Today's number is 35. That is Punxsutawney Phil's percentage accuracy rate in predicting either a longer winter or an early spring. Just a reminder, our nation's foremost meteorologist is a large rodent who makes guesses. And so is our president.
Welcome to Prof G Markets. I'm Ed. It is February 3rd. Let's check in on yesterday's market vitals. The major indices climbed after data showed manufacturing activity expanded the most in nearly four years. Treasury yields also rose, as did the dollar. Meanwhile, the gold and silver selloff moderated. More on that in a moment. And finally, President Trump said the US and India have reached a trade deal and are lowering tariffs immediately. Okay, what else is happening?
President Trump nominated Kevin Warsh to be the next chair of the Federal Reserve. If the Senate confirms him, Warsh will take over in May when Jerome Powell's term expires. Trump said Warsh is, quote, "central casting" for the role and promised that he will never let you down. The dollar strengthened after Trump's announcement, but US stocks declined. Now, one big question is weighing on investors: will Warsh lead an independent central bank, or will he simply deliver all the rate cuts that the president wants? Here to discuss this new pick and what it means for the future of the Fed, we are speaking with Mark Zandi, chief economist at Moody's Analytics. Mark, welcome back to Prof G Markets.
Hey Ed, it's good to be with you. Thanks for the opportunity.
So Kevin Warsh, I guess we'll just start with your reactions. What do you make of that pick?
Uh, reasonably good choice, Ed. I think, you know, his strength is he's been on the Fed before during the financial crisis. He was Ben Bernanke's right-hand man during that period. He's born of Wall Street. He was an investment banker, so he knows markets. Lawyer by training. So I think he has all the credentials. He knows central bankers around the world. So, you know, he can talk to whomever he needs to. So I think it's a reasonably good pick.
The reaction from the markets has been kind of interesting. Saying the dollar strengthened, stocks fell. A lot of people are saying that the market's reaction is basically telling us that Kevin Warsh is the new Paul Volcker. I just wanted to get your reactions to that characterization. Do you think that makes sense? And what did you make of how markets have been reacting?
Yeah, I don't know how to read too much into markets. I mean, the cleanest read is from the bond market, the 10-year Treasury yield, and that kind of moved a basis point or two. So not much of a reaction. You know, there was a sell-off in gold prices, silver prices. You know, maybe I think investors were using gold and silver kind of as a hedge against the tail risk that the president picked someone else that wasn't going to be quite as respectable and good. And once it was clear that Warsh was the chosen one, those prices fell back in. But broadly speaking, I think markets expected Warsh and felt pretty good about the choice. So I think the market reaction is pretty consistent with that view.
It is interesting that, you know, we're all wondering who's it going to be. Is it going to be him? Is it going to be Kevin Hassett? Is it going to be Waller? He went with the guy that appears to have perhaps the strongest spine. I mean, my reaction was he was kind of the best option that was on the table. You know, he was being a little bit of a sycophant in the months leading up to this election, but overall, I mean, it seems like he's probably going to be the most independent of the options. I'm just wondering if you agree with that, and if so, why did Trump go with him? Why didn't he go with a total sycophant?
Yeah, I, you know, the other choices were, I think, also good, reasonably good. I mean, you mentioned Kevin Hassett. Uh, you know, I think he would have done just as well. Uh, I think he's got an intellectual north star. He's an economist by training. Waller, of course, is a very good economist. I think he would fight for Fed independence. I don't know the fellow from BlackRock that well, but I think generally... I think they were all, you know, pretty good choices. But you're right, it is interesting. I mean, you'd say Kevin Warsh is more of the hawk, at least historically, been more supportive of policies that would keep interest rates higher rather than lower. And of course, the president's made it very clear he wants lower interest rates. So it's unusual in that sense, but you know, Kevin Warsh is, I think the president said it right, from central casting, right? I mean, he looks like a central banker. He's very smooth. He speaks very articulately. He speaks definitively. You know, you can see why the president might like him. He comes from money, wealth. You know, he's married into the S.D. Lauder fortune, and I think that just helped. So I don't know that the president was too focused on what Kevin Warsh has said in the past about quantitative easing or, you know, what the Fed should be doing with regard to interest rates, and more focused on these non-monetary related factors when making his decision to choose him.
What do you think this does mean for the Fed and for interest rates going forward? Is this going to mean we're going to not cut rates as quickly as the president would like?
I think, you know, here's the important point about the Fed in the current context: is Kevin Warsh is just one vote, right? I mean, this is a committee of 12, and you've got to get a majority of votes. And I think there's a couple, three votes that are inclined to lower rates almost regardless of what the economic data say, but the vast majority of members of the FOMC, which includes five presidents of district Federal Reserve banks, they're not going to vote that way. So I think at least in the near future, foreseeable future, I think we're on safe ground here that we're going to get decisions, interest rate decisions that are, you know, determined by how the economy is performing as opposed to what the political environment is like. The other thing to consider is everything kind of sticks to script. Kevin Warsh won't take the chair until May, and you're already pretty close to the election. So that's when I think the president would desperately want the rate cuts. But, you know, it's getting late in the game already, and this may drag on for longer just because of getting him through the Senate confirmation process. So I'm not sure when this really matters to the president. Kevin Warsh is going to have significant sway here, at least enough sway here to get those rate cuts that the president wants.
Yeah, I was going to ask about the Senate confirmation because Senator Thom Tillis said he would block any nominee until that DOJ probe is resolved. Of course, this was the Department of Justice's investigation into Jerome Powell, which I guess is ongoing. And he's saying it's not going to happen until you, I guess, shut that down. What do you think will happen with this Senate confirmation process? Do you think that this is going to be a sort of long, drawn-out, complicated process, or what does that all mean for the timeline?
Yeah. Well, I think Senator Murkowski, too, also, she's a Senate Republican from Alaska. She said the same thing as Tillis, which is she's not going to vote for Warsh until that's settled. My sense is that the president will figure out a way to stand down on the DOJ lawsuit. I don't think that's a winning strategy. And I think he wants to get Warsh in a chair. So I'm not sure how he does it or what form that takes, but I think at the end of the day, that's what's going to happen here because there really isn't anything there. Everyone knows it. And I think the president, you know, ultimately will decide that it's just not a winning strategy. And if there's one thing he's really, really good at, it's at pivoting. And I think he'll pivot here. That'd be my sense of it.
My final question before we let you go, this will be the end of Powell's tenure. What will his legacy be? How will textbooks and history books remember Jerome Powell as Federal Reserve Chair?
I sure hope it's not the battles he's having with this president. That may end up being, you know, what goes down in the history books, or at least what people pay attention to. I hope that's not the case because he's been a very good Fed chair. I mean, he's navigated this economy through some very difficult times, the pandemic being the most obvious, and that was pretty difficult to navigate. And, you know, at the end of the day, here we are. We're at full employment or pretty close, 4.4% unemployment rate. Inflation is a little on the high side, but if not for those tariffs, we'd be right back to the Fed's target. So if his goal is those two mandates, full employment and low and stable inflation, check, he did it. I think he should go down in history as a good Fed chair. And the other thing is he's the prototypical central banker. He works to gain consensus. He knows his colleagues well. He works with them well. He is the Fed, and hopefully we get a lot more Fed chairs in the future like Chair Powell.
