Moody's Talks - Inside Economics - Breaking in a new Chair

Episode Date: June 18, 2026

Claudia Sahm, Chief Economist of New Century Advisors joins the team to break down Kevin Warsh's first FOMC meeting and press conference. The group covers the rate decision, changes to Fed communications, the dot plot's future, and what Warsh's balance sheet views signal for monetary policy ahead. The new Chair is in the seat, time will tell if it's a comfortable one. Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Sandi, the chief economist of Moody's Analytics, and I'm joined by my trusty co-host, Chris Duretis. Hey, Chris. Hey, Mark. How are you doing? Good, good. You're still in a Brutzi?

I still am. Yep, until next week. And you're a wine cellar. Yes, yeah. Let's put it that way. Yeah. Yeah. With your crypto winnings all around, somewhere around you.

Oh, now it's all SpaceX, Mark. Oh, yeah. Yeah, that makes, that's even a better trade. than Bitcoin or Ethereum. But congratulations on that. I wish it was true. Yeah. So I meant to ask, G7 meeting.

What's the Italian perspective on the G7 meeting? Have you been following? I have been. What can I say? The expectation is it's just a meeting. It doesn't really lead to anything conclusive. It's a lot of chatter. It doesn't really affect the common person or business.

Uh-huh. So that's the, and then of course there's a lot of behind the scenes gossip around the different leaders and who sat next to who was talking to.

Oh, tell. Do tell. Do you tell, Chris. Oh, you know. Yeah. Well, one thing that came up today was that the picture was taken, right? They always take a picture with all the,

with all the different leaders, right? They do this group picture. And apparently, after the picture was taken, the leaders break off and have their own side conversations and the president of the United States, States was left kind of alone in this shot. So there was a lot of chatter about what does that how good. How bad is that. So that's the kind of level of discourse that we have wrapped in.

Well, I understand the Prime Minister Maloney was like best buds with the president, but that's not going so well these days. I think it's okay. It's okay. It's not good. Glad to hear it. We've got Claudia, Claudia Somm. How are you, Claudia? Hi, good. Happy to be here. Thank you for joining us. You've been on before. Have you been on more than once before or just once before? Do you recall? Maybe just once before.

It was a lot of fun. It was a good conversation. Really? I don't, I don't know. You actually remember the conversation? Well, I remember that there was a lively conversation. It's nice to be on a podcast with like multiple people and different perspectives. It's, you know, it was fun.

You know, I've been forecasting for a long time and I can't remember my last, last time, what I said the last time I've forecasted. I mean, they said, did you get it right or did you get it wrong? I go, I'm not really sure. It depends on the day and the hour. But it's good to have you on. And you're the chief economist of New Century Advisors. What is New Century Advisors? Can you just give a sense of that?

It's an investment firm. Many of its clients are state pension funds, non-profits, some NGOs, so very tailored to, you know, each client, like their kind of investment strategy. And historically, they've been very focused, fixed income, tips, treasuries. They really cover all asset classes now. But, you know, it makes for me as a former Fed person think a lot about monetary policy. It's a place for, you know, it's been useful. I can kind of add something to the discussion about, you know, with interest rates.

But I'm certainly learned a ton from people that come background in finance, like actually, you know, putting the money on the line. It's a different perspective. Right. Right, as opposed to in theory, actual practice executing on this. Well, it's good to have you on. And you mentioned you were at the Fed. I was noticing you were there in the middle of the crisis. That must have been an interesting time.

Yeah, no, I started out of my PhD in 2007 at the Fed, and I was hired to be one of the economists that focused on consumer spending. So my first years were just like absolute birth by fire trying to understand the economy. And that was a time, Kevin Warsh. you know, now the chair, but he was a governor at the time. So it was, it was quite a, quite an education at the Fed in terms of how to think about the data, the economy, monetary policy. So I appreciated that good start, but wow, it was, it was rough those first few years. Yeah, I noticed you, you, you were the chief economist of Washington equitable growth,

I guess, group. Is that what, it's this like a, it's a think tank. Yeah, and I had, I had been at The Fed, and then in 2019, I worked on a policy volume that actually was what turned into the Psalm rule, the recession indicator. Like, how to do, how to prepare for the next recession, like fiscal policy, automatic stabilizers. I mean, it was something I'd become very passionate about after having watched the Great Recession and it's aftermath. Like, come on, we could do fiscal policy better. But, you know, I actually work on that and work with Congress on it.

Like, I couldn't be a Fed staffer, right? Like, that's a pretty bright line between, you know, we don't go give advice to Congress either. And so I left and, you know, was at Washington for equitable growth. And during the pandemic, did get to work with members of Congress. And then kind of figured out, I'm really not good at politics. It's just not my thing. And so fiscal policy has got a lot more politics to it. So I've appreciated it.

