David Wessel on the Fed’s Current Inflection Point

David Wessel is a senior fellow in economic studies at Brookings and is the director of the Hutchins Center on Fiscal and Monetary Policy. In David’s first appearance on the show, he discusses stories of the Greenspan Fed, what is was like in Europe when the euro was adopted, the legacy of the Powell Fed, his thoughts on the great man theory, the outlook for the Kevin Warsh Fed, the ongoing challenge of Fed independence, and much more. 

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This episode was recorded on June 15th, 2026

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected]. 

David Beckworth: Welcome to Macro Musings, where each week we pull back the curtain and take a closer look at the most important macroeconomic issues of the past, present, and future. I am your host, David Beckworth, a senior research fellow with the Mercatus Center at George Mason University, and I’m glad you decided to join us.

Our guest today is David Wessel. David is a senior fellow in economic studies at Brookings and is the director of the Hutchins Center on Fiscal and Monetary Policy. He is also a longtime veteran and public intellectual of the Federal Reserve space, and is the perfect guest to join us today to discuss this pivotal moment in the Federal Reserve’s history. David, welcome to the podcast.

David Wessel: Good to be with you, finally.

Beckworth: Great to have you on. This is long overdue. I have to say that when I think of you, I think of the first time I chatted with you. I don’t know if you remember this. This goes way back. I was at Texas State University, and I had just written either a blog post or it was an op-ed, but I had highlighted how Milton Friedman had advocated for a version of QE, or large-scale asset purchases, for Japan in early 2000, so long before we had this at the Fed.

Someone had pointed it out to me, some speech he gave at the Bank of Canada. I dug it up, and people were shocked—Milton Friedman is advocating for something like QE. It blew their minds, because you remember there were all these op-eds like this to create inflation. You reached out to me because you wrote a column in the Wall Street Journal about that very thing, but even Milton Friedman would have supported something like that. I think that was the first time we chatted.

Wessel: I wish I could say I remember that, but I don’t.

Beckworth: It was a great time. There, in those early years of QE, it was unconventional. Now it’s conventional. You’ve seen so much, David. Tell us about your journey, because you were a reporter at one point. Now you’re at a think tank. You’ve seen a lot.

David’s Career

Wessel: Yes. I came to Washington in 1987 to work in the Washington bureau of the Wall Street Journal, shortly after the stock market crash. I worked with Alan Murray, and we covered the Fed. At that time, the same reporters covered the Fed and the federal budget at the Wall Street Journal. I like to tell people that I learned most of my economics, even though I majored in economics in college, as a reporter for the Wall Street Journal.

One reason for that was that a lot of powerful people, including Alan Greenspan, thought it was important for the Wall Street Journal to get it right, so they would talk to us. They would talk to us about things, whether they had to do with monetary policy or not. I covered the Fed for a while. I did a stint for the Wall Street Journal in Berlin, when the European Central Bank was just getting off the ground—

Beckworth: Wow.

Wessel: —which was also interesting. My good fortune was that the European Central Bank’s working language was English, and I spoke central bank, so that was a good match. Then, I had been approached about doing a book on the Fed in 2007. I told the book agent it was boring, and there was nothing to write about. Actually, that was 2006, I should say.

When Bear Stearns happened, when the Fed became the midwife to sell Bear Stearns to JPMorgan Chase, I wrote a piece in the Wall Street Journal that said there would always be before Bear Stearns and after Bear Stearns. The book agent called me up and said, “There’s your book proposal.” I was convinced that this was the peak moment for the Fed, Bear Stearns, so I took a leave from the Wall Street Journal. I would come back periodically.

When Lehman Brothers hit in the fall, I thought, “I’m the idiot who’s trying to write a book on the Great Depression in January 1930.” My agent, who happens to be married to a psychiatrist, and my publisher, said, “People are going to be writing books about this episode forever. You’ll have first-mover advantage.” I’d spent a lot of time with people at the Fed during that period. I got really lucky. I finished the book in March 2009, and it came out in August 2009. It’s called In FED We Trust.

That was one of the best parts of my career, writing a book about what was happening almost in real time, and being embedded the way soldiers or reporters are embedded with the military.

Beckworth: Yes, I used that book back at Texas State University. I assigned it, I don’t know how many years until, eventually, things moved on. That was one of the first books hot off the press. You covered it. You had a provocative subtitle, if I recall, In Fed We Trust: How the Federal Reserve Became the Fourth Branch of Government. Was that the subtitle, or something like that?

Wessel: Yes. One of the things I learned is that book publishers care about title. They care a lot about subtitle, for some reason, I don’t know, and they care about the blurbs on the back of the book. I wasn’t thrilled with that subtitle, but I acquiesced to it, so I own it. My big success was the publisher, the editor, once wanted to call the book One Nation Under Fed. I said, “That sounds like a book on world hunger.” 

Beckworth: That’s true.

Wessel: That’s how I negotiated to In FED We Trust, which was much better.

Beckworth: Yes, yes. That was a great book, because it’s like in the spirit of Bob Woodward’s type. You have these inside stories and what’s going on behind the scenes. I remember one story in particular. I won’t mention any names, but you highlighted how, during this time, there were different levels of governors, like a high school social environment. Some of them were the cool guys, some of them were the losers, and some were in between.

I won’t name any names, but I was like, “Man, this is brutal, this is harsh,” but this must be the way the dynamics work inside the Federal Reserve.

Wessel: It was like high school. There was the nerds, the cool guys, the jocks.

Beckworth: The jocks, that’s right.

Wessel: I put Dick Fisher, who was then the president of the Federal Reserve Bank of Dallas, as one of the jocks. His response was to send a copy of his book to each of the directors of the Dallas Fed wrapped around with a jock strap. 

