This Is How Incoming Fed Chair Kevin Warsh Could Shake Up The Central Bank

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[00:00:03]Hi, IBD. I'm Meredith Haymon. This is IBD Explains. Thanks so much for joining me. The central bank will soon have a new chairman. President Trump's nominee Kevin Walsh is set to take over for Jerome Powell in May, but what impact will the Fed's incoming leader have on interest rates and the stock market?

[00:00:22]Joining me to discuss WH's potential Fed policy shifts is IBD News editor Ed Carson. Ed, thanks so much for joining me. Thanks for having me, Meredith.

[00:00:31]>> Well, before we look ahead to Kevin Walsh, let's reflect. What will the legacy for Jerome Powell be after his nearly eight years as chairman of the Federal Reserve?

[00:00:44]>> Yeah, I I think it's generally going to be positive, but it is a mixed legacy.

[00:00:47]Uh he's going to get high marks for his quick response to COVID. He was very quick to cut rates, provide a lot of liquidity to the markets. on the other hand, he was a little slow. And not just him, the whole Fed was a little slow when inflation pressures picked up. I I think deep down it was hard for the Fed to really believe inflation would pick up after decades of of it not picking up, to be honest. And and people would say, "Oh, no, watch out for inflation."

[00:01:11]And then it just wouldn't. I mean, it just wouldn't. Uh, and there were some one-off factors that made it complicated. There were supply chain issues. There was the Russia Ukraine war. Made it difficult to uh beyond what the Fed was doing. But he did bely take aggressive action. And now he's trying to do slowly cut rates a little bit even as inflation stays high. And as he recently noted, inflation has been high above what they want for five straight years. Yes, there's some one-off factors, but at the end of the day, when it's sort of like if you're if somebody is constantly late for for uh to meeting up with you, and you go, well, there was always this reason. But it's like, but there's but they're always late, you know, that does come into it. So, uh, I I think again generally positive, but I it is a little bit mixed.

[00:01:56]>> All right. Now, for those who aren't familiar with WS, can you give us a little bit of background on him?

[00:02:03]>> Yeah, he's he was actually on the Fed board of governors back uh from 2006 to 2011, nominated by President George W.

[00:02:11]Bush. He was actually a key ally of then chairman Ben Bernani, especially during the financial crisis. like he was actively involved in some of the efforts to try to like you know sell the banks and all these things and try to keep things from collapsing. He was sort of originally a hawk but he signaled that he's more favorable toward rate cuts.

[00:02:29]Now some people have said that's a cynical move because he wanted to be nominated to be Fed chairman and President Trump wants rate cuts but there's also other reasons. There's other people who have been who were hawkish who have turned doubbish in recent years. He's been passed on by the Senate Banking Committee uh and is probably going to be moving on to uh full confirmation, you know, in very shortly.

[00:02:50]>> And was there any big takeaways from his recent confirmation hearings?

[00:02:55]>> Uh not a whole lot. I mean, you know, he's he signaled that he's not a big fan of forward guidance, which is uh like basically explaining, well, this is what we think is going to happen or this is how we think things might go. We'll see if that really develops because it's hard not to because if he does something and people go, "Why'd you do that?" It's going to be hard not to say, "Well, I I think the economy is going to do this, you know, sort of almost by deacto."

[00:03:19]He's talked about AI boosting productivity. He's talked about using more market signals for inflation rather than backwardlooking data, but we'll see how that goes. If he wants to make some changes to the Fed, every Fed chairman does. At the same time, I think people think that he's he's a normal choice.

[00:03:36]Let's go more into things then with Kevin Marsh's uh policies and strategies. One of the most important things he will handle will be interest rates. What is his outlook on interest rates and how will that affect the stock market?

[00:03:51]>> Well, he has signaled that he's more in favor of rate cuts than maybe Fed Chief Pal has been. I'm not sure how aggressive he wants to be relative to that. He's talked about AI being you know boosting productivity and we are seeing some signs some you know early signs that uh AI will produce productivity and that should allow for faster growth with less inflation.

[00:04:12]Though others have said the AI AI boom is so strong that it's going to draw in capital and actually interest rates will rise in the short run. So there could be some issues. There could be different things going on out there. But he also at the same time wants to lower the massive balance sheet. the Fed's balance sheet isn't maybe quite as high in all those treasuries and mortgage securities that bought during COVID and and years before that. He wants to reduce that substantially and that would somewhat offset rate cuts. So, uh you know the the net net effect may not be that much looser than uh than we would have been seeing under Powell.