I was a dependent for a while and now being with the investment fund. And they also give me some space. I was on the hill this week talking to members of Congress in a roundtable about how to respond to higher gasoline prices. So I still get to do some policy stuff, but I think it's better, maybe for me, a little, like, safer distance from it. Got it. I hear you. I hear you. And, oh, look who joined us. Thank you for coming. Hi, Claudia. Good. Good to have you on board. I was supposed to plug one thing before we dive in. What was that? Credit currents podcast. Yeah, the credit, shoot, is it currents? Credit currents. The credit currents, the credit currents,

the Credit Currents podcast. This is a new podcast that Moody's is doing, a shorter podcast. I was on with ASE and one of the, the moderator was from the rating agency, and we were talking about, actually we were talking about the consumer. That was a big part of the conversation.

So that's going to be on Moody's talks, the podcast that Moody's provides. There's a bunch of them, and this is a new one. And so I recommend folks. It was a good conversation. I recommend folks to tune in to that. Well, with that advertisement, let's dive right back to the conversation.

And maybe Claudia, this was the big news this week, obviously was the Fed meeting, and Kevin Warsh, the new Fed chair, this was this first meeting. So there's a lot to talk about. But maybe let's just begin broad strokes. What did you think of their decision to hold policy unchanged? And it was a unanimous vote, 12 to 0. No one voted against it, which is a bit of a change because in recent meetings, there's been a fair number of dissents. There was no dissent this go around.

But it was no change in policy. What do you think of that decision? So holding rates steady, I think that's the right decision. I think my biggest disappointment yesterday was we didn't get a lot of reasoning behind it. I'd like to hear why the committee thought it was unanimously thought it was the right move to hold rate steady. Because, you know, we're in an environment, inflation is well above target and it is moving in the wrong direction. It's moving higher. When we get the May data, the PC inflation is probably going to print at or a little above 4%.

That's double the target, right? So we're in an environment where inflation is a real problem. It was clear. It was loud and clear that the Fed understood. understands inflation as the problem, and they're, you know, committed to price stability, but then they held rate steady, which I think in an environment where there's a lot of uncertainty, particularly around the path of energy prices, and a lot of the extra inflation are supply shock driven. Like, I can see a very good case, and it really is the textbook case of hold steady. Don't raise rates into this,

because the Fed would just be causing undue cost, undue pain. They can't, they can't like, you know, reverse the energy shock. They're just going to add to it by, like, lowering demand. So there's a really, like, standard case to make for holding at this point. I think there could be a case for raising interest rates as we go later into this year, especially if the ceasefire, the progress towards a final agreement, the middle. Like, if this is a bumpy road, right, in terms of we see, you know, if this isn't the high water mark on inflation, I think as we get into the year, there's going to be some real concerns that maybe they

need to raise rates, even if it's the kind of inflation you might want to look through. Maybe it's just time to take a step. So I think where they're at right now, holding rates, affirming, they're focused on price stability, makes sense, labor markets in pretty good shape. But there wasn't a whole lot of like, well, how are you going to get us there? What's the plan? And I think that's You can probably get away with that at your first meeting as Fed Chair. I have a feeling it might get a little, it might not play so well as we go later into this year. So no change in policy. That makes sense to you.

It sounds like, though, that you would be biased towards a raising interest raise. So if you were on the committee, if you were Fed Chair and you were at that press conference and you were giving forward guidance, you'd kind of be guiding the market towards future rate increases. Does that sound right to you? Do I have that right? So I'm torn.

Like, I really think right now, monetary policy, it's a tough call. Right? Like, you know, I appreciate the largely, this extra bump up in inflation, I mean, even last year. So this, we're seeing, the energy prices is giving a leg up on inflation.

Last year, tariffs were pushing up on inflation. So I think there are these supply drivers that would be typically looking through. We're having a whole series of these supply shocks. They're layering on top of each other. It is the case that we're five years in to inflation above 2%. I think there is an argument that as it goes on, regardless of how you can explain higher inflation, the risk of it becoming embedded gets higher.

And so I think there is a case that that duration should overreaching. ride the kind of textbook. And as kind of a risk management, the Fed is raising rates. So I'm not there right now, but I think that if you saw energy prices, instead of continuing their march downward and inflation starts to move down to the trip, if we started to see some moves up, because the news is bad and the street we can close us, or maybe there's some other shock that comes at us, you know, that where inflation is not making notable progress as you get into the fall, I think the case is going to be there for those. rate hikes. And I mean, I'm not like happy about that. Like it's costly. It's a costly way to get

inflation down to 2%. But I think that that argument of just it's been too long. We have too many of these shocks. We have to respond to them. I think it's going to, it could grow to be the baseline. But it does depend on where, where the economy goes, where the inflation goes the rest of this year. So I think it's a, I really, you know, there's a whole bunch about like how to communicate monetary policy and all this. But I think honestly, like, the call, like, what is the right monetary policy right now to deliver that price stability? I think that's actually a really tough question to answer. Yeah, what do you think, Chris? So if you were on the committee, I assume you would have voted to hold firm as well. How would you have guided if you were providing

guidance? Yeah, I guess it's tough. And I guess we'll get into the whole discussion of the more limited communication style. That was really the big change. That's where we're going next. But I'm just going to... Right. Right. So, yeah, I think I would go to the old talking points, being data driven, step at a time, right? I don't want to...

