Nick Timiraos is a Chief Economics Correspondent for the Wall Street Journal and rejoins Macro Musings to discuss his new book titled, *Trillion Dollar Triage: How Jay Powell and the Fed Battled the President and a Pandemic and Prevented Economic Disaster.* Specifically, David and Nick discuss Jay Powell’s background and early career in law and finance, his unique path to being nominated as Fed Chair, how Powell’s character has aided him in his eventful tenure as Fed Chair, how he was uniquely suited to usher in the change to the Fed’s operating framework, and much more.
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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: Nick, welcome back to the show.
Nick Timiraos: Thanks for having me, David. Pleasure to be here.
Beckworth: Well, it's great to have you on, and for listeners who did not get your first visit to the show, we encourage you to go back. We'll provide links to that, but as much as Nick knows about the Fed, he also knows a lot about the housing industry and GSCs. And I've always thought Nick should write a book on that as well. But Nick had a great discussion several years back on the GSCs and what happened in the great recession, so check that episode out as well. But today we're excited to have Nick on to talk about his new book. And of course, Nick is the individual at the Wall Street Journal who follows the Fed closely here at the Board of Governors in DC. He's based out of DC. And Nick, before we get into this book, which is a great read, I was dying to ask you first, what motivated you to do this? You have a full-time job as it is. You're very busy. What motivated you to do it? And secondly, how did you find time to do it on top of everything else you're doing?
Timiraos: Yeah, that's a good question. The pandemic was crazy. It was a crazy time for everybody, and there was a lot happening. There was also a lot that didn't happen. It's hard to know what the counterfactual is for, if the Fed hadn't responded as aggressively as it did, if Congress hadn't stepped in as quickly as it did in March 2020. So as we got a couple of months away from March 2020, I began talking to people saying, "Hey, wait a minute. This seems like a major historical event has gone down. The Fed has played a surprisingly large role and this Powell figure is somebody who no one really knows that much about, unless you follow the Fed day to day." If you're just kind of the average guy on the street, he may not know who this Powell guy is. And he's got a really interesting biography.
Timiraos: He's not a PhD economist. As people who follow the Fed closely, it's the first thing they always say about him after they say that he's the Fed chair. But he had a pretty interesting road to the Fed, and then he happened to be the guy in the hot seat when all of these things happened. And I just thought, maybe there's a book there. So how did I find the time to do it? The Wall Street Journal, which has been my professional home for almost 16 years now, they were great. They let me take some leave because I wouldn't have been able to get this book done as quickly as I did, or even at all, if I had I would have had to do my two jobs at the same time. So I took a leave from the Journal for the first half, most of the first half of 2021, which was when I wrote most of this book.
Beckworth: Okay. So it is interesting reading your book because you obviously did a lot of interviews, a lot of material on background as well, but just the amount of research you had to do to get this all together was definitely a lot of work. As you read the book, you see that. So let's move to Jay Powell. And I want to spend a lot of time on this show talking about his life. So we'll get to the pandemic and some of the interesting developments near the end of the show. But up front, I want to really flesh out who this person is, Jay Powell. We talk about him a lot on the show and the background you provide in the book is so rich and interesting. So walk us through his early life, growing up in Chevy Chase, Maryland.
Jay Powell’s Background and Early Career
Timiraos: Sure. Jay Powell is the son of a lawyer. He goes on to become a lawyer. He's born in Chevy Chase, which today is a very affluent suburb of Washington, DC. And it was fairly affluent in the sixties and seventies, when he was coming of age. He goes to Georgetown Prep, which is a Jesuit school here in Washington. You may be familiar with other Georgetown Prep alums, like Neil Gorsuch and Brett Kavanaugh who were Trump's appointees, two of President Trump's appointees to the Supreme Court. Powell is classmates with RFK Junior. And this was when, tragically, when Bobby Kennedy was running for President. So he grows up in sort of this very rarefied Washington world. And so some of the circumstances he finds himself in later in his career, including when he is working for Nick Brady, who's the Secretary of the Treasury.
Timiraos: You could say those things maybe come naturally to some people more than others, but Powell was born in DC, is really a creature of Washington, knows the city well. He starts his career in law, but as I mentioned, he goes into investment banking and finance. He works at Nick Brady's firm on Wall Street, and then when Brady comes to Washington, initially for Ronald Reagan, but really to serve as the Treasury Secretary for George Bush, who's someone that Brady knows well, Powell's sort of interested in coming down to Washington. And I write in the book about how Brady had made an agreement with Bush that he wasn't going to bring everybody from Dylan Reed, which was his firm down to DC. But Powell eventually convinces Brady to give him a job, and so he's an Assistant Secretary of Finance at the Treasury, and then he becomes the Undersecretary for Domestic Finance when his boss departs. And so this is somebody who's comfortable in these settings in Washington.
Beckworth: So it pays to be connected and have that network set up long before you get into the game. So that's a great point. Let me go back to his earlier days. You mentioned he went to Georgetown Prep, then he went to Princeton and he graduated in 1975, you note in the book. And one of the little stories you bring out is really fascinating. In the summer of 1975, he travels through Europe performing at Paris cafes and other places, Hank Williams ballads. And that was shocking to me. It was fascinating. He's playing country music over in Europe and the Europeans must be receptive to it because he was obviously doing it. Anymore you can share about that?
Timiraos: Yeah. So Alan Greenspan had his saxophone and Jay Powell has his guitar. Powell even describes himself, I think as something of a late bloomer. So he takes this trip through Europe with a friend after college. He's still figuring out what he wants to do. Of course, Georgetown Prep and Princeton, that's the elite of the elite. But Powell, he's got these friends who are going into high power jobs and he hasn't really figured out what he wants to do. And so I have that anecdote about playing, he takes his guitar with him through Europe and he finds himself entertaining the crowds at Parisian cafes. He does come back to DC and he decides to follow in his dad's footsteps. Again, he goes to Georgetown Law and he becomes editor of the Georgetown Law Review.