Beckworth: Wow. Okay. The impact of journalism. Who knew? That was a great book, though. We had a lot of fun with it, my students and I did. That’s another way I got to know you as well, reading your work as well. You report and you write the book. What happens after that?

Wessel: I wrote a column for the Wall Street Journal for a while. Then, in 2013, I realized it was my 30th year at the Wall Street Journal. In those days, newspapers were profitable enough that you’d get a little catalog and you could pick a wristwatch, golf clubs, or something. I thought to myself I went to work for a newspaper a week after graduating from college in 1975. I’ve never done anything else. I’ve written about people who had three or four careers in their lives. If I’m ever going to do anything else, I should probably do it now. 

I was open to doing other things, but I didn’t really have any idea what it was. I ran into a guy named Glenn Hutchins, who was one of the founders of Silver Lake. He’s a Brookings trustee. He told me he was giving several million dollars to Brookings to start a center on fiscal and monetary policy. They were looking for someone to run it, so I volunteered. I went to Brookings at the beginning of 2014, and I’ve been there ever since.

Beckworth: The rest is history. Going back to your time covering the Fed in the ’90s, that was an amazing time, the maestro, Alan Greenspan. You chatted with him. You knew him. You got to see how he operated behind the scenes. Tell us about that.

Wessel: The thing I really remember most about Greenspan, besides the fact that he was just an incredibly skillful Washington politician, was that in his speeches, when he didn’t want to talk about monetary policy, the stuff he talked about was really interesting. That’s where I first heard about a Stanford economic historian named Paul David. Paul David pointed out, with great detail, why it took so long for electricity to work its way through the economy in the ’20s, to produce an increase in productivity.

He basically was showing how there’s a new invention, a new technology, a few pioneers do it, but it doesn’t really affect productivity growth in the economy until it works its way through the system, so a whole bunch of factories have to change, they don’t change very fast. That was Greenspan’s metaphor for the internet, why it was taking so long for the internet to show up. It was funny.

The editors at Barron’s asked me to write a piece about covering Greenspan on the occasion of his 100th birthday, which was a couple months ago. It was fun for me because I got to write about the things I never had any excuse to write about. The lead of the piece is, one thing I learned is, “Don’t ask the chairman”—he was always called the chairman—“a question while you’re in a buffet line with coffee in one hand, pastry in the other, and your notebook in your pocket.”

Greenspan had been talking a lot about how GDP was getting lighter. It was his metaphor for more of a service economy. I said to him, “How do you really know that GDP is getting lighter?” He started talking about some form, F something or other, that the Commerce Department puts out, where they have the weight of all the imports and stuff. I ended up doing a story about that, but I learned, don’t do it when you don’t have your notebook out.

Beckworth: Yes, such great stories. Then quickly, one more thing about your career while you were in Europe. You were there when the euro was introduced. Did you see the transition, the physical nodes, the bank accounts change? Was that a pretty smooth process in your evaluation?

Wessel: Well, it was, from the benefit of hindsight, incredibly smooth, but there was a lot of worry. They had already adjusted exchange rates, so the Deutsch mark was fixed to the euro, that was no longer. The Germans were, in particular, convinced that this would be an excuse for everybody to raise prices. A little bit like what you hear in the US when they dropped the penny, everybody thinks that people are going to round up and stuff.

It turned out not to be the case, but it was a pretty wrenching thing. Can you imagine what it would be like in the US if we were told, “Oh, we’re doing some currency deal with Canada, and we’re going to have something called the US-Canada dollar?” It was wrenching for them. It was pretty interesting. Also, it was really interesting to watch the ECB try and get its footing. As we know, communications is really important at a central bank.

One of the things I learned was how hard it is to communicate in a language that’s not your own. Another reporter and I were doing a story about why the ECB was having such hard time communicating. We did an interview with Duisenberg, who was the president then. He, at one point, went to his bookshelf and took out a Dutch-English dictionary in order to answer our question.

I thought, “Wow, this is incredible.” US central bankers often say a little bit more than they mean, or are misinterpreted, and that’s in their own language. This guy’s trying to do the same thing in a language that he’s not—

Beckworth: That is a great point.

Wessel: —comfortable with. There’s another funny story about Greenspan. I go to an ECB press conference in Frankfurt. I had previously arranged to talk to Greenspan because I was doing a story, a really early story on the Taylor rule, because it was so interesting, this rule. I still remember, it was in the Frankfurt bureau of the Wall Street Journal. I said, “Mr. Chairman, I’ve just come from an ECB press conference. They do them on the record, and they provide food to the reporters.” Greenspan said, “Which did you find more useful?” 

Beckworth: That’s interesting. You were there in the ’90s.

Wessel: The very end of the ’90s. 

Beckworth: Okay. By that time, Taylor rule had become—

Wessel: Yes.

Beckworth: The ’93 is the big Taylor rule paper, but it slowly becomes used at the Fed.

Wessel: Right. It was mostly about introducing the Taylor rule, the rule that explains all monetary policy, to a broader audience.

Beckworth: Okay. Let’s talk about your work at Brookings, at the Hutchins Center for Fiscal and Monetary Policy. You have a lot of events. You seem to be the place that Fed governors, presidents like to come and give a talk if they want to say something. Tell us about what you’re doing there and what your goals are.

Wessel: The mission of the Hutchins Center is to improve the quality and efficacy of fiscal and monetary policy, and public understanding of it. I’d like to say, fortunately, we’re not paid for performance. We’ve done a variety of things. At the beginning, we did a lot of stuff about the Fed, because the Fed was doing really interesting things. Ben Bernanke had come to join our center, so that gave us a certain amount of visibility.

