuries that we've been buying. And they didn't want to pull back until they were sure that they really needed to move. And so it basically put them behind by six months.

[00:29:32]If they hadn't had all of the trappings of the guidance and the this and the that, they could have raised interest rates in say October or November of 2021. Instead, they didn't raise interest rates until March because they wanted to go through this sequence. You know, that is that that did happen. But it's that was sort of the mother of all shocks, right? 15% unemployment in April of 2020. Um, and they designed a framework for just an extreme event. And I think inside the Fed there's a view that well of course we're not going to do something like that in normal times.

[00:30:08]Um, you could point to times I could point to something last fall where it looked like maybe they did the last cut because they had sort of blessed it in the September interest rate projections, but here we're talking about a 25 basis point move. nothing that you know is really going to screw up the global economy because of one one cut or not cut >> there. There are there moments now so we're seeing uh a sharp say we see the May inflation numbers come in and they should they jump even more than expected.

[00:30:40]Are there are they ready to be nimble to do rate increases faster? you know, like because I think the markets right now are forecasting maybe like starting to look at December as maybe a rate hike month.

[00:30:58]>> So, you know, let's go back to Hormuz and and whether it opens because I think that's an important question. There's one view that says, you know, if if we can kind of get off of this um off of these blockages and things things can start to flow again, maybe the Fed can, you know, maybe the path to cutting rates is back. I would be I would be surprised to hear a lot of people inside the Fed endorse that position right now because a couple of things have changed.

[00:31:29]One, the labor market looks better. to AI, which was being held out as something that could be deflationary.

[00:31:37]It's going to drive all of our costs down because we're all going to be so much more productive. Um, well, actually, in the short run, it's driving costs of memory sticks higher, that's going to filter into things. If I can't buy a turbine engine because it's, you know, oversubscribed for a data center, that's pushing prices up. So I think now there's a broader recognition that while AI could be very disinflationary or deflationary in the 2030s or towards the end of this decade if it's driving up input prices technology stack electricity in 26 and 27 that doesn't get you the rate cuts that you know that could come later. So those are two things that I think are different now when it comes to well could the Fed be back into a cutting mode if we can get through this geopolitical situation AI and and the employment market that looks different from a few months ago as to what it would take for the Fed to be raising interest rates. I think you'd have to see just stuff is not flowing through the Gulf. Uh that's you know other central banks are now raising rates. Everybody's worried about inflation expectations. Everybody's worried about real rates declining. That is inflation adjusted interest rates are going down if you don't raise uh nominal rates. And the last point I would make is I think one question here for the Worsh Fed is you know Worsh likes to say that we're back to the 90s. And what he's talking about is in 1996 Ellen Greenspan uh was under pressure to raise rates and he said let's just hold off here. we're seeing some productivity developments that are positive and and we may not need to worry about the inflationary effects of strong growth and he was vindicated. He got his colleagues to hold off on raising interest rates in 97. Are we in 96 or could this be more like 99? Because in 99 the Fed raised interest rates.

[00:33:34]They had cut three times in 98 because of the LTCM uh the Russia debt default that created some financial problems at the end of the year and they took those back. And so I think the question now is going to be well could this be more of a 99 situation where we need to undo the cuts that we made last year. Nobody's really putting it that way yet, but that's one thing I'm listening for.

[00:33:56]>> Okay, that's great. And you and you bring up the AI boom, the AI spending boom, which is a dramatic impact on the on the economy, and it it could indeed be inflationary now because the spending is going faster than the than the productivity improvements are kicking in.

[00:34:18]>> Yeah, I think that's that's the question now is is, you know, supply and demand, right? It's just supply and demand and the Fed's got to figure out where they think it is today, where they think it's going to be in 12 to 24 months and make sure that they're in the right position.

[00:34:34]Um, and you know, for right now, you don't hear a lot of concern that they're out of position, but you hear the risk is what's changed. The risk case last year was tilted towards weaker labor market and we should address that risk.

[00:34:48]And the risk case you're hearing people talk about now is, well, what if policy isn't as tight as we thought it was?

[00:34:55]What if it's no longer imparting meaningful restraint on inflation?

