Lael Brainard, Former Vice Chair of the Federal Reserve, joins Bloomberg's Kailey Leinz on Balance of Power to discuss her thoughts on Kevin Warsh's first meeting as Chair of the Federal Reserve.
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What Lael Brainard said
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Lael Brainard, former Fed Vice Chair and NEC Director, discussed Kevin Warsh's first FOMC meeting. She said Warsh stayed true to his vow not to communicate his own policy views, letting the Summary of Economic Projections do the talking. Half of the projections showed core inflation ending the year at 3.3%, warranting one or more rate hikes, which drove the 2-year yield jump. Brainard noted Warsh emphasized price stability, sounding like a one-mandate central bank. She argued the Fed should still provide a reaction function, not forward guidance. Brainard highlighted Warsh's task forces on data sources, inflation framework, and productivity as potential avenues to move dovish. She said Warsh's comments on trim mean inflation and the left side of the decimal point suggested wiggle room on the 2% target. Brainard said she would be cautious about insisting the Fed get inflation back to 2% given five years above target. She called AI a near-term inflationary impulse from data center buildout, but potentially disinflationary long-term. She warned of a possible stock market correction if AI revenues don't justify valuations.
Key takeaways
Half of FOMC projections showed core inflation at 3.3% by end of 2026, warranting one or more rate hikes.
Warsh's task forces on data sources, inflation framework, and productivity could move the committee dovish.
Warsh's comments on trim mean inflation and the left side of the decimal point suggest wiggle room on the 2% target.
7:09How quickly is that able to translate into lower energy prices that we have seen bleeding into other core inflation metrics?
8:35I do want to ask you about AI, but the way you're talking about inflation right now lends me to believe you might have been one of those dots that sees a rate hike by the end of this year yesterday. Is that the case?
9:27Are you in the camp that sees AI firmly as inflationary because of higher energy costs, because of the actual infrastructure buildout we are seeing, or that it eventually will be disinflationary because of increased productivity?
10:54What happens if these market gains start to dissipate at some point?
The bond market especially fascinating in the last 24 hours in the aftermath of the first Fed decision made under the new chair Kevin Warsh. The market clearly was expecting something a little bit more dovish than what it received in the form of a dot plot in which about half of the members of the FOMC suggested they would like to see or expect to see a rate hike this year. That's why we saw the 2-year yield yesterday jump to the highest level since April of 2025. But of course, as Charlie mentioned, we are seeing yields a bit lower today, including on the 2-year by about three basis points. Of course, as I reference that dot plot we got yesterday, Kevin Warsh himself did not contribute a dot as we know and as he discussed in the press conference, he isn't really a fan of the Fed providing forward guidance. He also seems to suggest that financial markets shouldn't need forward guidance from the Fed. Maybe the guiding should be going in the other direction. Let's remind ourselves of what the chairman said at the press conference yesterday.
The more that markets are paying attention to what's happening in the real economy, deciding what's good data and what's less good data, the more financial markets can price what they believe is the most likely. Financial market prices are probably the most important source of information to guide central bankers. But when all the financial markets are doing is reflecting back what we've said, then we're taking the most important source of information and we're being blind to it.
So let's talk to one former central banker, the former vice chair of the Federal Reserve, in fact, and the former director of the National Economic Council under the Biden administration. Lael Brainard is joining us now on Bloomberg TV and radio. She's now distinguished fellow at the Georgetown Center for Financial Markets and Policy. Welcome back to Bloomberg, director. It's good to see you. I wonder what you made overall of Kevin Warsh and his first press conference yesterday. Did he surprise you?
Well, it was a very interesting press conference. He stayed true to his vow not to really communicate his own views about policy or any sense of where policy might be going. The result of that was he really let the summary of economic projections do all the talking and I think the markets really reacted because you had half of those projections, didn't include his projection, but half of those projections saying that inflation is going to be a lot higher this year, ending the year at 3.3% core and that would warrant one or more rate hikes and that's why you saw that big move in the 2-year. The other thing that was notable is that both in the statement and in his discussion, he really emphasized price stability and made it sound like a one-mandate central bank. So those were the things that I think moved the direction of the market in a very hawkish shift. That's not actually what his comments, the sort of subtext, suggested, but those were the main messages.
Well, so talk about his comments on what we just heard him say about financial markets receiving guidance from the Fed in particular. I wonder if you have sympathy with the view that maybe the markets should be the one interpreting data on their own rather than interpreting the Fed's interpretation of said data.
Well, I think the difficulty here is that the market needs to and the public need to understand not forward guidance in the sense that I think he is objecting to, which is suggesting here's what our action will be if inflation and unemployment come in at these levels, but at least a sense of how the Fed's policy is seeing current inflation, unemployment, and that gives both the markets and the public a sense of where policy might be heading. So, what was interesting yesterday is he really didn't even want to provide a sense of what a lot of people call a reaction function.
But his own biases seem to be sort of subtext in some of his comments. You know, he noted that half of the people who did submit projections didn't see a rate hike this year. He said there was no cruel choice between inflation and the labor market. So there were a few things that he said that might have pushed back in the other direction. Well, and of course as we consider what is said or what will be said going forward, we know there's going to be a whole task force on communications. There's going to be a lot of task forces under this new chairman. Has he asked you to sit on any of them? He said he was still making calls.
No. I think what was interesting about the task forces, we knew there would be a review of balance sheet policy. We knew there would be a review of communications. But I think what was interesting is the task forces on data sources, the task forces on the inflation framework and the task forces on productivity all could be ways that even while emphasizing price stability he tries to move the committee in a more dovish direction. So those were the areas that I think we just don't know where he's headed. But what we do know is that half of the committee is very worried about inflation and that is consistent with the data we've seen.
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