Timiraos: And it's at that point where it seems like he really does begin to sort of find his stride again, that he figures out what he's going to do. And then we kind of come back to this a little bit later in his career. So he goes after the Bush administration ends, Bush is effectively fired in 1992. And so Powell goes back to the private sector. He goes to one firm, doesn't stay there very long, they have a trading scandal. And so he ends up back at Dylan Reed. Then he jumps to the Carlyle Group, which is a private equity firm started by another former government policy maker, David Rubinstein, who had worked for Jimmy Carter. And Powell's initially, he has some successes at Carlyle. People have made, talked about Rexnord Corp, which is a company, a private equity deal that he had done that was fairly successful, but he isn't as successful as other people at Carlyle and so he actually leaves. He seems somewhat frustrated. It just isn't the right fit.
Timiraos: He's done pretty well, so he's made some money, made quite a bit of money. But in 2005 he leaves Carlyle and then he spends a couple of years in the wilderness. So we kind of come back to this idea from earlier in his career where he's still figuring out, well, what is it that I'm going to do? 52 years old when he leaves Carlyle, too early, really, to retire. But he has a couple of business ventures that never really go much beyond a business card. And then the financial crisis hits and he decides, you know what, maybe I'll do public service again. But in Washington, it isn't really as if there's a place where you sign up for, “Hey, I want to be a Fed governor.” Especially when you're a Republican, which Powell is, and the President, Barack Obama, is a Democrat. So in 2010 he finds himself in a position of, well, what am I going to do here? And he ends up going to work as an unpaid advisor to a think tank called the Bipartisan Policy Center, which is a centrist outfit.
Beckworth: Yeah. So he had this love of public service that you're alluding to here. He's finding his way, but you mentioned early on, he had this yearning in his heart that he wanted to do something meaningful, give to the world. And you gave this other story how, when he was back at Brady's firm in New York that he said at a meeting, he wanted to do something related to public service if an opportunity ever came up. And all the partners rolled their eyes, like, ugh, we're here to make money. We're not here to change the world. But nonetheless, Nicholas Brady, he heard that and he took him with him to DC when he became Treasury Secretary. And another little interesting story you bring out is, he hires Randy Quarles as an assistant early on. And I knew that part, but then you mentioned later in the book that he actually suggested Randy Quarles to Mnuchin, Steven Mnuchin, for the vice chair, supervision role at the Fed.
Beckworth: So Jay Powell was pivotal in bringing Randy Quarles both times in. So fascinating stuff. But just going back to this point, he wanted to serve, he wanted to give back. And so he kind of kept finding himself circling back to public institutions, the think tanks, the government initially. And you also highlight that he had some practical experience, I think, that proved useful later in 2020. He dealt with several bank failures. One you mentioned, he dealt with the Bank of New England in 1991, but then also the Salomon Brothers scandal, which was a fascinating story I hadn't heard that he worked with and negotiated with Warren Buffet to take over. This was a primary dealer that had cornered the market on two-year treasury notes. It was quite a scandal. And so he's gotten his hands dirty before, so he has some experience coming in to the Fed. Is that fair?
Timiraos: Yeah. And I'm not trying to suggest that what he dealt with in 91 was anything like what the Fed had to deal with in 2008, but it was sort of, at the time, this was the kind of 1.0 version of too big to fail. Salomon was one of the biggest swash-buckling bond dealers, they were troubled by scandal. And Powell ends up being the guy who over a weekend in August in 1991 is really deputized by Nick Brady to go clean this up. And Powell talks about how Brady's the kind of the guy where once he trusts you, he'll throw you in the deepest part of the ocean and let you deal with it. And there's a moment that weekend where Powell's dealing with Jerry Corrigan, who's the President of the New York Fed and Corrigan wants Powell to report back before they sign off on anything. And Brady sort of overrules Corrigan and says, "I trust Jay, he's going to fix it." And so he and Buffet sort of figure out the terms during this very tense Sunday afternoon, where they're trying to make sure Buffet is going to be the chairman of Salomon before the market's open in Japan.
Beckworth: Yeah. So you give a nice telling of the congressional hearing where Jay Powell has to go before them and kind of give an account of what happened. Why did this scandal emerge in the first place? And we'll come back to this point in a minute, but one of the key things about Powell is he's very disarming, his personality. He has kind of an “awe shucks” yet smartness to him. And you see this back in the hearing in 1991, and you have some great quotes. I'm going to read briefly here from page 17 in your book. Now I'm starting here near the middle.
Beckworth: The page says, "When a skeptical congressman from Kansas asked him why Treasury hadn't detected Salomon's false bids earlier, Powell raised his eyebrows and lifted his head. 'The fact is we did catch it and that's why we're sitting here', said Powell. Another representative from Ohio piled on, 'Hadn't the Treasury simply gotten lucky because Salomon's behavior grew too sloppy? 'They fumbled the ball.' The Congressman said, 'You recovered the fumble.' Powell held his ground, 'But why did they fumble? They were hit, they didn't fumble in an open field.' And this drew laughs."
Beckworth: So it kind of disarmed the group. He had a nice kind of way to come back. And so he handled those hearings. And you see that today, I think, similarly when he's before Congress. So it's a nice and fascinating glimpse back to his early public service career that we see echoed today. And I think he's accomplished a lot, we'll talk about in a bit and do impart to this personality, this political smartness that he has. All right. So let's go back to where he left off in terms of his career. So he's appointed by President Obama as a governor. And you highlight this role he plays as part of the “three amigos.” So talk to us about the “three amigos” during this period before he's the chair, but while he's a governor.
Timiraos: Yeah. I will. One thing before that though, I think it's also to the point you raised about kind of where he finds himself in Washington. He gets back, he gets this governor job basically because he's the Republican who tells the Republicans during the debt limit standoff that their strategy is just terrible. And he says, look, you can't take the national credit rating hostage here. They're threatening to default on the debt. And so, he sort of arrives on the scene as this teller of hard truths. And so now he's at the Fed, he gets on the board in 2012. And you're right, he's one of the “three amigos”, which is one of the three governors who is reluctant about expectations that are building in the markets that the Fed's open-ended asset purchase program QE3 is running on for longer than he had thought it was going to.
