From Powell to Warsh: What the Fed's Leadership Change Means for Banks | BankTalk Episode 149

Speaker A: Foreign m.

Speaker B: Welcome to the Bank Talk podcast, the show where we talk to leaders and experts from the community banking sector. Whether you are a current CEO or aspire to be one, this podcast will give you valuable insights and advice on how to run your financial institution better. Each episode explores a new topic with a guest who brings their unique experience and knowledge. Tune in and discover something new each time you listen.

Speaker C: Hello, welcome to Bank Talk. Um, Rich Carty, your host today, sales executive with Remedy Consulting. Today's episode we'll be joined by Dan Hartman of counsel at Nutter and we'll dive into a few topics around the new Fed Reserve Chair Kevin Warsh as he was sworn in on May 22. Dan has a great history impulse on what's going on. So excited to hear a little bit about short term effects and where things may go. So thanks for joining us. Hopefully you learned something new and welcome to Bangkok.

Speaker D: Thanks Rich. Good to be with you.

Speaker C: Yeah, Dan, thanks for joining us. Really appreciate it. I've been lucky to meet you at some events and do a little partnership work here over the last year and after talking with you, uh, at a recent event, I think it's a timely topic. Kevin Warsh is being sworn in. There's a few range of matters we can dive into. But why don't you give me a little bit of a background on yourself and then maybe a little bit on your firm Nutter, and that might kick us off in a good fashion.

Speaker D: Sure thing. Yeah. Happy Direct. So basically I'm a banking lawyer, uh, but I've had an interesting path. I started out at a law school defending banks before the cfpb, back when they were first established in the early teens. So that was very interesting and exciting time to be in the right bank regulatory space. But then all of a sudden a lot of that work started to dry up around 2017 with the change in administration and I started to look to broaden out my practice. So I ended up joining Nutter for the first time back in 2018 working with their strong banking group. Nutter is a Boston law firm founded by justice, actually Justice, Louis Brandeis back in the 1800s. And I was looking to join a smaller, more community bank focused practice. Uh, so joined them back in 2018 and then in the middle of the pandemic, the Boston Fed started hiring. They were looking for help with the Main street lending program, which was one of the emergency lending facilities out of the pandemic and under the CARES Act. So I got a chance to join the Boston Fed, worked with them on those Emergency lending programs, their discount window lending, but also did traditional bank supervision, bank out M and A application reviews and approvals, different types of enforcement actions. Really got to do a lot and learn a ton about the Fed there. So I actually left the Fed about a year, a little over a year ago and I'm back at Nutter as of counsel and part of the banking and financial services groups at helping advise banks on everything from merger activities to traditional bank regulatory and supervision questions to enforcement matters and the like.

Speaker C: Excellent. Now Kevin Warsh came on board last week. Let's just dive into immediate short term expectations. What are you guys foreseeing in the uh, short term?

Speaker D: Yeah, so retro first initial disclosure. I went to law school, I didn't get an econ PhD, so I'm not an economist and I cannot, I'm not going to comment on, um, where interest rates might be going or not going because I leave that to much smarter people than I. But what I can tell you is I've learned a ton from my time at the Fed and from being able to follow it since I've left about how it's governed. And I've been paying very close attention to the litigation going on with the attempted removal of Governor Lisa Cook, with the ongoing, and now it seems to still be ongoing investigation of former Chair Jay Powell and how, what that means for Fed independence. And there's a lot of banks are coming and asking questions about what's happening there. So one of the key things to think of in the short term is how the Federal Open Market Committee, which is the committee that determines interest rates, is governed. So the FOMC consists of 19 total members. So that's the seven governors at the board in D.C. and then the 12 Reserve bank presidents across the country. Of those, 19, uh, 12 vote. So that is all seven governors and five Reserve bank presidents. So Chair Walsh comes in with a lot of speculation as to whether or not he's going to initially start to aggressively lower rates. But his big challenge is that he doesn't get to decide by himself. He's in control of the agenda, he is in control of the bully pulpit. But he has to get 12 people to vote, vote on any action. And so I think what we're going to see initially is that the FOMC and in terms of its interest rate decisions is going to have to follow where the economy goes, where the data is showing them. And if the chair wants to move on past that, he may find himself in the minority on the FOMC voting. And I know that's probably not where he wants to be. So I think in the short term expect to see a feeling out. Expect to see some dissents from certain voting members of the fomc. I think I, along with a lot of our, a lot of the listeners here are really paying attention to that first FOMC meeting in mid June.