The risk of providing too much guidance, of course, is then... It could be wrong. And you could either be wrong in the sense that you make the wrong call or you provide the wrong guidance and there's market volatility that results. Or I think... And even worse case is you stick your guns. You make a call, you provide that forward guidance, and then that you are biased to stick to that guidance

rather than have the flexibility of moving with the market or with the data as it comes in. So I probably would have stuck with the pretty, you know, down the center. You know, this is the current, the current conditions warrant the status quo. And then we'll see how things play out when it comes to the energy shocks, the tariff effects, the other things that were monitoring. the employment situation. I was little disappointed. My disappointment was that the comments that were made were all geared towards inflation, right? Like the other part of the mandate was

kind of thrown out or was either thrown out or really assumed away as though employment is going to continue on this very positive path. And I think we need to be a little bit more cautious when it comes to some of the potential downfalls that we could see in the labor market. Hey, Marissa, I know she turned off your camera, but hopefully you're out there. Do you have a perspective on this? Yeah. Yeah. I mean, I don't, I like more information rather than less. So I agree with the comments about, you know, I would have liked more of an explanation and talking through the data. I would have voted to keep the rate the same. I don't think we're quite at the point where I would comfortably. raise rates, but that seems to be the bias, and I agree with that. I mean, I think that they're going to be looking at both the inflation and hopefully the employment data as we go through. I'm not convinced that the job market, this newfound rally is very durable. I'm not completely convinced of

that yet, so I think they have to be vigilant about that as well. But yeah, I mean, to Claudia's point, inflation has been well above target for years now. And so what they have done has not brought them price stability. That was their final sentence in the statement, right? We will deliver price stability. But not a lot of detail around that. So I would have done what they did, but I'm disappointed about the lack of communication. And like Chris, a little bit, I think they're being a little bit taking the labor market.

piece of it for granted a bit. You guys are awfully hawkish. Whoa. I mean, on hold, yes. I mean, you're right. Four percent inflation is double the target. And, you know, there's a lot of uncertainty out there. So that would argue for doing nothing in the context of these shocks.

But I don't know. The labor market feels, I think you described the labor market as, how did you describe it? Claudia? It was good or? It was a very positive take on the labor market. I don't know. It feels soft to me. We got a couple, three months of good job growth, but I don't know how durable that is.

I'm very skeptical. I think there's a stability that we've seen coming into this year, right? I don't. I think the payrolls are really hard to read. Like, I'm not on the acceleration camp, but unemployment rate's been stable. Wage growth is slowly moderating. Right. Or do you even put any weight on?

Participation rates have declined. people were pretty many way, right? I mean, you believe the data. The aging piece, I mean, prime age still looks pretty good. Like, it's a mixed bag. But I agree. Like, it was a moment where they could say,

we're going to deliver price stability. Because it's like that's, that really is the glaring problem right now. I think it was completely appropriate last year. There was tension. They could, like, there were issues on both sides of the mandate. The data has moved in a way

where the bigger problem at the moment is priced at it. The data could change. again, right? Like, so there was a little bit of the timing piece. But yeah, no, I don't. And I think that's where I, it, this whole like, oh, they could raise rates. Like, that comes at a cost. Like, if they're going to rain in supply-driven inflation, that comes at a cost, that comes in, like, less wage growth. Like, like, I'm not, I don't want to be like to flip about, like, oh, you know, kind of switching hockey. But it's this issue of like, how do you solve this problem? And they may create a bigger one out of it.

The Fed is no, they have caused more than their fair share of recessions in the past by getting too exuberant in tightening. Right. I mean, I found it it was a pretty big swing. I mean, if you go back to the last meeting six weeks ago, they had a bias towards easing. You know, and inflation was also high, and we knew it was going to go higher. I mean, it's not a surprise that it's gone higher. And they had a bias towards easing, a stated buy. in the statement. This time the statement says nothing. And again, we're going to come back to

communication in a second. But we know they're biased towards rate increases because of the dot plot. And it was a pretty big swing in terms of the number of Fed members saying, hey, now the next move is going to be a rate increase. I just find that, I'm surprised by that. To some degree, I take solace in it because it kind of means that the Fed's independent, doesn't it? I mean, at least for the moment. because this is Kevin Warsh, you know, the president says he wants rate cuts, and now this Fed is saying, no, we're going to, more likely we're going to deliver a rate increase, is not rate cuts. So I took some soles in it, but I just found a weird, kind of weird, odd that we had that big swing in kind of one and six-week period. And in my mind, the data doesn't really argue for that, you know, so anyway. I think one, there were 18 Fed officials.

did not include Kevin Warsh. The only person we've talked about, are they independent or not, is Kevin Warsh. He did not participate in the dot plot. So, like, he doesn't get a point for, like, being independent on the shift. I think one of the things, the comparison to March is trick.