In the last couple of years, while we continue to do that—as you know, we just did a recent event on a retrospective on Jay Powell’s eight years as Fed Chair—we’ve realized that there’s a lot of work to do on the fiscal policy side. We’re doing a lot of stuff on that score. I have extraordinary freedom. Many people at think tanks have to figure out, how do I get some foundation, corporation, or a rich guy to fund what I do? Because Glenn Hutchins was so generous, we’ve raised some money on the side, but we don’t have to.

We do lots of things. We built a computer game on the federal budget, called The Fiscal Ship. We didn’t like the games that were out there because they made it seem like reducing the debt was the end of economic policy. In our game, first you choose your goals for government. We give you nine or 10 goals. You can pick up to three, some left, some right. Only after you pick your goals for government do we give you 125 or so tax and spending options.

To win the game, you have to both realize your goals for government, which might be fight climate change, it might be cut taxes, it might be bolster defense, it might be reduce inequality, and stabilize the federal debt at current levels. It’s been really fun. We had 43 undergrads at Brookings last week. We assigned each group a persona, like, you’re a retired couple, you’re an entrepreneur, you’re a single mom, and have them play the game by their own preferences. It’s been really interesting. The game’s been played something like a million and a half times since we launched it. We have a steady stream of college students who are in DC for their Washington semester. That’s been part of our public understanding thing. 

Right now, the thing I’m doing that I find most interesting is, for a variety of reasons, which are pretty much idiosyncratic, I organize a task force to try and figure out what to do about the challenges that climate change poses to the homeowners insurance market. We have a very diverse task force of people, some from the industry, some from the consumer side. Our goal is to, in the first quarter of 2027, issue a report that has some recommendations, largely aimed at state legislatures, that’s backed by a group that doesn’t usually agree on things.

Beckworth: This would be, for example, people who have homes on the beach, or other examples?

Wessel: There’s lots of things. One thing that’s just startled me is that there are 12 states in the US that don’t have any statewide building codes. Thirty-five percent of Americans live in places where there is no building code, or no building code that’s enforced, so as we look forward to new construction, that’s crazy. The real estate industry and the builders hate strong building codes, because they raise the cost in the short run.

There’s been some really interesting work. We have a paper in the works, by one of the people who’s preeminent in the modeling business, Karen Clark, looking at Texas, which doesn’t have a building code, one city in Texas, and saying, if every building built since 2000 had had a building code and they had a bad hurricane, what would be the less damage? 

There’s also a lot of questions about how do you encourage people to make their existing homes more resilient? The net present value might be positive, but you’d rather spend the money on a kitchen than a roof. There’s all sorts of stuff going on there. Then there’s questions about how do we create the right incentives? Including telling people, “If your house gets washed out in the flood, we’re not going to subsidize; you’re rebuilding it on the same place,” that kind of stuff. Then it’s to bigger issues about how do insurance companies price resilience? If a community spends a lot of money, how do you price that to make sure that there’s the right incentives for that? It’s been really interesting.

Beckworth: Sounds like an interesting project. Now, I want to go to your work that you’re doing on the Fed at the Brookings Institute. We’ll come to your June 2nd conference on the legacy, the early look back at Chair Powell’s work. Just in general, before we get to that, how do you operate? Do people come to you? Do you go seek out? Do you organize the conferences, or do people say, “Hey, let’s do this?” How does that operate?

Wessel: It’s a little bit of both. For the major events, there’s things that we organize, like the event we did, to which you referred, on Jay Powell’s tenure. We did an event several years ago, about the 2% inflation target. Where did it come from and what were the alternatives? There are times when we reach out to somebody and say, “We’d really like you to speak.”

We’re doing a conference in November on the functioning of the US Treasury market. I invited Beth Hammack, who’s president of the Cleveland Fed, but was previously in the business and was chairman of the Treasury Borrowing Advisory Committee, to be a speaker. Some of the Fed people reach out to us. Jay Powell reached out to us at the beginnings of COVID. We did an event remotely. Chris Waller is on a campaign to centralize or make it more efficient, the operations of the reserve banks.

Beckworth: Yes, that first speech he gave was with you guys.

Wessel: Yes, I didn’t realize what I was getting in the middle of there. You’ll enjoy this. Hoover has an annual monetary policy conference. There was a panel of policymakers, and three of them talked about lofty issues. Chris decided to double down on his discussion about how the Fed had to be more efficient, and we had to centralize operations.

John Cochrane, who’s an economist, The Grumpy Economist blog, says, “Governor Waller, you’re here at Hoover. You’re talking about centralizing things. It sounds vaguely Soviet. Thank God Stanford doesn’t centralize HR, or the Hoover institutions would never be able to hire anybody.” 

Legacies of Fed Chairmans

Beckworth: Yes. Let’s talk about your June 2nd conference, because that was really interesting. You had the Romers, David and Christy Romer, this power team from Berkeley who have done a lot of great work over the years, but this most recent one was on his legacy. It ties into the earlier paper they wrote about the inflation from that period, which was, honestly, to me, surprisingly critical. They came out and talked about things that I thought were too sensitive for people in that camp.

They talked about not just did FAIT work or not, but they questioned the emphasis on maximum employment, which was really surprising. Then in this presentation, I think it was even, they talked about the virtues, but also the mistakes that were made. If I understand correctly, Bernanke and Yellen came out and took a little softer view of Powell’s legacy. They didn’t question, at least, the inflation part as much as the Romers.