[00:04:47]>> All right, Ed. And you mentioned that War had a reputation as an inflation hawk. He wants to rework some of how the Fed measures inflation and even possibly do away with the core PCE index. Tell me more about how that will impact the market and investors and the Fed.

[00:05:05]Yeah, I mean corn PC inflation and a core inflation excludes food and energy and the idea is that okay that takes out some of the big big swings in things but he wants to go a little further and do something called uh you know trimmed mean inflation gauges which would exclude the biggest changes individually. Used car prices might skyrocket or plunge and that would be excluded in this measure. So the idea is to see real real underlying inflation without some of the noise. Right now that is a lower inflation rate than than core PCE. So that would make you say, "Okay, I'm more comfortable cutting rates." Back in 2021, this was also lower than what core inflation was showing. So maybe the Fed would have been even slower to react uh when it wasn't just, you know, in including used car prices in particular, but it was like, "No, no, that's signaling real constraints. there was real limits on autos uh that the Fed might have missed if it wasn't doing that. Uh as a practical matter, it may be, you know, he has to convince the entire Fed. This is not a dictatorship. This is he's the leader of a board of governors and rotating Fed presidents who have votes on there and they will have their own opinions on things and a number of them are going to be more hawkish. Uh pal did do a pretty good job of hurting cast between some people who really wanted to cut rates and people who didn't want to cut at all and he sort of you got to do that and it may take a little while for war to really make his impact on how the Fed does things >> and going more into his want to do away with forward guidance. What will that mean for investors?

[00:06:38]>> Well, investors like to know things. I mean they like having that comfort. Uh I think we also have to keep in mind historically we have gotten a lot ton of guidance and like maybe the enough is enough. People look back on Alan Greenspan and he was such a mystery back in the you know like the 90s 80s and 90s. Back in the 70s back then they didn't even tell you when they raised rates or cut rates. You had to infer from some market action down the road.

[00:07:03]Oh that's what happened. You know there'll be a limit to it. Like so maybe it just be less guidance. Maybe they'll just be because right now the Fed will put out these quarterly statements. They do these dot plots and say, "Okay, this is where we individually and collectively think rates will be." I don't know how useful that really is because after a meeting or two, the economic data changes and all that. So, you reduce some of that. It won't be so much. The incoming chairman Worsh and other Fed officials will still pretty give signals. This is where we think things are now and where things might go and what I want to do. So, maybe it won't make a huge difference as long as you get the next couple of meetings.

[00:07:36]after a couple of meetings, it's hard to, you know, you lose touch with what's actually going to happen. Uh, in any case, >> absolutely. And something we always talk about, how should investors prepare for any potential volatility coming with a leadership change in the Fed?

[00:07:53]>> Yeah, it may not be. The Fed may not take a lot of action right off the bat.

[00:07:57]uh in part because there's a lot of uncertainty about the uh you know the Iran standoff and uh which is both inflationary and potentially negative for the economy and so what how how does that do that so I think one of the things it's not just kind of it's like is knowing what war says what does that mean if wars says you know these little words you know that might be a signal down the road ah when war says that that means he's worried and he's going to cut rates you know cut rates soon ah No, no, no. He's really worried about inflation.

[00:08:28]But we may not really understand these little subtleties because it's not like uh Powell or any other Fed chairman will come out and put a sign, I'm cutting rates, I'm panicking, you know, they don't do that. Uh but there's these little signals. They'll they're talking, oh, the door is open. There's this. So, there could be volatility a little bit just because there's more uncertainty in these Fed meetings a little bit. But I, you know, uh, you know, it just, uh, as long as they, you know, as long as they give somewhat in the very near-term signals about what's going to happen, uh, the market probably won't be too volatile from this. You know, obviously, if the Fed is too tight or too loose, that could have an impact down the road, but I don't know about real big volatility. Uh, you know, once once uh once Worsh gets his feet wet and the and the markets more get more comfortable with him.

[00:09:15]>> All right. Well, we'll be watching. Ed, thanks so much for joining me. It's been a while, but we finally got Ed on the Fed back.

[00:09:22]>> That's right. Well, I hope I hoped I maintain the um the rate of interest in uh in these videos. So, thank you very much for having me.

[00:09:31]>> Very good. Very good. All right. Well, this has been IBD Explains. I'm Meredith Haymon. Thanks so much for joining me.

[00:09:39]We'll see you next time.