You are tough. I am tough. Tough love. But, no, one of the things with March, that was just a few weeks into the conflict in the Middle East. And I think that was a dot plot. Where I argued, like, why are we doing this? I mean, this was so, like, up in the air,

what's going to happen. Whereas coming into this one, and the first draft of the dot plot is done before the meeting. So really, people were doing penciling in their projections, what's appropriate monetary policy, even before the, you know, the memorandum of understanding had been signed. So before we've started to see some energy price movements down. So it could also just be picking up. March hadn't really adjusted at all. And then this dot plot was like full force of, I mean, we've gotten some really tough inflation prints, right? And it's not just energy. So I think it swung maybe the other direction. You know, these are always, you know, points in time with forecast. Like, we know that or points in time with how you react to the data. And so, yeah, but it was pretty marked. And I think it's

your reaction of like, wow, that was a big shift. I think this is a big deal. Because again, textbook says you'll look through this. Yeah. This was not, and this was like a lot of people off the textbook. So I, like, it does take a lot. I took a lot of signal from that. And I think it's, um, there's a real concern. Or, I mean, look pretty well anchored.

I mean, if you look at, you know the data better than I, sitting there at new century advisors, but I look at break evens, you know, five year, big, and 10 year break evens. That's based on treasury inflation protective securities. they don't, they're not signaling, you know, they hadn't risen, but they've come right back in. And they're not signaling, we got a problem on the expectation. If inflation expectations were rising, then I'd say, okay, I get it. But, you know, that's not the case, as far as I can tell. Yeah, no, that's part of the textbook, right?

If the inflation expectations look like they're coming unanchored, you raise rates. There's really no sign. There's nothing in financial markets. The survey-based measures, really not that much. Michigan even came in a little bit early June. So it's not there. The other thing that could get you to get the Fed to move. I know how you're at the University of Michigan survey.

Yeah. I think it's a tough one to. See, I hear the plug, but. Yeah, but I mean, you look at the survey measures, but even there, like, it's hard to see it. You look, the labor market is not overheating, right? Wage growth is slowing. We don't have labor shortages. That would be another reason to go.

And also in the inflation data, and this was something I spent quite a bit of time trying to look at, like, the breadth. Like, if you look at the cash, like, like, if you look at the cash, the categories, of the spending, the second round effects, like, it's just not there in the data. Now, it's early, so you don't want to be, like, complacent about it, but those, the things that you would normally have that would get you off of look through a supply shock, they're not, they're not here right now. And I think that's, if you were going to, like, actually explain, why are you on hold? That's all the stuff you would talk about is, like, we don't see these other things. But I, and I don't know. I'm, like, kind of,

because we didn't get a lot of color on it. But I think there just is this concern about duration. And I mean, wow, they have planted the flag now. We are going to give you price stability. Let's see once we get the brass tax and the labor market actually starts to weaken again. Let's see if they're doing that. But let's turn to communication. Oh, and I did want to, for the listener, explain the dot plots.

You know, the dot plot is where each member of the FMC puts forward their expectation for where the federal funds rate is going to be this year, next year, and I think the year after. And each member is a dot. We don't know which dot is the member, except that we know, in this case, Warsh did not participate in this and did not provide a dot. And we, so you can look at the dots and see what the members are thinking about, a future of rate increases of kind of a form of forward guidance. And this goes in another important piece of information is that the dot plot is part of the summary of economic projections, the so-called CEP. And that's a pretty involved document that gives us a lot of detail with regard to the members' expectations about the economic outlook, you know, where we are going,

where we're going to be in the next year, two or three. And in the long run, you know, a lot of information around the distribution of forecast, the uncertainty around the forecast, those kinds of things. So a lot of information, a highly transparent Fed, but it feels like, correct me if I'm wrong, Claudia, we're going in a very different direction under Chair Warshire in terms of transparency, in terms of what kind of information is going to be provided. Does that sound right? That was definitely the feel of day one. I mean, we're in a transition period, right? We still had a summary of economic projections, we still had a dot plot, but it didn't include the chair. Right? So like it was this weird kind of in between. And one thing I'll add on the summary

of economic projections on the dot plot that, I mean, the thing, okay, it is not perfect. It's often misunderstood. It can, it has its problems and I'm sure could be improved. But it is, it's, it's kind of a neat tool. I'm not sure it's always ready for like public use, but I think it's an interesting internal tool because it's not so each individual puts together a projection but it's not like a typical forecast a lot of times if we're forecasting we're either like taking monetary policy as given or maybe we put a tailor rule in or something like very mechanical an assumption and then you know forecast other parts of the economy so what this one is is it's like every individual is the fomc they get to decide like their their their past

for the funds rate, it's not necessarily what they expect the federal funds rate will be. It's what they think it should be. What is the appropriate federal funds path? And the whole exercise, people, commentators have noticed that like inflation is always 2% at the end of the forecast. Like what kind of forecast is this? It's always 2%. I'm like, yeah, but that's the exercise. Like, because you're trying to get to price stability.