Wessel: I think there were a couple of interesting moments. I think it’s widely acknowledged that the Fed was too slow to raise interest rates in 2021. Their forecast that inflation would come down quickly turned out to be wrong. I think there’s general acclaim for how quickly they reversed course, raising interest rates 75 basis points at a time. I think the disagreement is whether that really made a big difference.

Bernanke is of the school that a lot of the inflation was supply-driven, it wasn’t demand, and that it didn’t really matter that the Fed didn’t raise interest rates earlier. The Romers disagree. The really interesting disagreement, which not a lot of people picked up on, was the Romers had several lessons that they learned. Some of them are pretty much conventional wisdom, like yes, the Fed should be independent, and yes, the Fed should communicate clearly.

They said that even if inflation expectations aren’t rising, inflation itself is a problem the Fed should combat. People don’t like it, and all the reasons we’re against inflation. They argued that when the Fed says, “Oh, it’s going to be transitory, we can look through it, and look, inflation expectations aren’t rising,” they challenge that thing.

Janet Yellen, who had read their paper in advance—remember, these are colleagues and friends, maybe frenemies at some times—in her remarks and in subsequent conversations, she challenged that. Basically, her argument was, if inflation is up for some supply shock, inflation expectations remain well anchored, how much more unemployment are you willing to impose on the economy, just to respond to this supply shock? There was an interesting difference of view there.

One thing that just cracked me up was, I asked one of the RAs to count from the transcript how many times people referred to Jay Powell as a hero. I forget, it was like a dozen times in two hours. That really reflects people disagree with some of the monetary policy choices he made, the way they communicated, the August 2020 framework, with the emphasis on inclusive, and the whole—

Beckworth: Broad-based.

Wessel: —broad-based, and a framework that seemed more suited to a world in which we were going to be wrestling with a zero lower bound. When Jay Powell passes, his obit will be that he’s the Fed chair who stood up to Donald Trump and defended their independence. There’ll be like the 15th paragraph, where they say, “Also, you have the highest inflation since Paul Volcker.”

I think that people, particularly in the current context, given Trump’s continued criticism of the Fed and recognizing that Warsh is going to have to navigate between the FOMC and the president, there was a lot of emphasis on just how important it was that Jay Powell had protected the Fed at a time when it was under attack. That almost overwhelmed all the criticism.

Beckworth: Yes, for sure. I do think for such a time as this, Powell was brought onto the scene, both during the first Trump administration, but also during COVID. There’s a lot to navigate all those times.

Wessel: I think it’s really interesting that there are times when we get the right Fed chair at the right moment, almost by accident. Here’s Ben Bernanke. He spends his whole academic career studying the Great Depression, something which we all figured would never happen again. He happens to be the guy in the chair when we have the biggest threat to the financial system since the Depression. 

I sometimes say that Bernanke was like a paleontologist who studied dinosaur bones. Everybody said, “Well, that’s nice, but we’ll never need to know that,” then suddenly a Tyrannosaurus Rex shows up on the horizon. I think that really comes through in my book. He really understood how important the financial system was to the functioning of the economy and how important it was not to move timidly, that you needed to keep the financial system going to keep the blood flowing through the economy. 

Powell, who’s not an economist, I thought he would be afraid to act decisively. I was wrong. It turned out that one of the things he did particularly well was walk the halls of Congress. It’s often said that he wore out the carpets of Congress. He was really a much better retail politician than Ben Bernanke or Janet Yellen. When Trump started going after the Fed, until very recently, there was no one in Congress who would join with him, that he had really done a good job of protecting the Fed from an angry president. After all, the Fed is the creature of Congress, and he made that point many times.

Beckworth: That is a great point, that had someone else been chair during those years, it would have been very challenging for them. You needed someone who was a smart political operator. To be fair, he also became a great economist, too. 

Wessel: I think he was a good student of economics.

Beckworth: Yes, yes. 

Wessel: He learned a lot. When we were emailing before this, you asked me about the great man theory.

Beckworth: Theory.

Wessel: I’m resistant to that, but then, when you look at Paul Volcker, Ben Bernanke, Jay Powell, you have to say, what’s the counterfactual?

Beckworth: That’s where I wanted to ask you to go with this. What would have happened if there was no Paul Volcker? Could another person have taken and done what he did? Let’s go to Bernanke, because Bernanke, I think, is pivotal that I think the true counterfactual would have been another Great Depression. The problem is, it’s hard, because it seems like we have massive interventions that happen. It seems like states get involved in the private sector.

What would it have been like, in your view, had there been no Ben Bernanke, or had someone else been chair during that time? Is your baseline a worst-case outcome?

Wessel: Yes. It was pretty heroic to do what they did with Bear Stearns. They did a lot of stuff to try and keep the financial system going until they made the decision, which Bernanke says they had no choice, to let Lehman go. Only then did Congress actually pass the recapitalization of the banks. Even then, it failed the first time. Who knows? The Fed has a lot of capable people, and people would have recognized that this is a problem, we have to do something about it.

I don’t think it would have been as forceful or as quick with someone else, because you had to have in your mind—there’s that famous line that Bernanke says at Milton Friedman’s 90th birthday, “You’re right, we did it, we won’t do it again.” It was very much his thing. What’s really interesting is Bernanke is basically a scholar at heart. He’s at Brookings now. He stopped doing speeches. He doesn’t talk to reporters. He consults with the Fed when they ask him.

He’s working on a book about the Great Depression and how important it was to think about the financial condition of the borrowers as well as the banks, which is incredibly relevant to the 2008 crisis, where the starting point was a whole lot of houses that were owned by people where the house was worth less than the mortgage. It’s hard to believe that, for a long time, economists thought the financial system was just an irrelevant detail. It’s like the cash register, and what really matters is supply and demand. C + I + G, and the financial system doesn’t matter. Bernanke was one of the pioneers in saying, “Its not quite that benign.” The fact that we’ve learned that the hard way, and that he’s still doing research on that I think is incredible.

