Episode summary
What Kevin Warsh Means for the Future of the Fed
Wall Street Week
· · 10 min · Guests: Glenn Hubbard
Summary
Glenn Hubbard said the Fed’s latest meeting was essentially a hold, with no change in the funds rate, but the real story was internal disagreement over the policy path. He argued the dissents reflected a conflicted FOMC trying to judge whether rates should stay flat for an extended period or possibly move higher, rather than a clear signal that cuts are imminent.
Hubbard said the Iran war and higher oil prices add to inflation pressure, but they are not the core problem; inflation was already stuck above target before the Middle East shock. He said inflation expectations are still anchored for now, which he sees as the key positive, though prolonged war, elevated prices and tariffs could eventually unhinge them. On balance, he said he is more worried about inflation than stagflation, even though he sees some labor-market softening.
Turning to Kevin Warsh, Hubbard said the incoming chair is well suited for the moment because of his political and consensus-building skills, but his first task will be to build a coherent “theory of the case” for the economy. He said Warsh could review the Fed’s balance sheet, regulation and communication tools, but AI is not a reason to cut rates now because its disinflationary effects are mostly long run while the near-term impact is investment-driven demand.
Key takeaways
- Hubbard said the Fed’s decision to keep rates unchanged was expected, but the real issue was disagreement inside the FOMC over whether the next move should be flat, higher or eventually lower.
- He said the war in Iran and higher oil prices raise headline inflation, but inflation was already too sticky before the conflict, so the core problem predates the geopolitical shock.
- Hubbard said inflation expectations are still anchored, which he called the Fed’s most important short-term safeguard, though tariffs and sustained high prices could change that.
- He said Kevin Warsh is well suited for the chair job because he has political skill and can build consensus, but he must first define his framework for the economy.
- Hubbard said AI may be disinflationary in the long run, but near-term AI investment boosts demand and real rates, so it is not a basis for immediate rate cuts.
Notable quotes
“they certainly didn't change the funds rate. I don't think anybody expected that, or at least reasonably”
“I think it's fair to say under the hood members of the FOMC are conflicted”
“So I think incoming chair Warsh's story makes sense as a potential long-run hypothesis, I don't think it could be a theory of the case for cutting rates now”
“the decentralized structure of the Fed is a feature, not a bug”
“I think probably an incoming chair Warsh wants to be somewhere in between there”
How the episode opens
We had the-- the Federal Open Market Committee meeting, and we heard from Chair Powell. They basically didn't do anything. Did they have a choice?
-No, but I think they did do a few things. So they certainly didn't change the funds rate. I don't think anybody expected that, or at least reasonably.
The battle, of course, the dissents that happened were over the Fed's statement, or at least what people perceived the Fed's statement to be. Is there an easing bias? Is there a tightening bias?
I think it's fair to say under the hood members of the FOMC are conflicted. Some view that the next move is going to have to be flat for an extended period, possibly even up. Others, like Governor Miran, have a different sign.
So that's really what happened. Westin: One of the things I couldn't figure out is the easing bias language that they descended from the 3 members. I looked at the statement carefully.
I didn't find those words in there. -No, I don't think it's there in black and white. I think probably this is a reading the room kind of observation of people going on record that we really are uncomfortable with a view that at the next FOMC meeting, or maybe even the meeting after that, that a cut is forthcoming.
Westin: They did say in the statement that there was extreme uncertainty coming out of the Middle East because of the Iran War. Is that what is driving the concern about rates, or was there a pre-existing issue with inflation? -I would have to give you the classic economist answer of yes and no.
So yes, the uncertainty is a problem. Oil prices are high. The U.S.
economy is less energy intensive, but it will still raise at least headline inflation.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- fed leadership change
- inflation outlook
- energy markets
- senate confirmation
- fed independence and strategy
Watch the episode
Watch “What Kevin Warsh Means for the Future of the Fed” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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