They've said 2% is the target. So if you put your dot plot together, your summary of economic projections together, and at the end of the four, in 2028, you got 3% inflation. Well, back up, you probably need a higher funds path to get to the 2%. So it's a, it's a way of like putting the plan together. Like they tell us in the statement, we're going to deliver price stability. The dot plot is each of them kind of individually, what's it going to take? You know, and it has views about what they think is happening with inflation and employment. It also has. views about what's the value judgment, monitor pulse, how effective is it? What is it? So, like, there is so much in the summary of economic projections and probably too much. And that means, you know, it gets misinterpreted. But I do appreciate the exercise of, you got a goal, what's your plan? Like, your plan may get updated, but, like, what's your plan? Now, Warsh has had, like, longstanding, years long, like, issues with the, with the dot plot. I think one of his worries is that if you write down a plan, you're going to get committed to it and boxed in.

And, you know, I think anybody who does forecasting, like, we can't fall in low with our forecast, right. We know that this, this meeting was a good case in point. I mean, they literally went from, we're going to ease bias to we're going to tighten bias. They didn't feel boxed in at all. I don't see any, what's the boxing in? I don't get done. Yeah, no, I don't, I'm just sharing Warsh's view.

I think the sub can be, the dot plot can be improved. I think it might be some aspects of better internal tool than extra. Like, I understand issues, but the dot plot is not the reason that we have had inflation above 2% over the past five years. Like, this is not the reason we have not met price stability. So I, like, he points at a lot of stuff and complains about it, but it's like, I would, you know. So, and unfortunately, it's like, I don't, this whole thing about forward guidance,

We don't want to say where the Fed is going. We don't want to give false precision. It's like, okay, okay. But, like, how are you thinking about monitor? But, like, what's the process you're going through? Explain your decision. Like, there's this kind of the communication aspect that's about accountability

and helping us understand what they're doing. Like, that, it would be a big loss for that to disappear. So I worry a little bit. He's kind of throwing the baby out with the bathwater. Well, you know, he's put forward a lot of, proposals for reform at so quote unquote reform at the Fed, a lot of different things, balance sheet, and so forth, different inflation measures, so forth and so on. Those things are more difficult for him to change on his own. The communication, there, he's got, it feels like he has more latitude,

because he's kind of leading the way on the communication. And I, it feels like to me, if, and maybe I'm extrapolating too far, is we're not going to get much of anything. thing. I mean, if you look at the statement that was released with yesterday's decision, there is literally nothing there except that we didn't change policy. And by the way, the interest rates three and a half to three and three quarters. That was the extent of it. They didn't even tell us what's in their reaction function. What variables am I looking at to gauges? They didn't give a list of what those are. And then when he says, he doesn't give a, the dot plot to, in my mind, that means that that that's the, he doesn't want the dot plot. Dot plot is. on life support. And the whole SEP, the SEP is on life support. And it just feels like we're going to go into back. It's back to the future. You know, I've seen a lot of feds over the years.

And it feels like we're calling back to green span-esque, pre-green span-esque kind of. And I didn't think that worked well. I mean, in my mind, the transparency, it's hard to be too transparent, in my humble opinion. How can you be true to transparent? and it leads to less volatility in markets. I mean, if you don't provide information, you're going to see a lot, people are just going to be guessing and flailing,

and there's going to be a lot more volatility in market. So of all the things he suggested, that's the one thing he can change, and I'm most nervous that he will change. Chris, what do you think about what I just said? Would you push back on it? Certainly the last statement I totally agree with. That's what he can change.

He has all these other tasks force that are being assigned to figure out some other aspects of the Fed, but those are much harder to implement. So I agree with you. I'll push back. I'll take the other side. I'm not, I haven't been a big fan. Are you doing it because you really feel it? Or are you doing it because you feel like you need to push back? I think that we need some diversity of opinion here. Okay, go ahead. So, but the truth is I haven't been a great fan of the Doppler. I do agree with Claudia. As in terms of an internal tool? Absolutely, sure. This is very useful exercise to go through as the committee is meeting, trying to get a better understanding of where everyone's at. But I think the way it has

been presented to the public, certainly to the markets, is as though it is a commitment. And that has introduced some of volatility from time to time. So to my mind, either you go full transparency, which means don't make it anonymous. Have everyone committed. to their dots. And I'm all for that, by the way. Full disclosure. Okay, we can do that. Then there's very clear paths, right?

You're not mixing and matching here. You can see very clearly where every member stands or take it out entirely. I worry that the current system that we have here just, you know, it's a little bit wishy-washy. There's no real commitment to it, right? And again, the markets have reacted to it very violently, and you have seen volatility introduced as people really try to pick apart the dots and perhaps read more into them or misinterpret them, as Claudia mentioned. And so I don't know that they are as effective as... What about the SEP more broadly, the summary of economic projections? Would you get rid of that as well?

No, not necessarily. No. Okay. It's the dots. It's focused on the dot plot. Yeah, the dots themselves. Marissa, do you have a view here, a strong view? I mean, Fed members do go out and speak, and I don't know how That may stop, too. We don't know what's going to happen with that. I don't know how he feels about that. But I mean, they they anonymously have their dot plot. But then they do go out and give speeches and it becomes oftentimes obvious where they stand on monetary policy. So they have other ways of communicating. I agree. I don't think if markets are beholden taking the dot plot as gospel and this is what's going to happen, then I think there is a risk there. And I, I don't disagree with his view on that. So I think the other question is, what about communication in general and just the jaw-boning and the going out and speaking to markets.

