Joining me now with great pleasure, National Economic Council director, Mr. Kevin Hassett, and very dear friend. Kevin, thank you for doing this. So this morning you were at the Wall Street Journal CEO Council summit or some such thing, had a terrific argument. We're going to play some tape about one of the things you said, but you made a terribly important point. You made a terribly important point and that is that this never happens. The Fed must not be partisan. I think this is an absolute key point. I know the headlines are all about lower interest rates, but I think this is the key point that has to be made. The Fed should not be partisan. And I believe we have the tape on this. Do we have the tape? Okay, here it comes. Kevin, we'll let you comment after it plays.
I can just say it. The Fed must not be partisan. And I worry that the Fed has been partisan. But then the Fed didn't do anything when there was runaway spending and inflation was going out of control. It finally did something about the runaway inflation right after Jay was renominated. There are a lot of things that look political in recent behavior of the Fed and I think that's not acceptable. The Fed cannot be a political body.
So the Fed must not be a political body, and there's plenty of reason to cite plenty of things. This is so interesting to me. The Powell Fed was rather partisan in the first Trump term, rather partisan during the Biden years, and looked to be rather partisan in the second Trump term. Kevin, as NEC director, can you expand on this because this is so important?
Right. Well, the bottom line is that the job of the Federal Reserve is to do monetary policy. And you remember, Larry, on your show, I talked about a time when Alan Greenspan wouldn't let me write one of my tax papers because the tax was something that Congress was considering at the time. And he was like, well, when Congress is done considering that, we can publish your paper. But right now, if the Fed publishes a tax paper, it's going to look like we're playing favorites. We're going to inject ourselves into a partisan process. And I think he was right to do that. He held my paper for almost a year, if I remember right. So the point is the Fed should be focused on monetary policy and try to stay out of politics. Think about how many times in the last couple of years or even just this year, you've seen Fed people from regional presidents all the way up to people at the top go on and on about tariffs, even falsely asserting that tariffs could be inflationary even if there's a price effect for tariffs, right? As you know, it's a level adjustment, not an inflation effect. The point is that to take one of the president's top non-monetary policy issues and make it your main talking point every time you give an economic speech is to do the opposite of what Alan Greenspan advised. So I think the Fed needs to go back to being a nonpartisan organization that focuses on bank regulation and on monetary policy and tries to stay out of politics. Another thing I saw when I was studying this ahead of time was that the Fed almost never moves interest rates right before a presidential election because they don't want to look like they're playing political favorites. But what happened in the last election? We got a big rate cut right ahead of the election. Maybe that rate cut, if you look at the data, maybe they believed it was true that they should do it, but they should have looked at the long history of previous Fed chairs who said, you know what? Let's wait till after the election to do something. We don't want to look like we're playing favorites.
So saying NEC Director Hassett, Fed Chair Hassett would undoubtedly abide by the same principles you've just laid out here. I know you mentioned them this morning and you've repeated them here. You would abide by those same principles. Would you not?
I absolutely would. It's the job of the Fed to do monetary policy and to try to be as apolitical as possible. But it doesn't mean that you don't ever talk about it. If you go back to Chairman Greenspan, he would warn Congress, hey, if you spend like crazy and inflation takes off, then I'm going to have to lift interest rates a lot, so please don't do that. That's an appropriate kind of thing for the Fed to say. But to go and take every little nuanced partisan issue of the day and talk about it in speeches every week is inconsistent with the history and tradition of the Fed.
Seriously, but sometimes a little bit of humor. Treasury Secretary Scott Bessent was speaking on TV last week or Sunday, I think it was, and he was talking about the Fed. He said the Fed has 300 economists. He called it a universal basic income program for economists. His clear inference was we don't need 300 economists at the Federal Reserve, however many they may have throughout the sprawling 12 reserve bank system. So one question I have for you is, if you were running the Fed, would you downsize the staff?
Right. I think that what the Fed has to do is really carefully analyze the research it's doing and make sure that the research is focused on core functions. For example, are they doing a good job at forecasting how the economy is going to be over the next 12 months? Do they have a lot of people dedicated to that and are they doing a good job? If there are people who are fantastic at nailing the economy and it took 400 of them, then maybe you keep 400. But I think that if you go back and look at the research papers being written, there are a lot of things that are not central to monetary policy. In fact, if you go back and look at the list of working papers, Larry, which you could do, you could see that there's a whole bunch of good stuff and a whole bunch of stuff that's completely not central to monetary policy. That's the problem. The Fed needs to go back to being focused, as Alan Greenspan's Fed was, on monetary policy and being nonpartisan.
But the Fed's batting average on the economy and inflation is not very good. I see you smiling. You have no idea. I started my career at the New York Fed. There's part of me that has always wanted to be in that discussion at the Fed, but the point is they have a lousy batting average. I think their stance is not very good. The way they hold the lumber is not very good. They probably need to choke up a little bit and change it. The question I have is, would a Chairman Hassett change some of these division heads at the Fed who have been around and have been hitting .210 for all these years? Even .210 in today's world is too low.
Yeah. It's premature to be talking about personnel, as you know, Larry, but there are a lot of really good people at the Fed. A lot of them are friends of mine. As you know, I was a senior economist at the Fed back in the day when I was a little kid. There are a lot of people at the Fed still that I helped recruit. And you've got Chris Waller, a top brilliant governor who's maybe the top monetary theorist in the country. He wrote papers in places like the Journal of Economic Theory that would never take a Kudlow paper or a Hassett paper. There are a lot of good people at the Fed.
I don't want you to fire Chris Waller if you were chair. Nobody would want that. But in terms of the board staff, the people behind the forecast that have done so badly, I know you can't go too far here in this interview, but it's a subject worth discussing. It seems to me you got too many economists, what Scott Bessent is saying, and many of them are going to have to be removed if you expect to get your batting average up to even .275 or .280.
Right. I want to see why the forecast is what it is. What are the models that are driving the forecast? If the forecast isn't working, then what did the models miss? Are there new models that we should consider that could do a better job? Are there new researchers that we need to hire that could help us find better models? These are the kind of things that the next Fed chair is going to have to address, and it'll happen whether it's any of the candidates the president is looking into.
One more related fact, then we'll get back to policy. You've got 12 reserve banks and then you have 12 reserve bank presidents, and they yap all the time. They're out there chirping about one thing or another, and half the time the public doesn't know what they're talking about. Every five years, they're all up for renewal. This is the fifth year next year. The question is, would you, as Fed chair, be willing to make some changes at the reserve banks?
Well, I think that like any new Fed chair, you're going to have to investigate and think about who's doing a good job and who's not. The American people and the president expect the next Fed chair to hold people accountable, to help people be more effective, and to be nonpartisan. So for sure, that's something we need to look into. And of course, there have also been some accusations of misconduct and bad regulation over on the West Coast. There are a lot of things that need to be addressed, either fixed with new people or fixed with new ideas about how to run things.
You know, I've had this conversation with Mohamed El-Erian, a smart chap.
The Fed has completely struck out on the issue of compliance. Under Powell, you've got all these people with allegations of insider trading. Nothing's ever done until magically in the dead of night on a Friday evening, they issue a press release and say they're gone. The compliance issue has been an absolute failure during the Powell era.