Speaker C: Yep, I think that's helpful. And with other, a lot of these elected positions. Is that something he is now in for life? If we get a new president or when we get a new president, how does that play out next few years? What does that look like?

Speaker D: Sure. So each of the Fed governors is in for a 14 year term. It's staggered. So it's seven governors each get a 14 year term and they are staggered every two years in terms of when they're replaced. Gotcha. And then that is separate from the three chair positions. So the chair, so first Warsh gets confirmed as a governor and then he gets confirmed as the chair and the chair is a four year term. So you'll expect Chair Warsh, you know, he just got confirmed and sworn in on May 22, so 2026. So he'll be there till 2030 as chair. Chair comes with it, a lot of power and he'll clearly move into, so he'll move into whoever the next president is for at least a couple years and then moving on from there. One of the interesting precedents being set is that chairs at the end of that four year term typically don't stay for the remainder of that 14 year term.

Speaker C: Okay.

Speaker D: Chair Powell has become only the second chair in history to after leaving as chair, stay on as a governor and his term doesn't end until January of 2028. So you've got a situation where you've got two. You got a chair and a former Fed chair who are both serving on um, the seven person board at the same time. So when a lot of folks will be following now Governor Powell in terms of his decision making, when he decides that he's going to make public statements and when not. And it's going to be interesting to follow.

Speaker C: Yeah. With that kind uh, of dynamic, do you foresee things not moving maybe as quickly as Warsh would have expected or. I've read that a big reason Powell is maybe staying on is due to the litigation pieces of it. But I don't know if you have a thought there.

Speaker D: I've been hearing that's a lot about the litigation pieces. I think a lot of it is. I think now Governor Powell does believe he, it's Some of its litigation, but a lot of it. I think he believes that he's kind of, his mandate is to protect the independence of the Fed. And so I think he's going to have a little bit of a period to feel everything out, see where things, things are going. And I think as soon as he's comfortable that the uh, the Fed's independence is going to be protected, I see him resigning. But the only person who knows what he's going to do is Governor Powell. So um, I'm looking forward to see what, what he decides with.

Speaker C: Sure. The other thing, just take a step back with the elections and so forth. And I know I'm m kind of catching off guard with this, but just thinking about kind of how Powell was forced out a little bit little seems to be pretty unprecedented precedented. Do you think that moving forward that, I mean this administration is a little bit different than others, but do you think that's kind of foreshadowing what might be the move of uh, moving people out of those 14 year terms or so?

Speaker D: Actually Rich, I'm going to go to the opposite there. I think over the last last couple of years you've seen an administration that's aggressively tried to remove Paul and wish that he would resign from his early. Right.

Speaker C: Right.

Speaker D: And he did not. Right. They clearly exhausted all legal avenues, launched investigations, took tremendous action, but Chair Powell stood firm, made public comments as he needed and just completed the full four year term where he was in. So if anything, I actually think the last four years have proved that the Fed has this rock solid independence that is unlike any other agency. One of the things that I know a lot of our community bank clients at Nutter deal with is that if you're an OCC or an FDIC regulated institution, you now are in a situation where the FDIC chair or the OCC comptroller you now know will change at the date of an election. You now know that the Fed's leadership is going to be pretty much be maintained and that independence has proven quite strong even in the face of serious headwinds. So I think this has been a real learning experience and I think Fed independence is here to stay. The Supreme Court has come out with some recent dick death, uh, saying just the same that the Fed is quite a unique body consistent with the history and tradition of the first and second banks of the United States. And I think it's overall going to be a good thing.

Speaker C: Gotcha. No, that's great. So looking at 2026, inflation seems to be climbing a little Bit unemployment seems to be coming out. I know there's a few reports due to come out that will dictate some things. And inflation, you know, they're always trying to stay at that 2% target. What are some things Warsh is going to be able to push through? What do you foresee there?