Markets react on that, too. And I think investors price in what Fed, we see it all the time, right? There's reaction to Fed governor's speeches. So there's other ways of communicating their views other than the step and the dot plot. Yeah. I'm just worried that we're going to

all those lines of communication are going to be impaired. That's what it kind of feels like. Claudia, maybe you know this. Can he unilaterally as chair change the, take out the dot plots or the SEP? I mean, would that, what, do you know what the mechanism there is for doing that? Does he need a committee behind him to do that, or can he do that on his own?

Do you know? It's not entirely clear with the communication tools. I mean, I think there's probably. some fuzziness. I think one that I, that I don't think he can tell the reserve bank presidents to stop talking. Stop talking. Right? Like some, a former Fed official I heard talking about, well, there's the first amendment. And I was like, oh, wow, we're going to go to that. So, but it is a, it's, it's going to be straight. And I think, you know, this was his first meeting as chair, right? Like,

he's going to calibrate as goes on. But like, markets are going to fill in the blanks, right? Like, the, it was, it was really kind of sad that the biggest piece of substance yesterday was the dot plot. Right? Like that was the only thing to grab on to. And it's like that shouldn't be like that's not that's not the piece of substance. We should be getting insights on the discussions in the meeting, insights on how we're thinking about inflation. He was asked about inflation and reread a sentence in the statement about inflation. It's like, That's not good. So like, and I, so I think it's that, you know, there was all this concern that, you know, J. Powell would be the shadow fed chair.

I mean, if, if Kevin Warsh is unwilling to speak, I mean, there, the bargets are going to find a shadow fed chair. They're going to go find someone that they can listen to, whether it's Chris Waller or Lisa. Like somebody who's actually willing to talk about what's going on here? Like, what do you see? Right. Like, you just can't, you can't put this genie back in the bottle. Like, there are some pluses. minuses with how the Fed has become much more about communication. Things can be improved. But

like rolling the clock back, it's just, it's not going to happen, which means it's going to be messy and wildly inefficient. The whole thing like, oh, you can just listen to the chair speeches. That gives you a good overview. You can listen to the press conferences. It gives you good. No. Like those things that have been useful as kind of a collection of the thinking seem like they might disappear, which means then you have to go through the effort of listening to all these officials and they talk at different times and the data is a different. It's just like, what, what are we doing here? Like it just, it's like there has been so much uncertainty injected into our world in, not just the last few years, probably the last six years since the pandemic. It's like, why does the

Fed have to be one more source of uncertainty to put in the world? Like, why? Why are we doing this? So it sounds like you're on my, I mean, you're in my camp saying we want transparency. You're You're just, it seems like you're down on the dot plot, but outside of that, in principle, you're saying we need the transparency. Maybe some tweaks around the edges, maybe some things over here we might not want to be doing, but broadly speaking, we don't want to go back to the future where we didn't have, you know, it was highly opaque. We were all guessing what, we were looking at the size of green spans, you know. Briefcase. Briefcase to make a decision. That's what we were reduced to.

You're saying that's a bad thing. Yeah, that's a, like the Fed surprising markets as a principle. Like, it's just not, like, we don't need to do that. Again, it's costly. And I mean, markets, again, they're going to try and fill in the blank. They're going to make guesses. You're going to be more uncertainty. And investors are going to demand to be compensated for that uncertainty.

Right. So there is a, like, actual cost to this. This isn't just like, you know, some theoretical thing. And then the other piece that I worry about that's not financial markets, but just accountability. Totally. Show your work. Make sure the American people know that these people entrusted with decision, like, are thinking and talking about it and grappling with the issue. Like, that I think communication became a bigger deal after the global financial crisis, both because the Fed funds rate was at zero and they were using it as a tool.

But it also was the Fed was under a lot of scrutiny, the bailouts, this and that. So like getting out there and talking to people, like, I think that. that piece alone, don't talk about the future. Just talk about what you've done right now and how you're thinking. I think is really important and important for like the future of the institution. Because if, you know, we have more energy price shots. We've got some other random tariffs, whatever. They're not hitting 2% inflation. Right. So you've promised it. You talk big. You tell us nothing about how you're going to accomplish it. It doesn't happen. And people are going to be really unhappy. Yeah. I mean, I want to, I want to make one other point. I don't want to overstate the case. But, you know, when you have lack of transparency for more opaque, it leaves you open to crony capitalism, you know, people taking

advantage of the lack of transparency. You know, you're an insider. You're going to benefit, you know, because you have information no one else has. And I just don't, you know, that may be intentional and probably it could be unintentional, but that may be one of the results of the lack of transparency. Show your work. I think that's a great way of saying that. Let's move on to those, some of the other, the proposals that the new chair has put forward, they didn't come up yesterday, but they will come up because he's established, as Chris pointed out, these task forces to kind of consider the different quote-unquote reforms that he's considering. One is around, I want to talk a little bit about different inflation measures. We'll come back to that. We'll end with that. But the one I

want to talk about is the balance sheet, the size of the balance sheet. So, you know, as we all know, the Fed since the global financial crisis has changed the way it conducts monetary policy, an ample reserve system that requires a much larger balance sheet. And it's a big change. And that's always made Kevin Cher Warsh uncomfortable. He, you know, back in the GFC, the global financial crisis, he actually stepped down in protest over an expansion of the balance sheet related to quantitative easing at the time. So he's long a point. opposed to it. What do you, how do you view this, Claudia? I mean, what do you think about the balance sheet? Do you think he's right here? Should it be rained in or not so much?