Beckworth: I think the reality is, our world’s becoming more and more—

Wessel: Exactly.

Beckworth: —financialized, and so these risks are becoming bigger and bigger.

Wessel: Now, nobody would say the financial system doesn’t matter. People are worrying about what happens if the AI bubble bursts. Do we really want to have prediction markets where people are betting on their own wedding dates or whatever, the financialization of everything? Now, it’s taken for granted. It’s hard to believe that, for a long time, economists weren’t interested in this.

Beckworth: There’s just more and more debt, too. That’s the thing. In the ideal world, you finance with equity. Well, maybe not in the ideal world, because you have a portfolio of different ways to fund. A lot of financial stability people say, “We need to actually lean more into equity, less on debt,” but we don’t.

Wessel: Maybe we should have enough revenue for our government to cover what we’re spending.

Beckworth: Totally. We’ll come back to that. I think that is probably the biggest threat, in my view, to Fed independence long term, is the threat of fiscal dominance. I’ll just say this. I have to throw this out there. My critique of the Fed during the Great Recession, or Great Financial Crisis is, and I don’t think this is necessarily a critique against Ben Bernanke, but the FOMC in general, is that they were worried about inflation in 2008. They were slow. They were actually talking about rate hikes the second half of 2008, which now looking back, you’re like, what?

Wessel: Including Kevin Warsh, by the way.

Beckworth: Yes. A lot of them were the regional presidents. Part of the chair’s job is to manage that committee. Bernanke in his book even says he regrets the fact that they didn’t do anything in September 2008.

Wessel: Right.

Beckworth: I think, in general, and that’s been my critique, is to some extent, the Fed did worsen things by not acting, and creating an expectation of rate hikes when the economy’s tanking. With all that said, I’m still glad it was Bernanke. Had it been someone else in that same situation, it would have been a big, big blow up of the financial system.

Wessel: I agree with that.

Beckworth: Let me go back to Volcker, because I think Volcker’s an interesting case. He comes in. He’s willing just to lay it all on the line. He’s like, “Yes, we’re going to have a recession. Yes, we’re going to have high unemployment.” I mean, how many people could do that today?

Wessel: I agree with you. It’s hard to imagine. Volcker tells the story about how he’s sitting around with some bunch of business people. He’s probably puffing on his cigar. He’s asking them all, “What are your expectations for inflation?” He basically walks away saying, “Well, they’re wrong. I’m going to take it down.” You have to give Carter some credit for putting up with that. It’s hard to imagine Donald Trump doing that.

Beckworth: Your colleague Donald Kohn tells this story, because he was working at the Fed. It was his job to go around and talk to the public while this was happening. Apparently, Volcker handed out little badges if you survived those ordeals.

Wessel: It’s a good example, though. I was in college in the ’70s, and there was a substantial number of economists who would argue it wasn’t worth getting inflation down, that the tradeoff was too great, and we could index everything and we’d live happily ever after. It wasn’t obvious that the Fed would come in and do what they did, and begin the long, slow decline of inflation. Now, we’re freaking out, because it’s a little over 3%. Volcker never got it that low. 

Beckworth: In the grand scheme of history, it’s actually still remarkably stable. Long-term inflation expectations seem remarkably stable. 

Kevin Warsh Fed

David, all this amazing history, and work that you guys have done, I want to draw on that to help us make sense of where we are. It’s a pivotal moment. New Fed chair. We are recording this June 15th. This will come out in July. We’re about to head into our first FOMC meeting. There might be a second one before the show comes out. There are some big changes afoot with Kevin Warsh. What should we expect? What should we be thinking about?

Wessel: In a way, the economy made things a little easier for Kevin Warsh, because there’s no chance of cutting rates anytime soon. We’re at full employment. Inflation’s above target. At least, as we talk, oil prices are still high. There’s no case for cutting rates. He doesn’t have to make the argument to the FOMC.

I can imagine him telling President Trump that, “Look, the ECB and the Bank of England and the Bank of Japan, they’re all raising rates. I held the line and we didn’t.” That’ll be interesting. I’ve always thought that his most difficult moments would come when he was squeezed between the FOMC and the president, and whether he could stand up with as stiff a spine as Jay Powell did. We’ll see.

I think, on one hand, he’s going to be there after Trump leaves. On the other hand, I think he wants to be liked by them, by the Trump crowd. We’ll see. We’ll find out. You can actually bet on Kalshi as to when Trump will criticize Jay Powell. It’s like over 50% chance it’ll happen before the end of the year. I think the more interesting thing is what does he do at the Fed while the Trump sideshow goes on?

Nick Timiraos of the Wall Street Journal has said that regime change looks kinder and gentler than people had thought. I’m not surprised at that. I think Kevin Warsh said a lot of things when he was campaigning for the office. He’s been outside the Fed for 15 years. Some of the things he said, I think he’s probably learned were wrong, that they’re not all idiots as he implied. We’ll see.

I think the two things that he has talked the most about are less forward guidance, communicating less. I think that’ll be interesting. There’s been a long progression at the Fed to being more and more open. I think some people think they’re too transparent. I have to admit that I’ve always thought it was a bit strange that the Fed felt that the markets should always know with certainty what they’re going to do at the next meeting.

You wonder, “Well, then why do we have the meeting? Why can’t we get just emails?” What was very useful during the Global Financial Crisis when the Fed was trying to signal to the markets that we’re not going to raise short-term rates just because the economy is picking up, we’re going to keep this until it has outlived its usefulness. It’ll be interesting to see how he changes the Fed communication.