[00:35:00]And you know, if the Fed has to raise interest rates, they're probably not doing one move, right? They probably would be doing a sequence. And so, you're waiting for enough evidence to accumulate that says, "Yeah, you know what? Things have changed enough that you probably need to be moving a few clicks." and not just one. And so I think it'll take more time for that case to build and we could be on hold for, you know, for for months here as they try to figure out uh where the right place to be is.

[00:35:31]>> Okay, we we uh touched on housing. Let's dive into housing a little bit. Um, in 2020 2021, one of the big moves by the Fed was buying mortgage back securities driving mortgage rates lower.

[00:35:50]This was a pandemic stimulus designed strategy from the housing side.

[00:35:59]From the from the housing market side, my seat in the housing market, it sure looked like it went on a lot longer than it needed to to respond there.

[00:36:10]Uh mostly the Fed doesn't muck with mortgage rates, but this time they did.

[00:36:16]And so what is is that what should we think about that uh that specific lever that the Fed has? Will they never do it again? Will they they still have some MBS so they need to unwind them and that drives rates up now? Like what what do we need to think about the the Fed actively in in the housing market?

[00:36:38]>> Do they care?

[00:36:40]>> Well, no. They I mean the Fed bought MBS uh in 2008 to repair the mortgage market. In 2020, I think it was more of a duration. They just wanted to buy duration. You you can't buy enough 10year and 30-year paper without really messing up that market. So, you buy MBS, not because they're trying to target credit to the housing market in particular because they just want to buy duration. But you're right, you had the Fed pressing down on mortgage rates while home prices were already surging.

[00:37:08]You're pouring fuel on a fire that was burning. In hindsight, and I think the Fed has admitted as much, the MBS purchases are one of the clearest examples of the Fed staying in emergency mode after the emergency had passed. So, of course, they will think twice again.

[00:37:24]But to be honest, before the pandemic hit, when I would go talk to most people at the Fed, you would hear the view of we really hope we don't have to do QE again, rates were around 2% of the time.

[00:37:34]So, they knew there were was a risk. you were one shock away from zero rates and you'd have to buy something. But what I heard was, "But we're not going to buy NBS. We definitely don't want to do that." Well, CO hits and all of that goes by the wayside. So, I don't know that I would really want to say what they will or won't do based off of that example. But people are conditioned by the last war, by the mistake that they made. You know, Powell was a Fed governor during the taper tantrum in 2013. That was his first year. and that had an experience on him. Interest rates were going up everywhere and em were getting crushed and it's like, oh my god, this is because we didn't communicate what we were doing very well. So in 2021 it was all about we don't want to have another another taper tantrum. And I think you make a good point here that going forward it'll be well we don't want to lock in a generation of you know housing problems with uh miscalibrated policies. the the when when they're making policy, do they think about the housing market?

[00:38:43]Do they is that does it come up in the discussion?

[00:38:48]It it comes up sort of as a channel, not as an not as an objective. So their mandate is inflation and employment, not asset prices. Of course, privately they're aware that their tools are very blunt. When they cut, they're going to juice housing demand. When they hike, they freeze the market. Uh, and you have a lockin effect. But I think they see affordability as fundamentally a supply problem. Not something that monetary policy can fix. You wouldn't want to do something different for the entire economy because of what it's going to do to the housing market. So, there's a bit of a tension. I think they know their policy massively affects housing on both ends, but they don't think housing outcomes are theirs to steer. And so they'd argue that the lever there is going to be on the supply side, which is Congress or local zoning or, you know, the FHFA, not the Fed. did they? So when they're setting uh policy based on inflation, of course there's a housing is a big component of the inflation numbers um and specifically rent uh and and rent numbers which are also lagging. So, anybody who watches knows that the rent numbers because you they're set based on when you do a renewal of your lease, which only happens once a year, you really have a like maybe almost a year lag time between when the rents are starting to change, and when it shows up in the CPI numbers, the headline inflation numbers.

[00:40:25]Everybody knows this. How does the Fed deal with it?

[00:40:32]>> Well, one thing that Powell did in 20 the end of 2022 when it was, you know, everybody's pointing to apartment list or Zillow and saying, "Look, new lease rates are going down. Shelter inflation's at seven or 8%, but two years from now it's that, you know, like you're looking at a rearview mirror. Objects are way further away than they appear." So he came up with this uh three buckets. These three buckets of core inflation. Core inflation takes up food and energy. Not because those aren't important, but because they're volatile. Um what were them three buckets? One was core goods, one was shelter, and one was everything else that was a service that wasn't shelter.