I'm really skeptical of his arguments. I just, I don't see it as a top priority for the Fed. I think it's a multi-year effort to put a system in place that would reduce the size of it. I think there may be some political risks connected to the balance sheet. But I just, I'm not, I'm not sold on this one, that it's the big problem that he says it is. And I think it's interesting with all these task force, he's bringing in outside perspectives, which totally applaud. That's great. But the, you know, the Fed has thought a lot about the balance sheet, right?

And so I, I don't know. Like, I just, it's, but it's something he, Warsh has been very passionate about for a very long time. So I'm not surprised to see it in the task forces. I just see it as a potential massive suck of time and energy without a lot to, you know, on the other side. Yeah. And what I'm always, I'm right there with you. I'm just confused as to what the problem is that we're trying to solve for. I mean, I've heard some arguments.

I think he's made them that the balance sheet suggests or implies or is evidence of the Fed overstepping, that it's overreaching and entering into places where lawmakers should be, not where the Fed should be. But I have a hard time figuring out what that is. I mean, in my mind, the balance sheet is I'm buying treasury bonds and mortgage-backed securities from Fannie Mae, Freddie Mac, and the FHA, their government institutions. So, you know, where is the overreach exactly? I just can't quite figure that out. Is there any, is that, did I, do I have that right, that, that argument? Is that, is that, is that where they're coming from, where he's coming from? Well, and I think one argument would be by, you know, buying these government assets, holding

them on the balance sheet. I mean, you could interpret some of this as monetizing the debt, right, that the Fed's holding it on its balance sheet. And some arguments that by doing this, they're depressing interest rates, which is encouraging profligate borrowing by Congress. I'm not sure I would. pin that on the Fed per se. But like, yeah, so that's one argument. Isn't that even doing exactly what he says he doesn't want to do? And that is, he's like interfering with Congress. I mean,

Congress is saying and the president's saying, look, I just passed a law that's going to give a tax cut, deficit finance. Who are you, Federal Reserve Board, to tell me I can't do that. I'm, I'm the boss here, not you. You're the, you're the, you're my child. You have to accommodate me. So it's just the exact opposite of what he's trying to, he's doing the exact opposite of what he's trying to say. No? I mean. I find his arguments about it. I just, I have a hard time following them.

But then there's also this just broader the Fed gives it a bigger footprint and financial markets. And there's lots of different directions to his critiques. And maybe the task force wrangles it into something that is easy to absorb. Right. Chris, do we miss anything here on this particular issue? I mean, I'm with you on this one. fast. We've adopted this ample reserves policy. Unless we're going to wind that, I don't see how this is a significant issue or one that we really need to debate. Right. And, Clary, do you know, I mean, around the world, everyone, all the other central banks are kind of where we are, aren't they? I mean, in terms, not to say that that's the reason why we should do it, but, I mean, they're all kind of on an ample, I don't know the systems as well as you do, but it feels like most other central banks are operating. in the same way that the Fed is currently.

No? Do you know? It could be. I'm actually not as familiar with the different approaches. Yeah. Yeah. Amherst anything on this balance sheet before we moved to the inflation measures? Just that I believe that he actually explicitly,

they explicitly mentioned the balance sheet in the statement. Did they? I missed it. Yeah. They did. They affirmed the ample research. Like three sentences and I missed it? Yeah, it was a third of the length of the last.

Okay. But they actually called out the balance sheet management this time. Uh-huh. We have a balance sheet. It was, yeah, it was a very vanilla statement. All right. But it just goes to show that this is on his radar screen, right? He cut the size of the statement by two-thirds, but made sure to include something about the balance

sheet in it. Got it, got it. Okay. Let's go to the kind of the third. quote-unquote reform I'd like to talk about. And that's the idea that we shouldn't be focused on the solely on the consumer expenditure deflator. So the Fed targets inflation, the inflation measure it uses to target, the 2% target, is the consumer

expenditure deflator. That was the 4%. You mentioned Claudia. That's double the current target. And he's the chair Warsh has talked about other inflation measures, most prominently the trimmed mean C. I believe trimming CPI, which looks at the price changes month-a-month across all the different goods and services and excludes those which have experienced outsized price gains or outsized price losses.

And I think it's 16% or 8% on the top, 8% on the month. There's different trim-mean kind of measures, but that's kind of sort of what it is. What do you think about that proposal? The idea that we should be looking at, if I've got it right, that we should be looking at other inflation measures, Trimine being one of them. Yeah. So, I mean, I, like, so I think the Fed's target, like, how it defines price stability, should be on all prices.

