“As Fed Chair, how frequently would you consult with the president when he says he wants his voice heard?” a curious Margaret Brennan wondered, during a chat with Jerome Powell’s presumed successor on December 14.
“Well, I’m the top economic advisor for the president, and I talk about almost everything with him almost every day,” Kevin Hassett responded. “[We’ve] certainly talked about monetary policy.”
Yes, “certainly.” And that’s just it: The consensus among all but the most credulous observers is that as Fed Chair, Hassett would continue to “talk about almost everything” with Trump “almost every day,” and that monetary policy would “certainly” come up again and again.
That’s not the only reason Hassett’s generally seen as a poor choice to lead the Fed (he’s not taken especially seriously as an economist), but it’s the main reason and as it turns out, some in Trump’s inner circle think the optics of a Hassett nomination are too dicey to chance.
“There’s concern that the National Economic Council director is too close to the president, something that ironically made him the frontrunner to replace Powell in the first place,” CNBC reported on Monday, citing sources familiar and adding that the internal pushback likely explains why Trump reintroduced the possibility of a Warsh chairmanship late last week when he told the press that “the two Kevins are great.”
Previously, Trump said he’d narrowed the list of contenders for Powell’s job down to one, a remark markets took as confirmation of Bloomberg reporting which all but named Hassett Chair in-waiting.
The figure above shows you the sudden shift in betting market odds. Warsh is now ahead of Hassett, whose nomination was seen as a near lock earlier this month.
In the same reporting, CNBC said the feedback Trump’s received in recent days is more about “promoting Warsh than criticizing Hassett” amid concerns a Hassett Fed could lose the long-end of the Treasury curve, “the opposite [of what] Trump wants.”
Plainly, Warsh is the better choice, and were it not for a series of borderline sycophantic interviews over the summer, I’d call him a good choice. In July, he called for “regime change” at the Fed and said the bank’s “incumbents” (some of whom are his former colleagues) have a “credibility deficit.”
That latter part (about the credibility deficit) is undoubtedly true, but it’s not something one says about one’s friends on national television.
I’ll argue — purely based on his 2025 public remarks — that Warsh will be nearly as beholden as Hassett, he just won’t be the cartoon that Hassett is. That’s not nothin’. Optics matter in this context and if nothing else, the optics around a Warsh Fed would be markedly better.
I’d be remiss not to note that if Trump were really interested in stability, he’d just nominate Chris Waller or Miki Bowman, both of whom would gladly serve his purposes while retaining more than enough in the way of plausible deniability vis-à-vis Fed independence.
During the same chat with Brennan, Hassett said Trump “has very strong and well-founded views about what [the Fed] ought to do.” “I would hope that Kevin Warsh would be talking to the president as well if he were Fed Chair,” Hassett added.
Regardless of who is chosen, it is highly probable the long end will likely be unwieldy. Fiscal policy is currently too easy and about the get easier. Monetary policy is about to blast massive amounts of liquidity into the system. And the risk in Treasuries that no one seems to be talking about is stable coins. What happens when stable coins (the emergent largest buying cohort) stop buying because US Treasuries have become less stable or worse they start selling or are forced to do either due to legislation (a likely priority of a likely Dem controlled Congress in 2027)?
The Fed is now a major buyer of short treasuries as its mortgage book rolls off. Ironic that the Fed is a major funder of our deficit financing. Additionally Fannie Mae and Freddie Mac are building up their balance sheets by keeping new mortgages and bonds on balance sheet rather than selling them, presumably in advance of a return to public ownership. Together along with the recent reduction in rates we now have supercharged QE. No holding us back now.
“… we now have supercharged QE.” Fed buying in Bills and ultra-short paper isn’t QE. The goal isn’t to compress risk premia. I understand the temptation to traffic in that narrative — and God knows I could sell it in hyperbolic headlines — but it’s just not true.
QE is buying long bonds to force down their rates. Buying bills is just reserve management.
For now . . . I do think there is a plausible future (“plausible” in the current Bizzaro World where the Mar-A-Lago Accord guy sits on the FOMC) where the Fed forces short rates to very low, Treasury shifts issuance even more toward bills, the USA’s interest cost is thereby lowered, at the cost of having to roll over $20TR+ every six months. If one of those refinancings stumbles, who’s to say the Fed wouldn’t be ordered to step in?
I wouldn’t doubt this is the thinking of the administration. It sounds like a free lunch to me, and you know what they say about a free lunch, there is no such thing.
I would expect the irresponsible fiscal policy to push the short end to the largest dislocation from the Fed funds possibly ever. Too much supply, not enough demand.
I also think the Dems targeting stable coins will be an effort to force/exacerbate (with the admin push ing more funding to the short end)
this issue to pin it on the Trump admin before a Dem President takes office in 2028. Of course they will sell the legislation as a means to stop the USD being leveraged to finance illicit global activities via stable coins because stable coins as a vehicle is intentionally designed to be exactly that. I wouldn’t be surprised if the whole idea for stable coins came from the Kremlin in the first place. The Trump admin has been a Russian puppet state since day 1.
If Warsh thinks his former colleagues on the Fed have a credibility gap, just wait to see how he’s regarded after a year in service of the President.
Support for crypto is bipartisan now. Some hypothetical anti-crypto future president is going to have a near impossible time putting that particular genie back in the bottle (I prefer to keep my genies in bottles, it’s much more convenient than lamps, to say nothing of the fire hazard).