Moneybeat: Credibility test

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MARY REICHARD, HOST: Next up on The World and Everything in It, the Monday Moneybeat.

NICK EICHER, HOST: Time now to talk business, markets, and the economy with financial analyst and advisor David Bahnsen. David heads up the wealth management firm the Bahnsen Group, and he is here now. Good morning, David.

DAVID BAHNSEN: Well good morning, Nick, good to be with you.

EICHER: Well, the White House appears to be narrowing the field for the next Federal Reserve chair. We have said for months that it's been a jump ball between the two Kevins, Kevin Hassett and Kevin Warsh.

Kevin Hassett, currently the director of the National Economic Council, coordinating economic policy across the administration, widely seen as a front-runner to succeed Jay Powell--and we will get to Powell in just a moment, because that is its own story--but President Trump has now said that he wants Kevin Hassett to stay put, to stay right where he is.

So that leaves Kevin Warsh the top choice. He is a former Fed governor. He is now at Stanford and the Hoover Institution. He has deep ties to the private sector.

Warsh now increasingly the clear alternative, this coming at a moment when tensions between the White House and the current Fed chair could hardly be higher.

So David, when you step back from the personalities for just a moment, if that's even possible, how meaningful is it when we hear, “Kevin Hassett, you stay put”? How meaningful is that signal from the president?

BAHNSEN: Well, I have been on record for some time that I very much would prefer that the president nominate Kevin Warsh, and I, even separate from my hope that he nominates Kevin Warsh, very much hope that he doesn't nominate my old friend Kevin Hassett.

I will that, you know, with the prediction markets now in response to what president Trump said, pushing Hasset's odds all the way down to 16 percent and Warsh up around 15 percent, it doesn't mean that there isn't what one source of mine is predicting, which is a door number five, a candidate that will materialize that is not currently being discussed.

So it would be really hard to believe, after what the president said Friday, that Kevin Hassett will remain on that list. If that wasn't a way of saying he is not, then I certainly don't understand it, although the president does sometimes like keeping people on their toes. But that was a rather explicit way of doing it.

What does it mean? Well, look, for all of us listening, in terms of just people wondering what it means for interest rates, it means nothing, because there is not going to be a person nominated that isn't going to do what the president wants in the immediate term.

The issue here is beyond 2026. The president is going to nominate who he wants, as is his right to do, and he will nominate someone that he has a virtual certainty is going to cut rates a couple more times this year. That much I am quite confident of.

Now, let's say you were to get something in 2027 or 2028 where the data suggests a different course is taken, or there's just different things that require Federal Reserve action that may not be in line with what the president wants.

What person is most likely to then go be a Fed chair as opposed to an order taker from the president? I think Kevin Warsh is more likely to be that person and I think that's what matters more into the future. 

Where a lot of people are focusing on here, Nick—and I'll wrap this up—is just way down the line, even when President Trump is out of office. Is anything going on right now, the threats of law-fare, the attempt to fire, the statements that the president should be allowed to help set interest rates; is anything happening to really undermine the credibility of the U.S. dollar, of the bond market, of our own Federal Reserve?

And so far, the answer has been no, and the reason is because I do not think most credible financial actors have taken all that stuff seriously.

I don't think it's good, I don't think this process has gone very well, but I do think that we are really just talking about a short-term decision, and that the longer-term things will hold, even though the precedent has deserved a little more respect than it has gotten.

EICHER: Well, David, you have been clear for quite some time that you preferred Kevin Warsh as Fed chair, and it seems like that may be the case, but help me understand the preference for Warsh. What does he bring to the job that Hassett does not?

BAHNSEN: Well, I know both of them, and I first of all would make the comment on just financial markets credibility, that I believe sovereign wealth, the bond market, the currency markets, would view Warsh as a more credible candidate than Hassett.

And the reason is that I have known Kevin Hassett for decades as an incredibly strong free trader who now in the last ten months has become an anti–free trader.

When Kevin Hassett was the chair of the Council of Economic Advisers in the first term of President Trump, he fought back against Pete Navarro. He fought back against some of the COVID stuff that happened, he fought back against some of the really extreme tariff issues that were proposed.

And now he is the head of the National Economic Council in the second term, and I hear him say things almost weekly that he has never believed, and it has done a lot to undermine my confidence in his ability to be independent.

Therefore, my Warsh advocacy is much more about my Hassett opposition.

Now, that said, I was a managing director at Morgan Stanley in the time period that Kevin Warsh was an economist at Morgan Stanley. I was very fond of his work and I have seen him in the past when he was a Fed governor, take an opposition viewpoint, take a minority viewpoint, make an argument about some of the concerns he had with quantitative easing, for example—something I would point out that Jay Powell did as well back in the day.

So Kevin Warsh is not a risk-free pick, but he is one who I just think, on the margin, has more credibility at this moment than Kevin Hassett does.

EICHER: Well, David, all of this is going on against an incredible backdrop. We found out last Sunday night that Jay Powell and others at the Federal Reserve are now evidently under investigation over cost overruns tied to a renovation project at the Fed’s offices in Washington, D.C.