He gets this governor job basically because he's the Republican who tells the Republicans during the debt limit standoff that their strategy is just terrible. And he says, look, you can't take the national credit rating hostage here. They're threatening to default on the debt. And so, he sort of arrives on the scene as this teller of hard truths.
Timiraos: So he and Jeremy Stein, who's one of the “three amigos”, they go to see Bernanke when QE3 starts. And they have an idea that this is, they're talking about a 500 or $700 billion asset purchase program. This is $85 billion a month when it's at its full speed. So that implies six, seven, eight months. But Wall Street, after maybe by the beginning of 2013, four months into this, is now throwing out terms like QE Infinity, QE Eternity, the Fed is just going to be purchasing assets for much longer than Powell or Stein had been anticipating.
Timiraos: And I wasn't able to get all of this into the book, but if people are interested, they should go read the December 2012 meeting transcripts, because many of the arguments that Powell is making where he is concerned about asset purchases would be arguments that people would've been making opposite Powell in 2021, or even in 2020. Powell is concerned about the unanticipated consequences of asset purchases, everything from, you're to run losses on these if we have to raise interest rates a lot, that you're going to run a loss on the system open market account holdings. And so that's kind of interesting because those are not views that Powell holds to beyond 2013, 2014. He comes to see asset purchases as an important part of the Fed's tool kit.
Timiraos: And so the “three amigos”, Betsy Duke is the third, they go to see Bernanke in May of 2013. And they say, "Look, we need a stopping rule. You need to find an off-ramp, Chairman Bernanke, to these asset purchases. We've got to tell the markets that this isn't going to go on forever." And so Powell, I think, in no small part, maybe blames himself for the taper tantrum, because it is after that meeting in May, it's really after the minutes to the May meeting come out, where Bernanke's testifying on the Hill. And he says, we might end the asset purchases at some point in the next, I don't know, couple of quarters, a few months. I don't remember exactly what the timeframe was, but the market has this very visceral reaction to that.
Timiraos: You see long term Treasury yields rise substantially. There's a violent rush of cash out of the emerging markets and there was an unpleasant development because Powell actually, at that May meeting where he's saying we should find an off ramp. He's saying, this can be done in a way that doesn't provoke some market upheaval. And then he is, traumatized would be an exaggeration, but he cinched, he sees this reaction. He says, oh my goodness. And Bernanke sort of comforts him at one point and says, "Don't worry, you weren't here for 2008. This is nothing."
Beckworth: So I wonder if that cinching, that lesson, carried with him to 2020. In the back of his mind, he was thinking, I don't want to repeat that mistake or even now moving forward.
Timiraos: Yeah, I think probably so. One of critiques you could make of Fed policy in 2021 was that they were very inertial because they were trying to avoid a rerun of the taper tantrum. And I'm jumping ahead here, but at the January 2021 FOMC meeting, or right before it, Powell lays down the law. There are a couple of Fed Presidents talking about tapering, and they've just laid out their principles for asset purchases. They've said at their December 2020 meeting, we're going to have substantial further progress. We'll do this until 120 billion a month, until we have substantial further progress. There are couple of Fed Presidents out there saying, well, maybe we can taper soon. And Powell tells them to shut up. Talking about tapering is tapering, he says. And so, yes, I definitely think there's something to that, David, that, you don't want to make the same mistakes twice. And so they were very motivated last year not to repeat the mistakes they thought they had made after the 2009, 12 stimulus episodes.
Beckworth: Yeah. That's an interesting back history that I really didn't appreciate that Powell had a role in the 2013 taper tantrum. All right. So that brings us through 2017 and there's other things going on as well, but kind of the highlights. And that leads us up to President Trump having to pick a new Fed chair for 2018. So this process takes place in 2017, and we know Powell, of course, is appointed in February 2018. But let's go through the list of candidates, and you go through them in your book, that Trump had a look at and took seriously. So Janet Yellen, John Taylor, Kevin Warsh, finally Jay Powell. So let's start with Janet Yellen. What did President Trump think about her and what ultimately kept her from getting reappointed?
One of critiques you could make of Fed policy in 2021 was that they were very inertial because they were trying to avoid a rerun of the taper tantrum...at the January 2021 FOMC meeting, or right before it, Powell lays down the law. There are a couple of Fed Presidents talking about tapering...There are couple of Fed Presidents out there saying, well, maybe we can taper soon. And Powell tells them to shut up. Talking about tapering is tapering, he says.
Powell vs. the Field: How Powell Became Fed Chair
Timiraos: Yeah, that's a great question, David. So Donald Trump has this interesting, I won't call it a relationship with Yellen because they only met twice for relatively short in-person meetings, but there's a very interesting dynamic between Trump and Yellen, because first of all, you have to remember, Trump says a bunch of mean things about her when he is running for President in the fall of 2016. He says she's keeping rates low to help Obama and to help Hillary Clinton, that she's so political. There's a big fat bubble. And Trump doesn't really believe any of those things. He thinks that he wants interest rates to be low if he's President, but if he he's not President, then he wants a different set of economic policies. And there's even an ad that the Trump campaign runs. Some people thought it had antisemitic overtones. It flashes a picture of the global power brokers, George Soros and Lloyd Blankfein, who's then the CEO of Goldman Sachs and Janet Yellen.
Timiraos: So that wasn't a happy moment for the Fed to be drawn into sort of this political scrum. But then once he's President, he seems to really respect Janet Yellen as someone who knows what she's doing, who the markets respect. There's an element of appearances, physical appearances mattering enormously to Donald Trump. So as an example, when Randy Quarles comes in to interview for the vice chair supervision in the spring of 2017, there's some concern among Trump's advisors about how this meeting is going to go, because they've finally settled on Quarles as the pick after other people being in the process. You remember Trump, he didn't have a normal kind of vertical process for personnel, so there's always a chance that someone's going to get derailed from the side.