[00:41:15]Core services ex shelter. So let let's look at those because shelter has been by far the best behaved. It's actually running below where it was before the pandemic marginally. Um, you know, but to get inflation back to 2%, you need everything to go back to where it was before the pandemic, more or less. It could be a little bit higher because inflation was below 2% before the pandemic. So, let's give shelter a green light, an Agrade. Shelter is doing everything you would want it to be doing. Um, and the problem then is really in core goods and in services excluding housing. Core goods had gone back to where it was before the pandemic in 2024, which was about 0%. We were always in a little bit of deflation in the goods space since the early 1990s.

[00:42:04]Last year, core goods started to go up.

[00:42:06]You could say that's tariffs. You could say that's AI, you know, and and that, you know, that sort of offsets what you were getting from shelter. And then core services excluding housing is the last bucket and that pretty much went sideways last year. So, you know, the long and short of this is shelters, you know, shelter is is doing great. If core goods had stayed at 0%, if it had stayed where it was going back to in 2024, we wouldn't be talking about inflation being above target. Um, that's not the world that we're in.

[00:42:42]>> Yeah. And when you say how the the shelter numbers are doing good, you mean that from an inflation perspective, they're really low.

[00:42:52]>> Yeah. They're they are not the reason the Fed is struggling to hit their target. You know, shelter is just >> it's it's um it's giving the Fed everything that they wanted to see two years ago. And and you know, in some of the data, the real-time data that I look at, you know, we're we're looking at I'm looking at rents that are negative, like outright deflationary right now in the real- time data. And actually, in the in some of the purchase, depending on how you measure purchase prices, too. Uh, you know, in a lot of the country, home prices are down year-over-year. how uh so you know yes core goods are up uh and and there are tariff things there's there's Middle East things there's AI things driving all of that um does does that but the but the housing numbers in there probably do not reflect the negative yet right in other words it's the housing numbers are better than they even look you in the overall. So, do they are they uh rolling the dice and say like, you know, like we could ignore some of the head like we know that housing's going to bring the the headline number down lower.

[00:44:08]>> Like, do they use that?

[00:44:10]>> They've already if you're if the question is have they already kind of baked in better shelter inflation into their baseline?

[00:44:17]>> I think the answer is yes. I mean, what's happening in the housing market in 2026 is not driving the interest rate thinking of most Fed officials. Um, maybe with the exception of former Governor Moran, um, who was pointing to what was happening in the housing space as a reason to cut. Um, the the the question really is tariffs. If tariffs raised core goods prices and they were implemented a year ago, that should be rolling off the books now, right? If it was a one-time deal, it it should start to get less and less and less. And even if the Iran war hadn't thrown a bunch of sand in the years, that's what the Fed would be focused on right now. And then you get past that and you're going to look at, well, it is energy diffusing, spreading into other things. You know, it's going to hit airfares, but is it going to hit stuff that gets shipped across the country on freight trucks and and things like that? So yeah, housing is just not something uh you know la last year when the Fed was cutting I think there were some people saying look if if starts continue to go down and employment has kind of held in in uh you know uh residential investment but if it doesn't that could be the thing that starts to send uh job losses up. you haven't really seen that in the broad data. Uh so I would say that's sort of a a concern that wasn't realized or hasn't been realized. Maybe it'll happen, but if on the other hand, you're having all this construction boom and data center construction, maybe it doesn't. If the workforce is being deported, maybe it doesn't. So I think there's a lot of uh uncertainty there.

[00:46:02]>> Uncertainty there. But okay, that's a really interesting way to think about it. So looking at the housing starts numbers, the residential construction employment numbers really gives us insight to the employment side of the the dual mandate. And and so rather than looking at existing home sales numbers or existing home prices, it's like are we building houses? And uh and are we and if we're not are is that if is that if if home if the housing market is tumbling, do those unemployment numbers go up and does that drive the employment side? What's the what's the risk the current analysis of a stagflation uh scenario coming in under Worsh. So we we definitely have inflation coming in.

[00:46:58]Employment's been pretty good and maybe maybe improving as you said around the margins.

