FED RATE HIKES WOULD ONLY DAMAGE THE ECONOMY

Added: 2026-05-07

[00:00:00]President Trump's nominee for Fed Chair Kevin Wars moves to the full Senate for a final vote expected on the week of May 11th. Joining us now to discuss is Daniel Lay, chief economist at Tresis, international financial analyst and author of the book The New Global Economic Order. So Daniel, good afternoon. Hope you had a great weekend.

[00:00:20]So first question I want to ask you, what what is the state of the Federal Reserve that Kevin Worsh is inheriting and what do you think he's going to bring to the table?

[00:00:30]Uh thank you very much. I think that the state is one in which uh the general uh feeling is that the Federal Reserve has made some very drastic policy mistakes in the past 5 years. First by saying that inflation was transitory in uh 2021, then by hiking rates way too fast, and then by cutting rates in the middle of an election process which wasn't required. So there's been a lot of concerns about the uh lack of interpretation of monetary aggregates from the Federal Reserve. It is not paying attention to the growth in money supply and to the situation of government spending and government deficits. So that's what he is inheriting. I think that his big challenge is to fulfill the mandate. We must remember that the Fed now is not maintaining its mandate. It's not fulfilling it because the the the information coming from their own beige books is saying that small and medium enterprises are losing the opportunities of job creation. That job creation has been slowing down because of elevated rates and they have not cut rates. No.

[00:01:51]So I think that his position is going to be important. They need to fulfill a dual mandate which is jobs and inflation and those two elements need to be taken into account with the same level of care and with the same level of concern.

[00:02:07]>> Okay. So if if Kevin Walsh is confirmed um what would you say would be the biggest difference between him and Jerome Powell in in terms of approach?

[00:02:18]In my opinion, I think that what he is going to bring to the table is to be really data dependent. One of the frustrating things about the uh tenure of Mr. Powell was that he always said that they were going to be very data dependent and that they were going to be very uh detailed focused on those elements that would generate elevated prices etc. However, they moved from narrative to narrative instead of paying attention to the data as it was published. When inflation was coming down at the beginning of 2025 and throughout 2025, they kept a rhetoric about tariff impact on inflation that never happened. And obviously what they need to do now is to go back to be data dependent which will be welcome by markets as well because then we don't have to interpret all the time what they say versus what they do.

[00:03:17]>> Okay. So, if the Fed becomes more data dependent, do you expect um Kevin Worsh to be on on the leanings of more rate cuts um or do you think maybe we won't get as much re rate cuts as we want because he's only one one person and the Fed chair only gets one vote?

[00:03:38]>> Yeah, absolutely. I don't think he's going to decide obviously what how many rate cuts we're going to get or if we will have any rate cuts. I believe that we will have rate cuts simply because the shift of one person brings more numbers uh more people within the Federal Reserve that are truly data dependent and therefore the uh majority is going to probably lean to look at how much job creation are we getting. Is the job creation as strong as other economic indicators are showing? Are the beige books showing the reality of the labor market or are there weaknesses happening and at the same time the importance of having a policy that is focused on the measures of inflation that they have always focused on the core PCE and the core elements of inflation not the volatile elements that come because of energy prices and uh temporary factors like what's going on right now in the straight of Hormuz.

[00:04:44]>> Okay. So, what is your reaction to Jerome Powell saying that he's going to stay on the board of governors after he steps down as chair? Is it a bit unusual? What's your reaction?

[00:04:56]>> My opinion is that it is quite unusual because it makes no sense. It's almost like a stubborn uh kind of reaction that that in which he wants to sort of prove that he is going to stay regardless of the situation that has been so uncomfortable for market participants and for members of the Fed since uh at least a year ago. We must remember as well that uh somebody as important as the chair of the Federal Reserve must be humble enough to at least admit that they have failed that they have not fulfilled their mandate that they made very significant mistakes in 2020 in 2021 in 2024. This this is something that is not a problem. They need to be aware that it was an absolute atrocity to increase money supply by five times more than in any other period of uh recession when we had the lockdowns in 2020 and that massive increase in money supply led to a burst in inflation. Then to maintain very accommodative and very low rates in a period in which there was a strong recovery and coming very very very aggressively with big uh government programs that were generating higher deficit and therefore higher inflation and then uh the mistakes of hiking too fast and then cutting rates also too fast in the middle of an election. All those things are not a good track record for a Fed chair. And what he should be at least aware is that it's not good for the institution either. That when he is in the middle of a legal process, whatever the outcome may be, he should not be stubbornly deciding to stay just to prove a point. I don't think that that is very professional in my opinion.

[00:06:54]>> Okay. Let me ask you this. There's a term called shadow chair. Um what is your opinion on that? What do you think is going to be the dynamic between Powell as governor and uh Wars potentially as chair?

[00:07:09]>> Well, that is basically, you know, like it's I don't know. It's like an uncomfortable neighbor. It's like somebody that's what are you doing?

[00:07:17]You're going to be sort of advising the new chair on things that the new chair knows very very well because of his incredible experience. What is what is it? What is all this? It's it's I find it in my opinion it's childish. It doesn't make any sense. The Fed has so many advisors, has so many experts. It's not just the members of the board. We're talking about so many people that are constantly giving information and giving reports about the state of the economy, etc. So it's it's basically almost like trying to say I'm indispensable and therefore you need me to guide you through a process that makes no sense because Mr. Walsh is somebody that's perfectly capable and knows markets and knows monetary policy and the financial system upside down. He doesn't need to have somebody sort of guiding him in any shape or form.

[00:08:16]>> Okay. So, um, Daniel, just one final question here, and we have to talk about Fed independence because that's been a narrative through throughout this whole confirmation process. Uh, so Worsh was, uh, suggested by Trump as the nominee and Trump has said he wants rate cuts.

[00:08:33]So, where do you stand? Where do you stand on this point of Fed independence with Wars?

[00:08:40]>> Let's start from the elephant in the room with the elephant in the room. The elephant in the room is that the Fed has not been independent throughout 2020 to 2024 in any shape or form. And cutting rates by 50 basis points in the middle of an election just when the uh candidates had changed in the incumbents and you had Miss Harris coming as the possible candidate for president etc. had a very significant impact because it is basically the Fed taking sides with the incumbent in a moment in which neither inflation nor growth nor jobs were suggesting that they had to cut rates so aggressively and I come back to a point just before an election. So no, the Fed has not shown its independence and it didn't show its independence either when inflation surged sore in 2021. And what they did was to keep very very loose policies just because they had to maintain the level of support for the monster increase in government spending and government deficits. when the government increased spending by two trillion above what was already an extraordinary expenditure of the covid period. So the the the idea that now we are going to have to debate uh fed independence makes no sense to me. I personally think that that he will be more independent than many of previous chairs that have always erred on the side of massive government spending, massive tax hikes and huge money printing. And I think that that is the problem is that is that central banks are not independent when it comes to demand side policies versus supply side policies. When it comes to governments that cut taxes, that increase the private sector, and that reduce government expenditure, the Fed always takes a very surprising hawkish stance.

[00:10:53]Yet, they become very doubbish when you have governments that are massively increasing taxes, massively increasing spending and deficits. And I think that that is the problem. It's not that they are partisan, Republican versus Democrat. is that the Fed tends to er on the side of statism which is what I talk also in my book. That's a great argument there Daniel. Always great to speak with you. Thank you for talking with us.

[00:11:21]>> Thank you very much. Have a good day.