Timiraos: And Quarles walks into the room for this meeting. And Trump says, "Well, boy doesn't he looked the part?" And Trump's advisors at that point, sort of breathe a sigh of relief. If you've met Randy Quarles, you know, he has this very patrician bearing, sort of the square jaw and the three piece suit. He does look the part. I don't even know what a central banker is supposed to look like, but Randy Quarles looks like that person, especially if you're Donald Trump and appearances matter. So there's another episode which was first reported by the Washington Post, but I have it in the book as well, where Trump is meeting with an advisor. This is not a meeting on anything to do with financial policy, it's on tech or energy or something completely unrelated.
Timiraos: And the advisor's never been in to brief Trump before and sits down on the couch. And the first thing Donald Trump says to this advisor is, so do you think Janet Yellen is tall enough to be Fed chair? Well, yeah, she's already been the Fed chair at that point for three and three quarter years, but she's a small person. She's five feet tall. And so the other, I think, point I should make about Yellen is that Trump's staff is very skeptical of keeping her, even though there's this tradition through several decades now of reappointing, even if it's the President of the other party. There's a lot of concern. Remember in 2017, Trump is trying to get his tax cuts through the Senate. They were not able to repeal the Affordable Care Act. And today, I think people take for granted that the Senate Republicans would do whatever Donald Trump wanted, but at this point in time that wasn't necessarily the prevailing wisdom.
Timiraos: And so there's a concern that, gee, he's going to blow it with the Senate Republicans if he keeps Yellen. She gives a speech at Jackson Hole in August of 2017 that is pretty much a full-throated defense of the Dodd-Frank reforms and this is when Trump and some of his advisors are talking about "doing a number on Dodd-Frank. Stan Fisher, who's the vice chair goes and gives an interview with the FT blasting the Trump administration for some of the things they want to do on deregulation. And so Trump's advisors were able to take these things to him and say, see, she's really not on the team. You need to find somebody else. So there's a short list of other candidates and Powell's on the short list. But it's not clear at first that he would be the pick because he is sort of seen, both within the White House and by Senate Republicans, as a Janet Yellen lite, a Republican version of Janet Yellen.
Beckworth: Yeah, that was a big takeaway I got from your book is that the ultimate reason Janet Yellen did not get picked is because it was politics. His staff was worried the Republican senators would say no, and they wanted to get other things done, so I hadn't recognized this. That was interesting to see that. It wasn't so much her appearance. This came up, her appearance, and that's what I had in my mind. She wasn't tall enough, but what was more important was the politics going on behind the scene. Let's talk about John Taylor. So John Taylor, I remember he was supposed to be Fed chair under President George W. Bush and Bernanke caught it. So now it's his chance again with President Trump. So why didn't he make the cut?
Timiraos: Well, so John Taylor is the namesake of the Taylor rule, the guide for how you set rates. And at the time, the Taylor rule had said interest rates should be significantly higher than they were. I don't have it at hand, was it 3% or three and a half percent interest rates at the time. Are the Fed's just getting them up to 1% through 2017 when this is all happening. And so that's perhaps, if you're Donald Trump and you have a lot of debt on your real estate and businesses, Donald Trump, probably more than any President we've ever had knows what a 25 basis point increase in the cost of money means for a business. He does not want interest rates to go up. And here's a guy who's been saying, all of these monetary experiments, QE, and all this stuff, we shouldn't be doing this.
Timiraos: And Taylor actually gives a speech right as this process is nearing the apex where he sort of backs off from the Taylor rule, have to stick hard and fast to this. There are people in the White House who, including in the Vice President's office who are really pushing Taylor. Taylor also has maybe some challenges because the rap on him when he was at the Treasury Department in the Bush administration was that he wasn't the best manager. And so there were some people saying, maybe, you want someone who doesn't have that baggage.
Beckworth: Okay. So John Taylor does not make the cut. And then the other big contender, the almost contender was Kevin Warsh. So you tell a fascinating story about him. Even in the early 2000s, you mentioned he campaigned hard for a Treasury job that Randy Quarles ultimately got. And I actually worked at Treasury, Nick, under Randy Quarles, so I got to know him there. And so it's fascinating to read this back story to how he got that job. And I didn't realize Kevin Warsh wanted it so bad. And you mentioned in the book, he actually irritated, he created some enemies. He had lots of connections. He was well networked, but he also irritated people. He was so ambitious that you mentioned George Bush had to step in. But let's talk about the Fed chair appointment. That's back in the, other stories back in the early 2000s. Let's talk about getting the Fed appointment. What was his case and why didn't he make it?
Timiraos: So Powell and Warsh are the first two people who are invited to interview with Donald Trump. That's at the end of September, they're on back to back days. And Powell's interview goes quite well. Warsh's interview, I've heard differing accounts of how that went. But Warsh had been a loyal ally of Ben Bernanke through most of the early period of the crisis. And then they split over QE2 and after 2010. And Warsh leaves, and he becomes a very harsh critic of the Fed's unconventional monetary policies. And he's seen, Warsh is seen as somebody that maybe would be Fed chair if Mitt Romney had been elected President in 2012. And he continues to write op-eds that are very critical of what the Fed is doing through this period. He said the Fed needs new strategies. They've kept interest rates too low for too long.
Timiraos: Donald Trump becomes President and in 2017, all of a sudden, it seems like as with Taylor, maybe having been an advocate for higher interest rates is now a liability if you want to be the Fed chair under Donald Trump. And so Warsh gives a speech at the Hoover Institution's conference that spring of 2017, where he blasts the Fed. He comes as a reformer, that they need new communications, they need better policy, tactics, and strategies. And so he's no longer a critic so much of the low interest rate policies, so that's implied in his broader critique. But he's now positioning himself as a reformer. He will be the one who can reform the Fed and he had written, he he'd chaired a group that led a report studying the Bank of England, the Warsh report in 2014. So it's not as if he has no credentials on that point.
