IBM Vice Chair Gary Cohn IBM’s Cohn Talks Warsh’s Fed

**SPEAKER_1** (0:02)
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**Jonathan Ferro** (0:07)
Joining us now, the former NEC Director and IBM Vice Chair, Gary Cohn. Gary, good morning, good to see you.

**Gary Cohn** (0:13)
Good to see you, thanks for having me.

**Jonathan Ferro** (0:14)
You've been following the debate. I want your reaction, you know Kevin Warsh well. What is everyone getting wrong? And I say everyone, I mean the consensus for you on their reaction to that news conference last Wednesday.

**Gary Cohn** (0:25)
I'm not gonna characterize this as anyone's getting anything wrong or anyone's getting it right. What I'm gonna characterize this as, Kevin is a masterful student of the market. Kevin has been at the Fed before. He understands the limited toolbox, but the effective toolbox that the Fed has. What Kevin is doing right now, and I think people don't like this, is Kevin is reverting the Fed to the historic norms of what the Fed did.
We unfortunately as newscasters or as market makers or as traders, we got spoiled from the 8 period on. From 8 period on, the Fed has been an open box. They've been completely transparent. They have not done anything that you wouldn't know they would do hours or weeks or months before they did it, and the market became addicted to knowing what the Fed was going to do. What Kevin is doing right now, he's trying to get the market off the addiction of me, the Fed Chairman and the Fed Board, having to tell you what we're going to do, and you, the market and you participants, you should go and participate however you think it makes sense for you and wherever you think the opportunities are. This is a tough transition. People liked having the answers to the quiz before they took the test.

**Jonathan Ferro** (1:36)
So there's a market question. I also think there's an economics question that needs to be addressed. The issue for us, I think, is less about the lack of guidance, less about having the answers before the test, more about you've got an inflation problem, why you're not doing anything about it, which essentially was the Mike McKee question in the news conference. Why are you waiting? What are you waiting for?
So without giving us any real clarity on the preferred tool, why they're waiting, whether they carry on waiting, and at the same time telling us to believe them that they'll do something about inflation, I think the economic question is the difficult one to answer.

**Gary Cohn** (2:07)
Look, Chairman Warsh is going out of his way. I mean, he's literally going out of his way to tell you he is an inflation fighter, that the stable price mandate and the 2% inflation guide is his bellwether, and he's going there.
He has limited tools to get there, as we know. In fact, he has said in the speech, I have two tools to help us get there. I can raise rates or I can sell down the balance sheet. Those are his two tools. Raising rates, as we know, will affect the overnight rate, the Fed fund, that has very little effect on the economy as a whole. The real effect on the economy is, let's call it the five to 10-year bucket. That's where most people borrow, that's where consumers borrow, that's where credit cards are, that's where student loans are, that's where automobile loans are, that's where mortgages are. Kevin knows that. What he's also telling you is right now, the market is doing its own work in steepening the yield curve. In less than a year, we have gone from a two to 10s interest rate curve, inverted about 20 basis points to positive 40 basis points. We've moved 60 basis points in two to 10s rates. Kevin is saying, look, the market is doing my job. They're making the ability to borrow money out on the curve more and more expensive, and it's going to continue to get more expensive. If I raise Fed funds, yes, I can raise Fed funds. I'm not sure that has the effect. I think what he would probably prefer to do is he'd prefer to sell down the balance sheet, which again, would put more supply in the market, which would steepen the yield curve, but the market's doing that for him right now. So being in that chair for less than two months, or about two months, but he happened to come in in a funny time where a week and a half after he came in, he had his first meeting, then 30 days later, he had his second meeting. He then tells you nothing happened in those 30 days.
He's sitting here and I think he's evaluating where he wants to be. He's lucky on the schedule. He doesn't have an August meeting. He does have Jackson Hole. He could tell us what's going on in Jackson Hole. So I think Kevin wanted to probably get through those first two meetings, make it clear to the market that he is an inflation fighter, make it clear to everyone who's watching that the market is doing much of what he would have tried to get accomplished early. And he's going to have the month of August before the September meeting to come out and deliver a relatively baked plan in his mind. He's not going to give you the baked plan, but he himself will have a highly baked plan.