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Well, Kevin Warsh has been approved by the U.S. Senate to be the next chair of the Federal Reserve,
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so it is a perfect time to take a look at the leadership from Jerome Powell, who is heading
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out of that position after being there the last eight years, and looking ahead to what we might
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expect from Kevin Warsh as he heads into that role. And great to have joining us to discuss
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this Pat Harker, who's a professor of operations information and decisions here at the Wharton
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School, but he was also in an earlier life, not too long ago, president of the Philadelphia
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Federal Reserve Bank from 2021 through 2025. Pat, always great to talk to you and get your insight.
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Thank you, sir. I'm great. It's glad to be here. Thank you. Let's start with Jay Powell and give
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us your thoughts on his time, his tenure in overseeing and leading the Federal Reserve the
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eight years. It's been tough. I mean, he's been dealt blow after blow, and I think he's
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stood the test of time. You think about what he's faced, yes, banking crises, but they are kind of
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normal, although there are shocks to the system. The Fed knows how to deal with those. Pandemic,
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no, not so much. So you have to go back to Marian Eccles to think about somebody who
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faced, yes, bank shocks, but then he had the Second World War. And what you think about with
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the Second World War and the pandemic is you don't know when it's going to end. You don't know how
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it's going to end. You sort of know how a bank shock's going to end because you know how the
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Fed's going to respond and other parts of the government will respond. So Jay's been dealing
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with all of that. And then he's been dealing with a direct frontal assault on the independence of
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the Federal Reserve. And I think he really has stood up, he's held the line, and I'm just proud
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to have worked with him. So let's touch on the element of the pandemic because I think that
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obviously, as you kind of alluded to a moment ago, it was such a unique time and period for everything
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in our lives. But for financial leaders, take us through what it was like to try and kind of get
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an understanding of what was going on with the economy at that time.
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We were scurrying around for every shred of information we could get. Because the data we
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have, the official data from the government, is backward looking, right, by definition. So we were
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looking at open table reservations, Google commuter patterns. We were trying to find every
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shred of information to get some sense of where the economy was going. And,
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unusual for a central bank, we had to become amateur epidemiologists to figure out and talk
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to doctors about what was going to happen. What do you think Powell's legacy ends up being?
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I think his legacy will be what he's doing right now, which is standing up for the independence
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of the Federal Reserve. Look, presidents before have gone after the Fed, right? But it's done
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privately. This is a very public attack on the Fed, including legal action, at least threatened
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legal action. This is unprecedented. And the fact that Jay's standing up for the institution
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is what I think will be remembered for. How much of a concern is there that the Fed
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obviously is being challenged on its independence, but
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could potentially lose some of that independence moving forward?
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Well, I think it's really important is Humphrey's executor case that's going
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through the U.S. Supreme Court. They should be deciding this any day now. That will say a lot,
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because the court has hinted at the Fed being different than other federal agencies,
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but we'll have to see what they ultimately decide. If they decide that the president
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can fire at will governors, for example, who could then fire at will presidents,
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there is no independence on the monetary policy side of the Fed.
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Right. And that obviously becomes interesting as well because of the fact that Chair Powell
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has decided that he is going to stay on as a Fed governor, which take us through that as well,
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because historians tell me that this is not always the norm, that a Fed chair just
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automatically moves over to that slot. No, no. So you look at Eccles. Eccles did it,
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but actually Truman, President Truman asked him to stay on. This is different. Jay is staying on
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until he's assured that the institution is safe. That is, he wants to see these legal cases
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dismissed. Then I think Jay will move on. That's my guess.
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What do you expect from Kevin Warsh as he takes over this role?
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So on the monetary policy side, not a lot. I mean, if he's the one person changing, the rest of the
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committee members, the other 18 aren't changing, except there'll be a new president of the Atlanta
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Fed coming soon. So there, and plus he's dealt this hand right now with the war, where he's
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not going to be able to deliver on any kind of cuts. It's just not possible. Now, on the
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regulatory side, I think there's going to be action, and that is really in the hands of the
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governors, solely in the hands of the governors. So I think you'll see some action there, but
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I wouldn't expect a sea change when it comes to monetary policy anytime soon.
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But I guess the difference is that Warsh does have more of an economic background than Powell did,
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but obviously Warsh, a lot of people believe, from an economic standpoint, has a pretty good
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hold and pretty good frame on what we might need to see done in the years ahead.
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Yeah, I think so. I think Kevin's a professional, but again, he is not going to get his way if the
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committee is against it. And so you saw that in the last meeting, where three dissented to the
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hawkish side on the statement language. So I think Kevin's got his hands full on that. He's
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going to have a committee that's nervous about where we are in terms of inflation.
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Where do you think, and I guess you may have to a degree answered this already,
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until we get a resolution on the conflict with Iran, there's really not a lot that the Fed
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would want to do maybe at this juncture.
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No, I mean, I put a piece out recently, we talked about supply shocks, and the Fed not having a lot
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of tools for supply shocks. What's different now is this is, I call it supply coercion. These are
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actions by nation states, because they know in an asymmetric war, they need to get an upper hand
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somehow, and they can influence us through these supply shocks.
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I saw comments earlier this week, we talk about rate cuts all the time. But the potential of a
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rate increase is something that I guess, at least has to be on the minds of Fed leadership
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moving forward.
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Yes. I mean, if inflation expectations start to get unanchored, there's signs that people are
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getting a little nervous. But if they start to move up in a significant way, the Fed will have
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to take action. It cannot allow inflation expectations to get unanchored.
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What do you take from your time running the Philadelphia Fed and obviously the relationship
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you had with so many governors and that experience over that window of time that you were there?
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I wish Americans could see an FOMC meeting.
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We disagreed, we would have reasoned disagreement, but it was never personal,
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there was never politics that entered the room. It was 19 people debating what was best for the
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country. And seriously, there was no ego, there was no politics, it was people trying to do what's
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best for the country. Now, we disagree, we all have the same data, we disagree in our judgments,
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but we never took it personally.
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Should there be a level of concern that what we're seeing play out in our politics right now
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could bleed into the Federal Reserve?
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I sure hope not. I think the beauty of the Fed that was, you know, set up here in 1913
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was that you have 12 reserve banks that are somewhat isolated from the political discourse.
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And I think that is one of the secret sauces, one of the superpowers of the Fed or the reserve banks.
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Pat, I appreciate your time today. All the best. Thanks very much.
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Take care.
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Thank you, Pat Harker, who is a Professor of Operations Information and Decisions
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here at the Wharton School.