Timiraos: And as you note, there are so on people who are really big fans of his in Washington. And then there are other people who have been rubbed the wrong way, and they come out of the woodwork and tell Steven Mnuchin, who at this point is running the process. We didn't talk about Gary Cohen. Gary Cohen had been a candidate for Fed chair. Trump had publicly mused early on as the two candidates were Yellen or Cohen. Then Cohen has some harsh words for Trump after the debacle at the neo-nationalist gathering in Charlottesville. And so Cohen's pretty much frozen out at that point and Mnuchin becomes the person. Well, there are people telling Mnuchin, you don't want Warsh and so Mnuchin, at a certain point, comes out strong for Powell. And maybe that's because he sees where things are going.
Timiraos: He's also had the opportunity to get to know Powell because when Dan Tarullo resigns from the Board in April of 2017, Powell becomes the point person on FinReg. And so they are able to sort of develop a little bit of a rapport, a relationship. Powell, compared to Warsh, has a few more gray hairs. He's seen as somebody, perhaps by the Treasury Secretary, who's, maybe the gray beards would be more comfortable with. And Trump even says to his college classmate, Ron Lauder, who is the father-in-law of Kevin Warsh, "Your son was great, but he's just a little too young." There you go, you have the appearances again.
Beckworth: Now, that was another fascinating story you have in there that Kevin Warsh's good looks actually came back to bite him in the rear. And I like the story you mention about Warsh back in 2010 and he broke with Bernanke. And if I remember correctly, he wrote an op-ed. He voted in favor of QE2 or whatever it was. And then he comes out and literally blindsided Bernanke and the rest of the governors and the Fed, and really pushed them apart. So he both has people that love him, as you said, and people that aren't as excited about him.
Beckworth: All right. So we have Powell, he gets appointed. You mentioned a few other details. So Jay Powell likes to ride bikes. So does Steven Mnuchin. They did some bike rides together. And at the end of the day, you say that, for President Trump, Jay Powell is a Republican version of Janet Yellen. So continuity, don't rock the boat. All the other candidates have these flaws that President Trump doesn't want. So Jay Powell kind of slides in there. And it's just interesting, again, someone who didn't have the ambition, wasn't lobbying for it. And I think you mentioned how Steve Mnuchin liked him. I think this goes back to his disarming personality, again. His ability to get along with people and see that he can get work done. He's pragmatic. So all these life skills that were taught, he had them and to his advantage, he used them.
Beckworth: All right, so let's move into then his time as Fed chair pre-pandemic, so 2018 to 2019. And you highlight that as he comes in, he wants to have several people as a part of his troika, the three people who really lead the agenda. So it's the Fed chair, the New York Fed President, and then the vice chair. And this was also some news to me, but he wanted John Williams initially as the vice chair, which was interesting, but didn't make the cut. And you also revealed some more details about the New York Fed selection of John Williams. One of the critique has been about the regional bank Presidents is how they get appointed. It's a little bit mysterious, but you actually provided a few more details I hadn't seen before. So walk us through John Williams and then ultimately Rich Clarida as well. How did they all come onto the scene?
Before the Pandemic: Powell’s Tenure from 2018 - 2019
Timiraos: Yeah. So this is happening around the same time. The White House now is deciding who's going to be the vice chair for Powell. At the same time, Bill Dudley has announced his resignation effective that summer of 2018. So there's going to be a new New York Fed President. Williams has some conversations with the White House, but he never gets to the stage where he's interviewing with Trump. And then the New York Fed campaign, the committee that decides on the New York Fed President has narrowed down their search to three candidates. Raymond McGuire, who's an investment banker, runs investment banking for Citi Group, and then Mary Miller, who had spent her career at T. Rowe Price and then as the Under Secretary for Domestic Finance for Tim Geithner in the first term of the Obama administration. And then John Williams is one of the finalists.
Timiraos: And remember, there's a lot of pressure on these reserve banks to have a more diverse leadership because the reserve bank presidents at this time, and really until now, skew white male. And so Ray McGuire is black. One of the most prominent African-Americans on Wall Street, and Mary Miller of course, is a woman. But there is a concern, the search comes down to McGuire versus Williams. And there is a concern within the Fed and the Fed board has to sign off on the pick. And there is a concern that look, this bank, Citi took TARP money less than 10 years ago. And the system has been very proactive in making sure that they're minimizing these potential conflicts, where they have people from TARP recipients coming to work inside the system. And so that ends up really making it almost impossible for the New York Fed Board to pick Ray McGuire. And so John Williams, who at the time is the President of the San Francisco Fed ends up getting selected by that committee.
Timiraos: At almost the exact same time that's happening, Trump is deciding who to choose as the vice chair of the Board. And Rich Clarida ends up being the person who I think Powell is the most comfortable with. There were a couple of other people who had been campaigning for the job. Larry Lindsay, who had been a Fed governor in the nineties and top economic advisor to George W. Bush, and then Mohamed El-Erian, who had also worked at PIMCO with Rich Clarida, but Clarida ends up being the person Powell is the most comfortable with. And at this point, Trump has not turned on Powell. So when they talk, and I'm not sure how much they were actually talking, but Powell makes clear that Rich is the guy he wants. And when Rich interviews with Donald Trump, it's sort of bizarre at one point. Trump asks him, well, what do you think of Muhammad El-Erian, some people are talking about him. And Rich, sort of awkwardly says, well, he used to be my boss. And then Trump interrupts and says, well, Jay likes you. Steve, referring to Mnuchin, likes you. So it's going to be you.
Beckworth: Wow. What an interview process. Something else that you brought out about Rich Clarida is that he is a very talented musician. I knew that he had some skills already. I was familiar with his album “Time No Changes,” which we all looked at when he was vice chair. But you mentioned he played the clarinet, the saxophone, the guitar, the piano, and he was in jazz and rock bands in high school. So he could have gone down a very different career path had he pursued his music path. And you said his father was a high school music teacher. Is that right?