Speaker D: Yeah, so I think a lot of the initial changes that he'll really be able to make are optics. Right. He's uh, talked about holding back on forward guidance in the way that prior Fed had. He's talked about holding fewer press conferences and the like. So I think you're going to see the initial thing is you're going to see a change in optics, you'll see a change in culture potentially at the Fed and then I think yeah, you're going to see a lot more of a pullback to the Fed's traditional mandates. So he's talked about like you said, being firm on that 2% inflation target, starting to cut the Fed's balance sheet. And so I do think those types of situations are where you will see real initial changes. I just don't think the changes are going to feel as dramatic given the fact that BD that he's dealing with, as I said, the 12 person voting committee.

Speaker C: Gotcha. You mentioned the forward guidance piece. I think I was reading something there, you know, that's more so Warsh seems to be frustrated with how that measures certain metrics would he put in place differently? You know it seems like the conventional methods is not something he's looking to use. There's some other ways that he wants to measure indicators to make those decisions.

Speaker D: Yeah, I mean I, I think it's honestly more of a uh, uh, and again going uh, not to dive too much into the economics. I think it kind of goes back to making the FOMC meetings mean something. Now before you go into these meetings with the market being pretty clear on where the Fed was going, I think maybe this is the type of opportunity where Chair Warsh will be able to really open up debate in those closed door FOMC meetings and allow for that free flow of ideas. I don't know but I'm hopeful that that result in better monetary policy.

Speaker C: Well, and it does make sense. I still remember reading newsletters or something along those lines where it would be a week before, uh, the Monday, uh, before the Wednesday meeting and they already kind of knew where it was going to go. Now to your point, those meetings, you know, would be really interesting to be a fly on the wall and see what's being said and so forth.

Speaker D: Yeah, I mean those are really interesting and those are the, the meeting minutes get published on a lag. But I can tell you that these first couple Warsh FOMC meeting Mitts, when they get publicly released in the future, will be definitely top uh, level information for journalists and Fed followers alike.

Speaker C: That's great. So Dan, let's think about long term. If we're looking past two years, when maybe Powell's out of that picture now, or maybe even looking beyond that, where do you foresee the change taking effect? What might be the biggest changes?

Speaker D: Yeah, so I. So Rich, I think a really good point is that Powell term ending in January of 2028. So as I mentioned earlier, the efforts we've seen to try to fire Governor Lisa Cook are an indicator that the administration is very interested in the Fed Board of Governors leadership. And while the FOMC is governed by that 19 person group, the Board of Governors is only governed by the seven governors in D.C. which has general supervisory authority over the 12 reserve banks. And so as we follow that, you start to see the, you know, the balance of power shifting. You've got a multiple, you've got now three Trump appointees, Vice Chair Bowman, Governor Waller and Chair Warship, as well as four Biden appointees on the board right now. So once Chair Powell steps down In January of 2028, that opens up that fourth seat, which makes a majority of Trump appointees at the Fed Board of Governors. Now I don't think historically people have thought about the Fed almost like the Supreme Court in terms of who are the Democratic nominees and who are the Republican appointees. But in this situation we're starting to see that, that that's becoming more of the case. So I, I'm going to be paying very close attention to who Trump appoints there and then you know, following the actions of people like Governor, uh, Vice Chair Bowman or Governor Waller, um, to see like what are the types of changes that might be happening at the board level. So it would be things like is there more transparency in how Reserve Bank Presidents are chosen and appointed and how the board is involved in that? Are, uh, there other ways how the Inspector General that oversees the Fed, are there any changes in how that person is appointed and looks into a lot of the probes? Are there changes to the ethics policy? We've seen a lot of governors and Reserve bank presidents over the last 10 years need to resign due to certain conflicts of interest issues. So like, what are the changes there? And then in general, not to forget the main audience here is supervise, you know, the Fed's role as supervisor of bank holding companies and state member banks. What are the changes on the bank regulatory side too? That's where. And those are all the types of things that happen at the board level and not at the FOMC. So I think that, uh, January 2028 is going to be a real turning point to see exactly what kind of policy changes Chair Warsh is looking to implement. And that's when he'll, he'll be able to push a little bit harder.

Speaker C: Okay, that makes sense. Now I know you don't want to touch upon predicting rates and so forth, but the other thing I did see is, or know is Warsh has always criticized the Fed's 6.7 trillion balance sheet and kind of has said, I think it was a disguise or the way that he phrased it. Can you touch upon that maybe about what effects would happen there, what he might change around his stance?