I think he’s going to find that it’s fine to say, “I’m the chair. I’m going to talk less,” but he’s going to have a hard time controlling the 12 bank presidents, and if he creates a vacuum, they’ll fill it. That was one of the advantages of the press conferences that Jay Powell started. Bernanke did it less frequently. Jay Powell did it after every meeting really for two reasons. One, because the markets began to believe you couldn’t move rates unless there was a press conference. Then, that constrained the Fed. Also, it means that the chair gets out there first. We’ll see how that goes.

The other thing is all this angst about the size of the balance sheet. I think Warsh made quite clear in his confirmation hearing, this isn’t going to be a rush. We’re not going to sell a trillion dollars’ worth of bonds on day three. There’ll be some study, and I think that’s totally appropriate. There’s been some really good work. Darrell Duffie did a paper at the Brookings Papers on Economic Activity. Lorie Logan, the president of the Dallas Fed, did a speech and a paper on, if you want to reduce the size of the Fed’s balance sheet, you have to reduce the demand for bank reserves.

There are ways to do that, but as long as the banks hold so many reserves and you’re encouraging that, you’re going to have to have a lot of assets. It might be regulation. It might be changing the way you remunerate, stuff like that. That’ll be interesting. In general, I think he’s going to move less radically than people think, or some people feared, but we’ll have to see.

He’s brought in a couple of people to the office of the chair, including one that seems a bit strange, Paul Winfrey, whose expertise seems more fiscal than monetary, although he did write the Fed chapter in the Project 2025 book, but he seems to have disavowed that. He has kept the division directors. He’s kept Michelle Smith, who’s the chief of staff.

Beckworth: Oh, he has. 

Wessel: The chief of staff for every Fed chair since Greenspan. I think it’s going to be more gradual than people think, but we’ll have to see. It’s going to be quite entertaining for people like you and me. I don’t know about the general public.

Beckworth: Going back to what we were saying earlier about, we get lucky, I would say we’re blessed with the right person for the right time. It may be that Kevin Warsh is the person who President Trump will listen to, and he may know how to talk to Trump, and how to calm him down. Like you mentioned, I held the line. Other places are raising rates.

Wessel: I think that Kevin Warsh believes that he can manage Donald Trump. There are a lot of bodies in Washington for people who thought they could manage Donald Trump, so we’ll see. I think he has a lot of self-confidence, and he’s very good with people. I think, from what I hear from the Fed, people have been pleasantly surprised when they met with him. He didn’t tell them they were a bunch of idiots like he did when he was running for the office.

I think the other thing is that the Fed has done a lot of things in the last 15 years, and not all of them worked out as well as they had hoped. To come in and say, “We should rethink this,” seems completely reasonable. They built a big financial stability staff after the crisis. Do they need that many people there? Do they need to work better on understanding what drives inflation since some of the things they thought were wrong?

One thing the Fed has not done is ever bring in outside experts to do a blue-ribbon panel, which is ironic, given that Don Kohn, Ben Bernanke, and Kevin Warsh himself, have been hired by other central banks to tell them what to do. Taking a hard look at all these things that some of them done in a crisis, and some of them done by accident, seems to me totally reasonable.

I can imagine him doing a series of studies, like, what is the best way we communicate? How should we think about the balance sheet? It may be that he’s the right guy to do that because Bernanke and Yellen and Powell, all came in saying, “There’s going to be a lot of continuity between me and my predecessor.” Warsh is liberated from that. He can say, “Why shouldn’t we rethink this thing?” We’ll see.

Beckworth: I definitely think he’ll do something on the balance sheet, but very gradual and slow, like you mentioned. I think it would be great. I’ve been someone who’s championed this perspective. We have the framework review. Let’s have a review of the operating system. A lot of other central banks have done this.

Wessel: Absolutely. Also, they still haven’t given us very much guidance on how they think about the balance sheet. Under what circumstances would you use QE? How do we decide what the optimal maturity of the balance sheet is? There’s plenty of room for discussion. I just think he has to be a little careful not to look like, to go to your earlier point, that he’s basically trying to help the Treasury sell a lot of debt. That’s the challenge.

Beckworth: That is the challenge. Then, on communication, I like the point you made. Effectively, the horse is out of the barn when it comes to the regional presidents. They’re not going to stop talking. They’re going to continue to communicate. I’m not sure how much change, other than maybe the dot plots, or FOMC meeting.

Wessel: I think there’s a difference between the dot plot and letting everybody know in advance what the FOMC is going to do at a given meeting, where I think there’s probably got to be some way to pull that in. That’s not a new idea. Jeremy Stein, Harvard professor who was on the Federal Reserve Board of Governors, has made the point that it would be okay once in a while, if the bond market were surprised by the Fed. It’s not the end of the world. I don’t want to surprise my kids by telling them I’m not going to be home for three weeks or something. 

That’s different than giving business people, consumers, politicians, and the markets, a sense of what your reaction function is. I think that’s the struggle. We should know what their outlook is, and we should know, do you really think inflation is going to come down without a recession? If so, why?

Bernanke has proposed that they should do more scenarios. A lot of people think that would be too clunky. There’s a big difference between forward guidance, “We’re going to tell you there’s going to be two rate cuts in calendar 2026,” and as we get closer and closer to the end of the year, the dots become essentially a promise. That’s a lot different. I think you could get rid of that, and the world would not end.

There are a whole bunch of people on Wall Street who don’t like that. They want to be able to tell their clients with a 100% certainty what the Fed’s going to do, but that’s not the business that the Fed should be in. I think you have to be careful not to return to the old days when it was all like the Wizard of Oz and Greenspan. 