Timiraos: Yeah, that's right. So he's got the musical gene too.
Beckworth: Yeah. So fascinating details in the book. Let's move to Jay Powell and talk more about his character, we've alluded to it. But the walk us through this personality, his strong political chops, his disarming charm and how it's made a difference.
The Impact of Powell’s Character
Timiraos: Well, one of the important lessons he internalizes is from the blowback the Fed faces after the 2008 crisis. You had to bail out all these banks. There's a lot of unhappiness, of course, that the Fed had to do all this. Parts of Congress become quite unhappy with the Fed, especially over Dodd-Frank. Republicans think that the Fed has just completely partnered with Democrats on promulgating these new financial regulations. The Fed felt like it really had no choice because if you're not in the room, when these things happen, you're going to lose your authorities. They're going to get handed off to others. But Powell recognizes that there's an opportunity now with a reset. Bernanke and Yellen, even though he's very much in that mold of policymaking, they're no longer there and so he uses that as an opportunity to sort of reset the Fed's brand, including on Capitol Hill.
One of the important lessons he internalizes is from the blowback the Fed faces after the 2008 crisis. You had to bail out all these banks. There's a lot of unhappiness, of course, that the Fed had to do all this. Parts of Congress become quite unhappy with the Fed, especially over Dodd-Frank...Bernanke and Yellen, even though he's very much in that mold of policymaking, they're no longer there and so he uses that as an opportunity to sort of reset the Fed's brand, including on Capitol Hill.
Timiraos: And one of the things about Powell is that he has a very good EQ. He's a very good listener. He has this weird trait where he can repeat back a sentence backwards. But he's listening to people well. And he doesn't sort of talk above them and use these highfalutin words that sometimes central bankers use where people feel like they cannot understand at all what this person is talking about. And he actually seems to enjoy it. He does a bunch of these 30-minute meetings, 20, 30 minute meetings up on the Hill meeting with lawmakers. I want to hear what matters to you and I'm going to tell you what we're doing. And people like that. And people seem to like him.
Timiraos: And so he uses maybe we'll call it his honeymoon period at the Fed to really begin to get to know the boss, which is Congress and the 535 lawmakers who could make life difficult for the Fed if they want to. And I don't know how much he saw the fight coming with Trump, Trump trying to bully the Fed into providing easier policy. I would imagine that Powell recognized this was not going to be some sort of easy rodeo. And I don't know if that's why he took on these meetings, but it certainly didn't hurt to have people who knew that you weren't, whatever the caricature was going to be in the tweet or in the President's own version of events.
Beckworth: Yes. And you mentioned that one of the Fed staffers called him the Jimmy Stewart of monetary policy. So I love that it. It is, he's an “awe shucks” kind of guy, but yet he's effective at doing his job. And the other famous quote of his you mentioned in the book that is, he said that he would wear out the carpets on Capitol Hill. He would make so many visits that his mark would be left there. So very, very well thought out. He was very intentional about doing this. So I think we see the success in that honeymoon stage, but I think a lot of the things that's happened since then, I think, we can also chalk up to this effort, this high EQ, this intentionality that he had, including ushering through the framework change, changing how the Fed does monetary policy going from flexible inflation targeting to flexible average inflation targeting. That's a huge change. And not anybody could just usher that through, but someone like Powell, I think, probably helped navigate it through. The operations, formally adopting the ample reserves system, and then finally just navigating through the pandemic. It's great to have somebody who can speak to both sides of the aisle, someone who's a mediator. I just think Powell was the perfect person for this time. And his personality played a big role on that.
Beckworth: Okay. Let's move into the attacks that you saluted to and something I learned from your book, I guess I didn't appreciate, or note before, is that Trump really didn't start his attacks on the Fed until after the trade war was really put into play. And the trade war was not put into play until after the tax cuts of 2017 were made. So Trump, he didn't want to burn any political capital. So the tax cuts, by the end of 2017, they're passed. And then he's like, okay, the gloves are coming off. We're going to go full speed ahead on the trade war. And then the trade war creates uncertainty. It affects stock market and the Fed is tightening at the same time in 2018. And so that sets the stage for the attacks, that trade wars going on. So it's interesting how you put the pieces of the puzzle together. I'm wondering, Nick, do you think Trump would've attacked Powell anyway? So let's say there's no trade war, but you mentioned in your book, Trump loved low rates, and in fact, he even pushed for negative rates. He harassed Powell. Why can't we have negative rates like Germany and Europe? So let's say there were no trade war, which was the catalyst here in him attacking the Fed, creating the environment to attack the Fed. Do you think he still would've gone after the Fed and Powell, even in an environment where that wasn't going on?
Timiraos: Gee, that's a good question. It's certainly possible. Trump didn't want anything that was going to threaten his stock market. He loved to point to the Dow as a report card. And he talked a lot about how he wanted there to be rocket fuel in the economy, in 2017 when he is passing the tax cuts. And then in early 2018, people forget about this, but there was a big increase in federal spending. The sequester caps are lifted dramatically. And you have people like Larry Summers at that point, talking about the economy overheating, the Fed doesn't want the economy to go up like a rocket ship. They want slow and steady, even-keeled growth. So yes, it's certainly possible that without the trade war, you still get the turn of events that we had [where Trump begins pressuring the Fed to usher in easy money], especially if you have Fed officials talking about restrictive monetary policy, which a lot of people were talking about in 2018.
Timiraos: People were saying, three and a half percent unemployment, that's crazy. You're going to have to engineer an increase in the unemployment rate because that's too low, but then you do get the trade war. And that sort of, as I write in the book, Trump basically gets what he wants out of the Fed, not really by bullying them on Twitter, but by pursuing a trade policy that leads them to conclude that they cannot actually push interest rates above two and a half percent, which was what they had been talking about doing.
