The Fed Is Facing An Impossible Problem | Judy Shelton & Thomas Hoenig

**SPEAKER_1** (0:00)
When you need to build up your team to handle the growing chaos at work, use Indeed Sponsored Jobs. It gives your job post the boost it needs to be seen and helps reach people with the right skills, certifications and more. Spend less time searching and more time actually interviewing candidates who check all your boxes. Listeners of this show will get a $75 sponsored job credit at indeed.com/podcast. That's indeed.com/podcast. Terms and conditions apply. Need a hiring hero? This is a job for Indeed Sponsored Jobs.

**Thomas Hoenig** (0:30)
I think the Fed, I think the US has a big problem. It's called the debt.
And what it does is putting a lot of pressure on the Fed and monetize that debt. Otherwise, you're going to see yields go up. Kevin knows that, the world knows that. And that's why you're seeing some of this resistance. And then on the, on the, on the repo or the, what I call the swap arrangements.
I'm very concerned about them because what you're doing and what you're being forced to do is the Treasury is looking to the Fed to really fund Japan's purchases of US debt so that you don't, they don't find Japan doesn't find itself selling debt, US debt and therefore depressing the price and raising interest rates. So, so we have a conundrum and the conundrum is really, how do you solve an impossible problem?

**Adam Taggart** (1:30)
Welcome to Thoughtful Money. I'm its founder and your host, Adam Taggart. This year so far has been full of transition and challenge for the Federal Reserve, arguably the single most influential institution for the global economy. The chairmanship has been passed on from Jerome Powell to Kevin Warsh, who appears to want to chart a more hawkish and limited scope for the Fed. But inflation stubbornly remains above the Fed's 2% target, and elevated oil prices resulting from the US. War in Iran are a new inflationary force outside of the Fed's control.
Meanwhile, bond yields are rising as former foreign buyers of US. Treasuries like China and Japan are now actively reducing their net holdings. That doesn't please the administration that just put Warsh in the seat. So what is the Fed most likely to do in the remainder of 2026?
Is it well-positioned to handle these challenges of higher inflation and higher yields? Or are events starting to slip out of its control? For answers, we're incredibly fortunate to be able to turn to today's remarkably qualified panelists. Dr. Judy Shelton is an economist, author, senior fellow at the Independent Institute, and the author of Good as Gold, How to Unleash the Power of Sound Money. She is a particularly qualified expert on today's topic because she served as an economic advisor to President Trump during his first term and was nominated by him in 2020 for the Federal Reserve.
Dr. Thomas Hoenig is the former CEO of the Kansas City Fed, a former voting member of the Federal Open Markets Committee, a former director of the FDIC, and now a distinguished senior fellow at the Mercatus Center. Tom, Judy, thank you so much for joining us today.

**Judy Shelton** (3:09)
My pleasure.

**Adam Taggart** (3:11)
Thank you. Well, look, I cannot think of a more august panel for this topic. Thank you so much to the two of you for joining us. As I mentioned off camera, I made the mistake of asking X Twitter if they had questions for you, and I got several thousand. So I had to distill those to just a manageable number here. I'm going to try to get through as many of those with you as possible. A number of them have been asked by names. I think you and many of the viewers will recognize here. And if you two are okay, we'll just jump right in.
Let me start, and let's see, Judy, I will direct this to you, and then Tom, you can pile on with any comments you have.
What's your initial assessment of the tone and direction that Kevin Warsh has set so far, and what do you think the biggest tasks are that lie ahead for him?

**Judy Shelton** (4:03)
I'm very, very impressed, very favorably impressed with the leadership that Kevin Warsh is already demonstrating. I totally approve of his task force approach to bringing about needed reforms. I think the challenge for him will be to continue with these already laying out the groundwork with the notion that we should let free market forces of demand and supply determine the cost of capital, rather than having rates imposed by a committee. I think that's a very interesting and free market-oriented capitalist, if I may say, approach.
But I think that he is going to be forced at some point to say, because he is a hawk in the sense that he believes that it is the Fed's job to get inflation down at least to the 2% target, he is maintaining some room to maneuver as to how he would do that. And he is not committing to the idea that the only way you do that is by raising the interest on reserve balances, interest rates. So people are going to say, well, then, how are you going to fight inflation if it's not just this Keynesian rope response of increasing interest rates and making them restrictive, that is cutting off demand by curtailing growth and risking higher unemployment.