Beckworth: Really no federal funds target announced at all, right?

Wessel: Exactly, yes. When I came to Washington, they didn’t even announce when they’d raised rates, or lowered rates. You had to see it.

Beckworth: Fed watchers were truly Fed watchers. They need to define what was going on. That is awesome.

Wessel: Then, six weeks later when it’s—longer then when the minutes came out—you’d see, “Oh, yes, they did.” We’re not going back to that. I’m sympathetic to the Bernanke point that there is a level of transparency which is essential in a democratic society, that the markets function better for the good of the economy if they have some sense of how the Fed is looking at things, as long as you don’t lock yourself in.

What Warsh is saying is the Fed has locked itself in. What happened in 2021? Well, they said, “We’re not going to raise rates until we’ve tapered QE, and then they got locked in.” There’s got to be some way to do both these things, not get locked in, but still give people some idea of what you’re thinking.

Beckworth: Do you like the current number of FOMCs? Should it be more or less, like every month they meet?

Wessel: Meetings?

Beckworth: Yes. Do you think that would be helpful, or would that add more noise?

Wessel: More meetings would be a mistake. I think it’s pretty good now.

Beckworth: All right.

Wessel: Do you think so? Do you think it should meet more often?

Beckworth: Well, I think when the economy turns quickly, there might be an argument there. Some have made that argument, like, why keep the rate fixed for a month?

Wessel: Well, I think that the Fed should maintain the flexibility to move in between meetings. There have been times in the past when they did that. Part of this whole forward guidance thing, is everybody thinks, “Well, you only move at a meeting.” I think the Fed is afraid if the chairman calls a conference call and says, “We’re going to raise rates in between meetings,” that it means something’s really bad.

Beckworth: Bad, yes.

Wessel: There might be a way to do that.

Fed Independence

Beckworth: In the time we have left, David, let’s talk about Fed independence, because this is something that we’ve touched on, but something I think increasingly important going forward. Maybe spell out for us what you think Fed independence is because there’s different definitions out there.

Wessel: Right. I think it is a fact that there were certain norms that have been violated. The president trying to fire Lisa Cook, or threatening to fire or indict Jay Powell are definitely threats to the independence of the Fed. What do I mean by that? I think the idea is that the Fed should be insulated from partisan politics enough, so that they can make unpopular decisions that have long-run benefits, but might have short-term costs.

In my view, politicians around the world have decided that, if we take over the job of setting interest rates, inevitably, we’re going to set them low in order to get more growth before the next election at the cost of more inflation later. Fed independence means insulated enough from partisan politics, so you can do the unpopular thing when you have to. It doesn’t mean that you’re literally independent of the government. That’s ridiculous.

There are other countries that function quite well where the inflation target is set jointly by the Ministry of Finance and the Fed. I wouldn’t have a heart attack if Congress decided to set the inflation target. I think it’s important that they be accountable to Congress, truly accountable, in that, I think that the hearings have become somewhat of a joke. The press conferences are better than the hearings. At least they’re talking about monetary policy. I think that independence does not mean you’re not accountable. It doesn’t mean that you should be free of criticism, but it does mean that you should be free to make decisions even if they’re politically unpopular.

Beckworth: Do you think the Fed should get a true independent inspector general? Because the one right now reports to the Fed chair versus Congress.

Wessel: Yes, probably. The harder question is, should this independent inspector general be auditing their monetary policy decisions? Is that what you want? Clearly, with their building project, it would give us more confidence if the IG was not appointed by the chair.

Beckworth: Yes. No, I think probably limited to nonmonetary policy questions. There’s a place, like you said, an external review would be, I think, the entity that comes in and evaluates QE or...

Wessel: Right. One thing that I think would be constructive is, instead of waiting for somebody to create some monetary commission, which would inevitably be a political issue about how many Democrats and how many Republicans, and who gets to appoint whom, it would be to the Fed’s advantage to say, “We’re going to set up something.” 

The framework review every five years, I think, was a good idea. I think the timing was unfortunate that it happened at the end of Powell’s term the last time. If you don’t set a firm schedule, then people are going to always accuse you, “Oh, you’re trying to signal something.” I think that was a step in the right direction. I’m not sure it was executed as well as I would have liked. I don’t think it was very self-critical. Some way to review their decisions, and their operations, as you say.

Beckworth: When I think of independence, I agree with everything you’ve said. I would just add on top of that, probably the biggest one. This is truly economic independence, in the sense that, at the end of the day, if we become a country where we literally cannot pay our bills without printing money, without the Fed supporting Treasury, we’re in trouble. That’s fiscal dominance. CBO forecast, any forecast of where the primary deficits are going, it’s awful. That to me is a long-term worry I have.

Wessel: Well, it’s certainly a long-term worry for the country, independent of whatever the Fed does. It’s rather discouraging that, so far, all Congress has been able to do is make it worse. It’s a real interesting question. What changes that? Is it some bond market rebellion? Is it some spike in interest rates so big that the Fed can’t step in and buy some bonds for a week and calm it, like the Bank of England did?

Is it some sudden outbreak of leadership in Washington, which seems a bit remote at the moment? Although, a number of people pointed out that the senators who are elected this November will be in office when the Social Security trust fund runs dry. That could be the action-forcing event.

Beckworth: A catalyst, yes.

Wessel: The question is, how does this affect the Fed? I think that’s one thing that worries me a lot about some of the things that Kevin Warsh said when he talked about negotiating a new accord with the Treasury. Bessent has suggested that somehow the Treasury should be involved in the Fed balance sheet. That makes me a little nervous. I think there has to be communications. There’s always been communications.