Speaker D: Yeah, so I think that's mostly going to be the Fed's decision on, uh, whether or not it's going to sell assets or let bonds that it's holding mature. The buying and selling of assets on the Fed's balance sheet is something that was really implemented only in recent history. When we say talk about it like the last 20 years. And yet, I mean, it is the type of thing that as our country is going in $37 trillion of debt, how the Fed handles their purchases of bonds is going to really impact the market.

Speaker C: Okay, that's interesting. Obviously, time will tell there, but no, I forgot to ask you that because I know we wouldn't want to dive too far into the rate side of it.

Speaker D: The only other thing is like the end of the day, what, what are going to drive rates? It's going to be, it will be something like the national debt, but at the same time it's going to be what is the impact of AI, what is going to happen in the Middle east and Ukraine and all of that, like, that's going to drive where everything goes. Fed chair only has so much power. So there are so many major issues that are, uh, completely unpredictable and like how they're going to impact employment and people's incomes is difficult. And I know that, like, that's not an easy answer. Banks in particular, hate uncertainty.

Speaker C: Right.

Speaker D: Um, I think, you know, we're, we're dealing with, we're dealing with a lot of uncertainty right now, unfortunately.

Speaker C: Well, that's the current battle. Rate cuts versus inflation. And what's the right move versus what happens next? Well, Dan, is there anything I missed? Anything else, you know, maybe our listeners might want to hear about or anything else maybe you want to touch upon?

Speaker D: Sure. So as I think about your listeners and the banking community, one thing I think it's important to touch on is just that community bank regulation. Here at Nutter, we represent a lot of the community banks in New England and they are, they're constantly following what's coming out of the Fed. One of the things that comes out is the, uh, speeches and different changes from Vice Chair Mickey Bowman. I'll say. You know, I get the question a lot. How will bank supervision change under Chair Warsh? And I think one of the important things to recognize is that Chair Powell before him was very deferential to Vice Chair Bowman. She came in as a former community banker, was really focused on community banks, hosting, hosted a community banking conference dedicated in D.C. where the Treasury Secretary spoke, has made incredible changes to the bank supervision process, including a focus on material financial risk. No longer taking supervisory actions based on missing processes or procedures. But whether or not we're really having a nice return to supervisory bread and butter issues. Is the thing that your bank is doing financially risky from the Fed's perspective, is it going to impact financial stability? If not, maybe the Fed needs to take a step back and let banks be more free to compete. So I think that's where we are and I think that's where, I honestly think that's where Chair Powell was in terms of his deference. I'd say Chair Warsh has been very similar, hasn't talked a lot about bank supervisory policy. And so I expect him to be about, just as, if not more deferential to Vice Chair Bowman. So I would say as banks are thinking about any changes on the regulatory side under Warsh, you can expect more of the same. Vice Chair Bowman to be very aligned with Chair Hill at the FDIC and Comptroller Gould at the occ. And then because of the way the Fed works, a lot of the changes do require votes at that board level among the seven governors. So expect maybe the Fed's moving a little bit slower than the other two agencies, but expect them to be all moving in the same direction.

Speaker C: Excellent. No, that's a good point. Well, Dan, unless there's anything else, I really appreciate the insight, your background, obviously you're tied pretty close to the Fed and luckily I'll be seeing you at some of these New England events and so forth. But if anyone had questions, is there anywhere they could reach out to, uh, find you?

Speaker D: Sure, yeah. Just Google Dan Hartman Nutter, you'll find me. Happy to talk to folks in New England. But you know, I would say one of the interesting things over the last year is that I've been getting more and more questions from folks outside of New England and that's been a real testament to the experience of the Fed. But Nutter's effort to expand as a true national leader in this space. So happy to chat with anybody who's Fed member, bank has a holding company question or uh, just otherwise wants to find out more about what's going on.

Speaker A: Awesome.

Speaker C: Uh, Dan, thanks again for the time. Really appreciate you joining us here.

Speaker D: Thanks, Rich. Really appreciate it.

Speaker C: And thanks to everyone else for joining us today. Great episode. We'll see what has to come with Mr. Warsh now in place. And thanks again for joining. Keep listening, keep learning. Have a great day.

Speaker B: Thank you for listening to the Bank Talk podcast brought to you by Remedy Consulting. If you like what you hear, please rate, review and share our work with others. Thanks again and we'll see you next time.

Speaker A: Um,