[00:47:04]What what are we thinking about stagflation where they're both going? I mean, yeah, it's a genuine bind, right?

[00:47:11]Inflation rising with growth softening would be the classic stagflation setup.

[00:47:16]Uh, you know, I always compare it to a soccer goalie facing a penalty kick. You have to decide which way you're going to jump. Are you going to jump left to shore up the falling uh employment? Are you going to jump right to deal with rising prices, knowing that whichever way you go, you could make the other problem worse. You leave more of the net open. So, I think that means that the likely near-term path is just to hold and wait. They're not going to cut into rising inflation. Uh they won't hike into a softening economy unless they really see something that'll hurtens them. So, that means buy time, watch the data, hope the energy shock proves temporary or transitory, if that's not a bad word. Um, you know, I think the risk that hold and and wait stops being viable is if inflation broadens out. If if three or four months from now, you're now seeing it spreading into more goods and services. Um, because at some point holding steady a nominal rate while inflation rises is actually easing in real terms.

[00:48:22]And you see the European Central Bank, which cut rates a lot more in the last couple years than the Fed did, getting ready to raise interest rates at their next meeting largely because uh you know, because of that dynamic.

[00:48:36]>> Interesting.

[00:48:37]>> The uh the housing numbers there really say there's nothing in the housing numbers that that indicate home price appreciation yet or home or shelter cost appreciation.

[00:48:50]haven't seen anything yet really turn the corner. There are some pockets where that is true. Uh some some price appreciation. Some of the Midwest Northeast markets have super tight supply and therefore home price climbing. San Francisco has had a lot of AI investment capital markets boom, wealth effect kind of boom that is driving home prices higher and rents higher there. But but these are still pockets around the country. And so um broadening out inflation would be into other parts of services still ex housing.

[00:49:33]>> Yeah. I mean big picture people ask me what's it going to take to get interest rates back down to 5%. That's a good question.

[00:49:42]I say well look at what it took the first time in 2009. I mean, you had the Fed buying assets, interest rates near zero, the 10-year I I have to go look 3% in the mid-30s. Um, you know, we're not just one or two interest rate cuts away from getting something like that. people think that we're getting 5% mortgage rates anytime soon, you're you're kind of betting on um some scary things happening in the economy because that's what gets the Fed to cut, you know, more than a one or two off recalibration move. Um and I I think that's kind of the big big picture here is that, you know, what if 6% is the new equilibrium?

[00:50:27]uh you know we're kind of above it when things are going better below it but otherwise uh you know we I think we kind of got so accustomed in the 2010s to you know 5% was high being below 5% was normal um and we kind of shocked the economy out of that. Yeah, we um that I think makes a lot of sense and it's it's not something that people in in our industry, especially the mortgage folks like to hear, but it is likely that we're in this 6% range for a long time.

[00:51:02]Un as you point out, unless there is some scary scenario, some scary kind of crisis, >> the Fed, I like to say the Fed doesn't cut for free, right?

[00:51:16]They some you know something some financial catastrophe or so you know someone said to me right before the Fed cut to zero in March 2020 well President Trump wanted low rates in the worst way and he's getting them in the worst way.

[00:51:32]>> I think about that from time to time. I mean, you know, lower interest rates. It It would be great if we have this productivity boom and we can sustain stronger growth with lower inflation and you don't have to raise interest rates.

[00:51:48]You can have lower interest rates. That would solve a lot of the fiscal problems the country faces. That would um you know make real estate um um look better.

[00:51:57]But you don't get out of these affordability challenges just by cutting interest rates and sending home prices back up. Yeah, you for sure. And you uh you actually mentioned that inflation has been was below the 2% mark for a lot of the last decade right before we went into the to the pandemic.

[00:52:19]Was is there now a in retrospect a view that that rates were too high or did we under grow because we we were too focused on inflation during that period?

[00:52:36]>> Well, I mean partially yes. The Fed unveiled this new framework in 2020.