It's certainly possible that without the trade war, you still get the turn of events that we had [where Trump begins pressuring the Fed to usher in easy money], especially if you have Fed officials talking about restrictive monetary policy, which a lot of people were talking about in 2018.
Beckworth: Yes. And you make this point that the Fed's raising interest rates in 2018. And so Trump is running this trade war and the trade war is creating uncertainty, problems in stock market. And so the long end of the yield curve actually drops because of what Trump is doing, whereas the Fed's pushing up to shore. And so it took two to tango here, but it's interesting that Trump actually played a role in that curve beginning to invert. And it's an interesting kind of analogy to where we are today, the Fed's basically in a similar predicament, inverted yield curve, should they take it seriously or not? And back then, they were very eager to keep pushing forward.
Beckworth: And that's a nice segue into what I want to ask about the Fed's thinking, how it evolved 2018, 2019, because we know they had a number of rate hikes in 2018. They were talking about doing more, then they paused, big change, big pivot in early 2019. And what was interesting is I read your book and kind of thinking back on this. Jay Powell had this speech, and you mentioned it in your book, in August of 2018 where he kind of poured cold water on navigating by the stars. “Let's not rely too much on it. There's something there, but they're vague, they are hard to see. Let's not rely too much on it.”
Beckworth: But by the end of the year, a few months later, he was relying on that very concept to push rates up. And you mentioned he had that moment where he said rates are a long ways from neutral. Then he changes to just below neutral. But point being in both cases, he's referring to the neutral rates. So how do I handle that tension? On the one hand he was saying we shouldn't pay too much attention to r-star. On the other hand, by the end of the year, he was saying, well, we need to pay attention because we're getting close.
Timiraos: Yeah. Well I think that last quarter of 2018 is really where his trial by fire begins because he makes this offhand comment on October 3rd, 2018, where he says we're a long way from neutral probably. And I think the important context for that is the September 2018 meeting, we won't get the transcripts for a couple more years, but there's an element of hawkishness at that meeting. You even have someone like Lael Brainard giving a speech after that meeting saying maybe policy has to get restrictive. And so the one way to read the comment, which was the way the market read it, was Powell's saying interest rates have to go up a lot more because we're a long way from neutral. The other way to read the comment though, is Powell basically saying we're a long way from having to figure out if policy's going to have to get restrictive. Maybe it will. Maybe it won't, but let's get to neutral first.
Timiraos: But that comment begins to sort of, it's not a scripted line. It's in one of these unscripted Q and A, sit on the white leather couch sort of things, and it begins to sort of take on baggage. People are amping out over it. The stock market and really the 10-year yield begin to come down. And so people are looking for a catalyst. Well, what is it that made the market get nervous? And they can go back and look, well on October 3rd, after the market's closed, Powell made this comment about maybe he's a hawk. And I think that's a danger that you run when you put someone in charge of the Fed who's new, is markets have to figure out what is this man or woman all about. And no one, at the time, knew a whole lot about how Powell was going to lead things once there was kind of this handoff from Yellen, which was to keep, raising rates once a quarter by a quarter point. And then you get a long way from neutral.
Timiraos: And then in November, when the markets are really seizing up over this, he says, “rates are just below a broad range of estimates of neutral.” John Williams is another one. He's the expert on R-star. And he gives a speech that Fall saying, “well, R-star isn't a specific destination, it's more of a fuzzy blur.” And so you can see that they're trying to get away from it. I think the challenge that Powell has on the committee, and this is very much the case at that December 2018 meeting is you've got a bunch of different views around the table.
Timiraos: So you've got Clarida who thinks a neutral rate is at around two and a half percent, which is where they are just getting with that final increase in 2018. And he says, “look, if we can't get to neutral now, when are we ever going to be able to do it?” But I think Clarida would've been comfortable pausing at neutral. Williams thinks neutral is at two and a half percent, but that they're going to need to go to three and a half percent. And you have other people on the committee who, I think, share that view. So no one can agree on where neutral is, but then also no one can agree on where the terminal rate is, which may be completely different from where your estimate or the neutral rate is. And that December 2018 meeting becomes very difficult because the rate increase is really priced in up until the last day. And then there's market turmoil, there's trade war concern. There's Trump tweeting saying, don't do this stop with the 50 bps. He's talking about balance sheet policy, allowing $50 billion of securities to mature every month. And so it really creates kind of a, I hate the term, perfect storm, but there's a perfect storm in that December 17th, 2018 Fed meeting where Powell thinks that he's signaling a dovish hike and the market just says, this isn't dovish at all, what are you guys doing?”
I think that's a danger that you run when you put someone in charge of the Fed who's new, is markets have to figure out what is this man or woman all about. And no one, at the time, knew a whole lot about how Powell was going to lead things once there was kind of this handoff from Yellen, which was to keep, raising rates once a quarter by a quarter point. And then you get a long way from neutral.
Beckworth: Why do you like the term, perfect storm? I think it's a great description of that time, Nick. You brought out John Williams and Lael Brainard because that was something that was very shocking to me at the time. Lael Brainard, she even applied that, what's the big deal of the little yield curve inversion, long as it's the path to normalcy. And then they have John Williams come out and say, ah, bah humbug, R-star. We don't really know where it is. And so I actually created a t-shirt back then the Fed's motto for 2019, “we have the nerve to invert the curve” because they seemed rather flippant at the time. Now you mentioned in the book, and as we know, the Fed changed their tune dramatically in January when they saw what was happening. And I'm wondering if, what happened between December and January and subsequently later that year in 2019, is the fruition of the ideas in the August speech of Jay Powell. So Jay Powell lays out the intellectual case for not taking R-star or navigating by the stars too seriously. And as you said, it's trial by fire. Maybe by January, it's actually something that they're taking to heart. Is that one interpretation?
