{"text":[[{"start":5.98,"text":"Is Kevin Warsh a credible economist? That is a question many investors posed when US President Donald Trump nominated him as Federal Reserve chair."}],[{"start":15.22,"text":"And while naysayers warned about “a disaster in the making”, Warsh’s recent speech in Jackson Hole, in which he pledged to fight inflation, has sparked cautious praise from some former critics."}],[{"start":26.72,"text":"But the really crucial question now, ahead of Wednesday’s key Fed meeting, is whether Warsh is a good political strategist. For his challenge is not “just” the economy but the capricious political threats from the White House."}],[{"start":39.44,"text":"I have known Warsh for many years, and he has always expressed strong free-market ideals. Thus, he detests inflation and government meddling — and (like me) hated the overuse of quantitative easing by the Fed after the 2008 crisis."}],[{"start":54.86,"text":"But Trump is the opposite: he loves market meddling if it boosts his power, is demanding lower interest rates and will probably pressure the Fed to buy more bonds if Treasury prices keep sliding, after 10-year bond yields moved towards 5 per cent last week."}],[{"start":70.12,"text":"Figures such as Democratic senator Elizabeth Warren have thus assumed that if there is a direct political clash, Warsh will capitulate to keep his job. “Having proven himself to be Donald Trump’s sock puppet . . . [his] credibility is in tatters,” she declared this spring."}],[{"start":86.08,"text":"But now that “sock puppet” is biting back. And there are at least five reasons why this may continue, since Warsh now has more political leverage — and skill — than many earlier feared."}],[{"start":97.44,"text":"The first relates to Jerome Powell, his predecessor. When Powell stepped down as Fed chair in May, he took the highly unusual decision to remain on the Fed board and told friends he would stay there until Trump conclusively dropped threats to prosecute him."}],[{"start":112.08,"text":"Many Fed-watchers thought Warsh would hate this. Not so. As chair, Powell was Trump’s favourite whipping boy for any economic woes, and his continued involvement means that Trump’s acolytes are in a minority on the board. The unplanned consequence is that Warsh can blame anything that riles the president on him. The Fed board is now operating in an unusually democratic manner, with “family fights”, as Warsh has said."}],[{"start":136.84,"text":"A second factor is rising bond yields. This presents a nasty headache for US Treasury secretary Scott Bessent, who must sell more than $10tn of Treasuries in the next year. Hence his bid last week to cap yields with a $6bn bond buyback programme — that failed."}],[{"start":153.84,"text":"But “unlike Bessent . . . Warsh does not seem too bothered by rising bond yields”, as Gavekal Research told clients this week. No wonder: rising yields will help Warsh reduce inflation, even without rate hikes, suggesting the era of secular stagnation is over — as he said in Jackson Hole."}],[{"start":170.52,"text":"Of course, this creates another risk: investors may panic if Warsh and Bessent are visibly on a policy-collision course. And that concern has been stoked by a recent Wall Street Journal column from Stanley Druckenmiller, Warsh’s former boss and ideological ally, that urged Bessent to “let the bond market speak” without meddling."}],[{"start":190.28,"text":"But nobody should forget that Warsh and Bessent are both protégés of Druckenmiller. They supported each other’s bids for their current jobs and will collaborate to prevent a financial crunch. As Bessent flails, however, it makes Warsh look more powerful by default."}],[{"start":204.28,"text":"A fourth issue is the balance sheet. Trump, like all real estate players, is obsessed with interest rates. But he seems completely uninterested in the Fed’s complex monetary policy mechanisms, and has never ranted — yet — about the fact that the Fed is now reducing its holdings of long-term securities* to the tune of about $19bn a month (which, as Gavekal notes, is more than Bessent’s buybacks). This gives Warsh another tool to tighten financial conditions (he has tasked an external committee with ideas, which reports later this year)."}],[{"start":234.12,"text":"Then there is a fifth point: timing. Opinion polls show that US voters increasingly disapprove of Trump, partly due to his Iran war. Hence his desperate gambit to offer every adult citizen a $5,000 dividend if Republicans win the November midterms, leading critics to mutter about “peak Trump”."}],[{"start":253.94,"text":"In reality, such chatter still looks premature ahead of the midterm elections. But investors are already less wary of Trump’s melodramas or the dramatic statements from Bessent; after all, yields rose after his announcement of buybacks. That gives Warsh more ability to display independence."}],[{"start":271.72,"text":"So does that mean the Fed board will actually hike on Wednesday? After Friday’s inflation data, the markets are pricing an 80 per cent or more chance of a hike (even though I suspect some Fed board members would prefer to wait until after the midterms)."}],[{"start":285.48,"text":"But the key point is this: the odds show how the political calculation around the Fed has changed. Warsh is displaying some strategic skills and political wings. Let us hope he can keep these — especially if (or when) those rising bond yields create pressure for quantitative easing."}],[{"start":301.92,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1789170905_2765.mp3"}