Bernanke and Geithner talked about the maturity of QE versus the Treasury’s issuance. That’s not really the issue. Trump has said from time to time that the Fed should lower interest rates to make it easier for the Treasury to borrow. I think that’s a dangerous line. I think what I’m afraid will happen is, so someday there will be another crisis in the bond market, in the Treasury market. We’ve had a couple already.

The Liz Truss moment is a great example where there was an unsustainable fiscal policy proposed. The markets tanked, put a lot of pension funds at risk. The Bank of England stepped in. They got pretty lucky. They said, “We’re doing this for a week,” or something, and then it’s over. It’s really hard to know if there’s some hiccup in the Treasury market. How much does the Fed step in, and does that start to morph into, basically, fiscal dominance?

I don’t think that it’s going to be some bright line. I think the Treasury market will be dysfunctional. Everybody understands that, as they did in March 2020, that the Fed has the capacity to buy a lot of Treasuries. They buy a lot of Treasuries. Then, in 2020, it morphed into more monetary policy QE. Well, that’s dangerous because how do you know when is it market functioning, and when do we have an insolvent thing? I think that’s a concern and a worry.

I think that the irony is—maybe “irony” is not the right word—a lot of people are worried that someday the debt will get so high that the Treasury won’t be able to sell bonds. I’m not sympathetic to that. I don’t think there’s some magic number that one day the Treasury won’t be able to sell bonds. I think we could have a period where interest rates creep up. 

Where I think the risks of a crisis are greatest are largely political. What if Congress doesn’t raise the debt ceiling sometime? What if somebody, and there was talk of this, decides to put a tax on interest on Treasuries paid to the Chinese? What if the president succeeds in firing a Fed chair? What if the markets begin to conclude that the US Congress is incapable of any kind of fiscal responsibility? Every time there’s a problem, they just cut taxes and raise spending, and it goes on and on and on.

The problem is going to be caused by, I think, some loss of confidence in our political system. I think that’s a pretty dangerous thing to do when you’re the world’s largest borrower, but it does raise concerns for what does the Fed do when that day comes? Are you going to have a Fed chair who says someday, as Jean-Claude Trichet did at the ECB, “I will cut interest rates, but I’m only doing it if you guys do something on the fiscal side?” So far, we haven’t had that kind of Fed chair, but we may test that.

Beckworth: I think Paul Volcker probably is the closest to that, because there was fiscal reform in the ’80s that accompanied his interest rate hikes. In fact, my colleague, Tom Hoenig, his view of the ’80s is that there was, in a sense, a new accord. Paul Volcker was like, “Look, we’re going to let rates go high, and this is on you, Congress, and you better get your house in order, because we’re not going to artificially keep them low.” Maybe we need a chair that does that.

Wessel: Bernanke’s view was my job is maximum employment and price stability, and I take fiscal policy as given, but that’s very different than the Volcker or Trichet view. I don’t think Kevin Warsh has that kind of guts.

Beckworth: Yes, it may not be Warsh. 

Wessel: It may be his successor.

Beckworth: Maybe it’s somebody else. Here’s how I think this could unfold, and I’d love to hear your feedback on this. I think what’s going to happen is, you’re right, we’re not going to have a Treasury market default outright, but what we’re going to have is steady rise in trend inflation. That’s how we’re going to pay for this. Eventually, at some point, inflation becomes so uncomfortable—we saw high inflation in ’21, ’22—people, they vote. They respond.

Wessel: I agree, but the inflation doesn’t do that much to cure the debt problem. If you’re running primary deficits, you’re constantly selling bonds, and if we have a lot of short-term debt, we have to roll it over. The notion that we’re going to inflate away the debt is—

Beckworth: Not inflate away the debt, but vote. 

Wessel: No. Right, but if the Fed acquiesces, and doesn’t stand down to Congress, we could get that. I think one of the most interesting lessons of the past couple of years is people really don’t like inflation. They like it a lot less than many economists. There was all this talk that we should raise the inflation target to 3%. Can you imagine proposing that today?

I think it could be the moment that Congress and the president get some sense of responsibility when there’s more inflation, when mortgage rates are rising, and they can say to people, “Look, we have to do this because, otherwise, you’re going to have to pay these high mortgage rates.” So far, they haven’t tried very hard.

Beckworth: Yes, I think that’s a great point. If we do get to this place where everything’s looking awful—higher rates, higher inflation, we need leadership—I think that’d be both the president, as well as someone at the Fed, they need to come together and say, “Look, we have to make tough choices.”

Wessel: This is where coordination is important. Greenspan, he was a bit fickle. He was in favor of tax cuts when Bush was in office, and in favor of tax increases when Clinton was in office, but he did lend support to the fiscal policy. Actually, after the ’90 budget deal, the transcripts show that he argued inside the FOMC that we have to cut rates, we have to reward them for doing the right thing. It’s a quarter point. It wasn’t really make any difference, and lots of other things happened.

I think the Fed is well positioned to reinforce leadership if it appears. They’re not well positioned to be the leaders, or to create leaders. That’s on us. That’s what we have to do. So far, I’d say we’re not doing a great job. 

Beckworth: Well, on that note, our time is up. Our guest today has been David Wessel. David, thank you so much for coming on the podcast.

Wessel: You’re welcome. I enjoyed it.

Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. Dive deeper into our research at mercatus.org/monetarypolicy. You can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. If you like this podcast, please consider giving us a rating and leaving a review. This helps other thoughtful people like you find the show. Find me on Twitter @DavidBeckworth, and follow the show @Macro_Musings.