Now, for a full year of the second Trump term, it seems that Jay Powell and Donald Trump have been at odds, and Powell has been almost completely unflappable during these confrontations with the president.

But what we saw this week was very different—Jay Powell releasing a video rejecting the whole thing, saying there is nothing to it.

I have never seen a fighting-mad Jay Powell quite like this.

So how does that kind of aggressive pushback strike you, David? Does it strengthen the Fed’s institutional credibility, or is there some downside risk here?

BAHNSEN: Well, it was an incredibly successful week for Jay Powell, because what he did by getting in front of it that way and taking that posture was get the support of literally everybody and got the White House to completely retreat and actually have to put out a narrative that, "oh, the president didn't even know about it, and we weren't even a part of it, and this U.S. attorney, Janine Pirro, formerly of Fox News, was doing this all on her own."

There isn't any question that it is ridiculous and outrageous, and if cost overruns are now a criminal offense then I have got to have a talk with my wife on a few things.

EICHER: Well, maybe that, and check in with your member of Congress as well.

BAHNSEN: And every government employee in human history. But no one believes that there is really a concern about legality and criminality of cost overruns. It's a bullying technique and now that I've heard the whole story and had a few days to talk to people and process it, I think it is entirely possible that Pirro was on her own and that the president wasn't a part of it.

Either way, this man has a few months left, his term is going to end, and there is absolutely no rationale for this.

But what happened this week, Nick, that is important—and why I say it was such a successful week for Jay Powell—is you couldn't find a Republican that was willing to defend what happened. Everyone was taking Powell’s side of it.

And remember, there are enough Republican senators that are leaving that they can hold up votes, and that is exactly what happened with Senator Thom Tillis of the great state of North Carolina, saying, “I won't approve more Fed replacements if this thing isn't put away.”

So the leverage is not with law-fare right now; the leverage is with the Fed. 

Look, it's unfortunate that the relationship deteriorated the way it did, I am not defending all the monetary policy decisions Jay Powell has made, but a criminal investigation is ridiculous and I am looking forward to being on the other side of this drama so we can get back to the other drama of interest rate policy.

EICHER: Oh and drama galore. Let's turn to the drama involving voter sentiment, David.

A new Wall Street Journal poll finds that voters are broadly unhappy with the economy, they are skeptical of the administration’s handling of inflation, they are not convinced that economic growth is improving their lives. That's what came through pretty loud and clear in the Journal poll.

Do you think that the voters are misreading the economy, possibly? Are they responding to something that the data don't fully reflect? What do you say?

BAHNSEN: Well, remember, the economy is not something that people read. The economy is something people do and feel, and so somebody who believes their standard of living is going down or not getting better, or certain particular promises that were made to them are not happening—there is no data point that you can offer to make them feel better.

The reality is that I am one who believes the inflation rate will actually be heading down from here, despite those various elements that tariffs are pushing higher, just cause I'm quite confident that housing and some of the rent numbers are gonna be coming lower, which will help the data point.

But for people to meaningfully feel better, you will have to see something in housing and rent levels.

And right now, we're seeing a couple of different proposals a week come from the White House that are just really disappointing and really awful.

But what could very well happen when some of the provisions from the Big, Beautiful Bill get enacted is I am very hopeful you will get an increase in capital spending, capital expenditures, business investment—something to drive productivity besides telling people, "oh, we're building a data center upstate from you, that will be a booster to productivity."

If the only thing we have going to try to boost productivity is stuff adjacent to AI, then I don't think that is going to be a great narrative this year.

But there could very well be more. I just want to remind people the new tax bill gives businesses 100 percent immediate expensing on capital expenditures and useful things put to work. The ability to deduct research and development expenditures, some of those things I hope will be stimulative.

I do spend more time criticizing the things I don't like that the administration does, and there's been a lot more of them than I expected in the first year. 

We are now at the one-year anniversary and I feel disappointed in the way the first year has gone compared to the way I felt after the first year of the first term, where I was largely very encouraged.

But there have been some positive things, and those things could very well pull through in 2026—the energy independence, the deregulation, but the problem is a lot of the deregulatory efforts are being offset by other regulatory suggestions, and so it's really going to be difficult to make voters feel good.

But I will say this, Nick: one of the ways to not disappoint voters is to not promise them stupid things. And to promise voters that you are going to do things that you really can't do as a politician. 

Everyone has to do it, I guess, to get elected. 

But I long for a day where we don't. Where the people running for government, their promise in the economy will be limited to the things they're going to stop doing, the damage they're going to try to get rid of, not "we're going to go divide the oceans for you." 

That type of stuff I think sets a bad expectation, it's a messianic view of politics. 

EICHER: All right. David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group. He writes at DividendCafe.com and has a new article out at WORLD Opinions as well.

David, hope you have a great week. We'll talk to you next time.

BAHNSEN: Thanks so much, Nick.

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