Timiraos: Yeah, very much so. It's clear that there's a year-end market reaction. Year-end is already sort of a difficult time in the markets, but that reaction to that meeting had a huge impression on the Fed and on Powell. And Clarida goes out and gives a speech in early January where he says we have to balance the risk of the model being wrong when we set policy. And that's just not something I'm used to hearing from Fed people, sort of saying, well, the models might be wrong and we shouldn't set policy just based on a forecast, if it looks like the economy's not performing as we think it will. So the other thing that happens, so you talked about the nerve to invert the curve.
Timiraos: In July of 2018, which is when twos and tens begin to flatten quite a bit. The two-year Treasury yield begins to get quite close, rise quite high to where the 10-year yield sits. And the Fed puts out this paper saying, really, don't pay much attention to the two ten spread, look at the near term forward spread, which they take the three month bill rate versus the implied six quarters later three month bill rate. And that's still fairly steep. And they say, that's a better indicator of Fed rate cuts. Inverted yield curves, they don't necessarily predict recessions. They predict rate cuts, which also tend to predict recessions.
Timiraos: Well, very beginning of January , right before Powell does the pivot, what happens to that near term forward spread, it inverts. Now, I'm not saying that they weren't setting policy based off of the near term spread, but you could see in the markets January 2nd, 2019, the market's now saying, we think the Fed's going to cut. And nobody's thinking that. You still have JP Morgan and the macro modelers saying “the Fed's going to raise rates three or four times this year.” Powell pivots that first Friday in Atlanta. He says, basically, we're done. He has not consulted with the FOMC when he says that. But they're quickly on board. Everybody recognizes that there's a lot going on. And interest rates, if they're close to neutral, maybe you don't have to do anything else at that point. It's a good position to be in when inflation is at right below your target. Different place from where the Fed is now, of course.
Very beginning of January , right before Powell does the pivot, what happens to that near term forward spread, it inverts... Powell pivots that first Friday in Atlanta. He says, basically, we're done. He has not consulted with the FOMC when he says that. But they're quickly on board. Everybody recognizes that there's a lot going on. And interest rates, if they're close to neutral, maybe you don't have to do anything else at that point. It's a good position to be in when inflation is at right below your target. Different place from where the Fed is now, of course.
The FAIT Framework & Powell’s Twitter Presence
Beckworth: Yeah, we are running low on time, Nick. I have two questions left and we're going to have to skip a big part of your book, which is the pandemic. So listeners, get the book, read it, great stories, great details, like we've been mentioning already. But I want to move to the more present time and the Fed in the January meeting, it reconfirmed its existing framework, the framework they announced in August of 2020. So they recommitted themselves to the flexible average inflation targeting framework. And something that I think many people, including myself, did not get about this framework is the ‘flexible’ part. We were focused too much on the average inflation targeting approach. And if you focus just on AIT, you get the impression that it's symmetric that if it's below, yes, we all understood below at zero lower bound, but if it was above, it would come back down. But it's a flexible one, and moreover, if you look at kind of the intellectual history, Bernanke's temporary price level target, this was all always intended to do price level targeting only from below target.
Beckworth: It was never intended to be something from above. And again, I fell prey to this impression too. Oh, it's some kind of symmetric, maybe it's a shorter version of a price level target, but no. And I think there's a lot of confusion over that and just now we're beginning to figure this out. So when you look at the FOMC’s summary of economic projections, you see inflation coming down to 2%. You don't see it under shooting 2% and going back up to two. So is that something you've seen as well, though a lot of people are missing, that fate never was like a symmetric version of a price double target. There's always an asymmetric approach.
Timiraos: Yes, absolutely, a hundred percent. Go read Clarida's speeches and go look at the footnotes. For Clarida, this was basically a way of back-dooring in Ben Bernanke's temporary price level target. And how do you define the temporary interval? You're re-anchoring expectations. And the Fed did that really by last June or July. You saw expectations come back up to where they had been before they started to slip in 2014. And so at that point, it's pretty much mission accomplished for FAIT. Now, they don't say that at the time, because they've delivered this very dovish guidance in September 2020. The way they operationalized the framework was to say inflation forecasted rise above two and rates at zero until we hit max employment. In June, July, they're certainly not ready to declare max employment when we're still at a 6% unemployment rate, but we got there much faster than they anticipated. And so, hence the pivot in November of 2021.
For Clarida, this was basically a way of back-dooring in Ben Bernanke's temporary price level target. And how do you define the temporary interval? You're re-anchoring expectations. And the Fed did that really by last June or July. You saw expectations come back up to where they had been before they started to slip in 2014. And so at that point, it's pretty much mission accomplished for FAIT.
Beckworth: Yeah. And I would also add one of the challenges of doing a temporary price level target or any really price level target is, you got to know how much of that increase is due to supply shocks versus demand shocks, in the real time, that's almost impossible task. Okay, last question. I'm dying to know this since you have inside scoop at the Board of Governors. So how active is Powell in following Twitter? You actually had an article on this some time ago, but when we say things, is he really listening to us? How engaged is he in social media, Twitter, listening to podcasts, all those things? What is your sense from interacting with the Fed?
Timiraos: I don't know. That's a great question. I don't know. I think he's probably more present than the average person might realize. He's got a lot of other stuff to do. The Fed staffers who I've talked to who have mentioned this sort of Twitter lurking trait to me have said he's looking to sort of have alternate information streams and Twitter can provide a good one. There's a comment he makes in the transcripts about, this was when he was a governor, but it's very specifically a reference to a Joe Weisenthal tweet on the ECB, 4:00 AM, people following what the German court is doing with the lawsuit against the ECB. And so he's lurking. I don't know how much time he has for it these days.
Beckworth: But you do outline a nice thing about his personality and his leadership is that he is looking for other opinions and one place he goes is to Twitter for that. But other academics, people outside the Fed as well. Okay, Nick, with that, our time is up. Our guest today has been Nick Timiraos. Nick, thanks so much for coming back on the show.
Timiraos: Thanks for having me, David. It was a pleasure.
Check out the Conversations with Tyler episode featuring David Rubenstein.
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