So the PC deflator, maybe use CPI, but I think PC is fine. So, but that's the goal. And he affirmed yesterday, 2% is the goal. He did not affirm the, like, the PC side of it. But then this question about, you know, where is it? inflation head? It's not just like where is inflation right now in the Fed, you know, shouldn't be reacting to relative price changes, like there's this oil, maybe there's one-offs, you know, that you're trying to get at, where is inflation going to be a year from now,

two years from now? Like, what's the underlying pace? Where is this headed in terms of price changes? Core is often used where you split out food and energy because it does a better job of forecasting where inflation is headed than overall inflation, right? Like, that's why we use core like has per there are other measures the trim mean um and the p c trim mean the dallas fed does is actually an asymmetric trim because there's a negative skew to pc inflation there's more of these declines than there are increases so it has a negative skew so actually has more trims off um more at the top than the bottom uh and and you know historically it's actually done a better job of predicting you know inflation over the next two years than core not always there are times

especially when the skew of inflation turns positive, as it did during the pandemic, as it has now, the trimming can kind of get off its meat. So, like, there's no magic, like, metric out there that tells us what inflation's going to be in two years. Everybody who does forecasting wants to know what's underlying inflation. Like Kevin Warsh often talks about, like, oh, I'm concerned about underlying inflation. I'm like, join the club. This is what we're trying to do. And there's no, I think it's fine. you have different metrics, you look at them.

But like, the Fed has all these metrics. And when the governors were talking about waiting in 2021 to raise rates, that was the last time the Tremine was trotted out because it wasn't showing the increases. That didn't go so well. Oh, is that right? I didn't know that. Yeah. Which is not to say that now we, like, we should just be really careful with it.

Like, and that's we're like looking at the full distribution of prices, but you still got to tell the economic. story and what's behind them. And so there's a part of me that it's like, okay, Kevin Warsh, you want to, like, he comes at things differently than other people at the Fed. It's the nicest way to say it. Which, but that can be really healthy, right? Like, look at things a little different, pull out the data.

But it's also like, you know, if there were some really low-hanging fruit, some really easy fix, the Fed would have fixed it already. Like, these are hard questions. So he wants to start from first principles. Fine. But like these are not, he also wants these task forces like on inflation done by December. It's like, come on. Like in six months, we're going to rethink inflation.

So I'm a little skeptical. Like I don't quite know what to make of these, like in terms of where this is headed. But I do worry about moving the goalpost or like his economic task force. He really was pretty, I think, rough on our statistical agencies, calling them echoes of history, not up to modern standards. Like, you're kind of going after the referee that creates the inflation day. I just get a little uncomfortable. It doesn't have to go in a bad direction.

This could all be a very healthy exercise, but it just feels a little worried. Interesting. Yeah, I mean, of all this, of all these reforms, the one that I'm okay with, I mean, all of it's fine. There's nothing wrong to go take a look at the balance sheet and see if we're missing something here. here. Okay, fair enough. And should talk about, you know, communication is that. So looking at these things is fine. Great. The task force, no problem. But of all the task force where I'm most sympathetic, it's on the measures of inflation, maybe there is a better way of measuring inflation than the current PCE deflator because all measures of inflation are going to be imperfect. And some are going to be, all of them are going to be misleading at some points in time because of just construction and the way things are going. So most sympathetic to that. perspective. Okay, so we're running out of time. We all have at the top of the hour we have to get going. So anything else, I mean, bottom line, Claudia, what do you think? Is he going to,

are we going to be okay here with Fed independence and a well-managed Fed? I mean, are you reasonably comfortable with things or not? So on the question of Fed independence, I actually felt a little better yesterday. Like, I'm not sure I feel great about the direction of monetary policy. I still am a little unsettled by the changes, but I like that it's, it kind of feels like we're in the space of monetary policy. And that's really the first time I've felt like that with Kevin Warsh. So, so I'll take that as a plus and then we'll see where it goes. Yeah. Okay. Chris, you? I bet what's your view on the new chair? Yeah, it's a first meeting. It's the first press conference. So you got to imagine he also wants to put his fingerprints on it.

So, you know, let's give this one to when there was nothing crazy that was said, right? So that's a positive. And let's see how this plays out, right? I think it'll be more informative to see how the second, the third meetings go. This one, you're not sure if he's just trying to stake his territory or how committed he is to some of these policy changes. Yeah, fair enough. Mercer, you feel the benefit of the doubt for a few meetings. Yeah, I'm not going to judge it on this first meeting.

Yeah. I'll have to say the most critical thing is Fed independence, and I came away feeling better about that, for sure. All this other stuff, we'll figure it out. I mean, it may not end up in the right place from my vantage point, but that's okay. It'll be fine. Just as long as the Fed can remain independent, we should be okay.

Okay, we're going to call this a podcast. Claudia, was so good to have – really good to have you on. Thank you for doing it. I hope we can get you back on again shortly and appreciate that. And I don't think there's anything else to say. With that, dear listener, we are going to call this a podcast. Take care now.