[00:52:42]They had been working on it before the pandemic hit that basically said we're not going to raise interest rates until we see meaningful proof that inflation's going to hit our target and maybe even go above it for a little while. Now the overshoot that they were talking about was two and a quarter or two and a half% not you know seven or 8%. So they got hit with nothing like what they were expecting. But yes, I think the Fed under Powell, the framework that they rolled out in August of 2020 basically said we kept thinking we were being preemptive because inflation was going to come back and you know we never saw it and we don't need to be the enemy of growth if we don't see inflation that you know that this it was just bad timing, bad luck, whatever you want to call it. we got hit with inflation at the moment that everybody said, "Oh, we really need to be less worried about inflation." And the Fed has been playing catch-up ever since the Okay, so that's that. So they there is recognition of that that they were undershooting and and probably could be more growth oriented in the economy in that occasion. But now we're in an entirely different era and we're probably that we throw that that framework out and work the other direction now.

[00:54:04]>> Yeah, I think that's where we are. You know, when I started covering the Fed 9 years ago, there were every, you know, every so often you'd get hit with these shocks that would bring prices down.

[00:54:13]There was a wireless pricing adjustment in the CPI in 2017 that everybody thought we'd they'd be getting inflation back up to their target and oh this is and you know I used the Rosanne Roseanne Dana line earlier that was actually Governor Dan Terulo at a Fed meeting in 2015 or 16 observing that we keep getting hit with disinflationary shocks.

[00:54:33]Maybe technology and globalization are just changing the way the inflation generating process works. And I think now you have to wonder if it's moving in the other direction. We're undoing globalization. We are, you know, whether it's French shoring or reshoring, uh we are introducing new cost structures into the supply chain. We are moving from a a just in time uh inventory management process where you kept everything away and you got it here right when you needed it to a just in case. Maybe I'm going to have, you know, redundancies in my supply chain because I don't want to get caught unable to sell. Um and that you know so are we building do we have a economic structure that is more inflationprone than what we had before the pandemic that you know this could be the big challenge for the Worsh Fed is Kevin Worshes articulated a view that AI is going to be disinflationary and the Fed needs to look ahead to the uh you know the lack of pricing power that's going to exist in the economy. I think the question is does that collide or do we get hit with something before we even get there where you have these overlapping and correlated shocks, you know, geopolitical shocks. We have a world that is that is uh is causing more of this whether it's tariff trade policy or what we're seeing in Iran this year where we're just this is just going to is this going to be a feature of the economic landscape and that that's awfully hard for a central bank to say well we're going to set policy now assuming that this sort of run of bad luck is going to continue that that's a difficult thing to do uh but you know you you do see what's happening here >> right so in other words rather than Powell being the crisis chair, it would be Powell is the first chair of the crisis era where there's one crisis after another.

[00:56:31]>> Yeah. I mean the the in the 1990s we called it the great moderation and central bankers had it easy because they could you know they could say well inflation just kept coming down. It was at 4% when Greenspan took office in ' 87 and by 96 it was at 2% and it just it seemed like maybe we had tamed this thing. Um and that was the great moderation. It made central bankers lives easier. They had the winds at their backs. What do central banks do now if they have the winds at their face and and what do businesses that have to do with a different cost structure do in that environment?

[00:57:11]Nick Timmeros, it's been a terrific hour already. I really appreciate your insight. Uh the uh book Trillion Dollar Triage, if you are my listeners, if you're my my if a Fed critic or you want to understand what are they really doing there, read that book. It's so cool thinking about like what did they have?

[00:57:32]What were they facing and what did they do about it? Really, really fascinating.

[00:57:37]before lockdowns even happened, the crisis was well underway. Um, Nick, any other books in in the works?

[00:57:46]>> No. You know, I wrote that book five years ago. My kids were three years old at the time, and I promised myself I'd wait until they got out of the house.

[00:57:55]So, >> it's a lot of work to be a book, man.

[00:57:59]>> Maybe maybe when we're on the other side of this regime, there'll be another uh story to tell.

[00:58:04]>> Maybe. That's right. Okay. Um, and every day in the Wall Street Journal, Nick Tim Ross is where you find his stuff, is the the expert on the Fed and I appreciate your insights and your uh inside information and uh really helped shape our understanding for the housing market.

[00:58:22]So, thank you so much, sir.

[00:58:24]>> Well, thanks for having me, Mike. I really I appreciate it. Always learn a lot from you, too.

[00:58:28]>> Great to Great to talk. All right, everybody. That's that's the episode for the week. We'll be back in in a couple of weeks with another episode and uh see you then.