Trump Calls for Fed to Cut as New Paper Highlights Role of Regional Reserve Banks

Plus, Ackman warns on Harvard borrowing against “overstated…illiquid” endowment

Jack Kemp, Republican congressman from New York, in 1982, the year he called for the resignation of Fed Chairman Paul Volcker. Bernard Gotfryd photograph collection (Library of Congress).

With the Federal Reserve Open Market Committee scheduled to meet tomorrow and Wednesday about interest rates, President Trump last night commented, “We have a very stubborn Fed. I mean, the Fed should lower…”

Meanwhile, the National Bureau of Economic Research just released a new working paper from Vyacheslav Fos and Nancy R. Xu of Boston College’s Carroll School of Management, headlined, “When do FOMC voting rights affect monetary policy?” They take advantage of the fact that the 12 regional bank presidents all attend the open market committee meetings, but there is a rotation so that only five of them have voting rights at each meeting. The economists looked at meetings from 1969 to 2019, before “Groupthink Sets in at Powell’s Federal Reserve.”

They found that it mattered for monetary policy which regional presidents had a vote at which meeting. As they put it, “In terms of economic significance, the economic conditions in voting districts affect Taylor rule regressions in a profound way and have large effects on financial markets.”

“The path of the target rate would have been different if all bank presidents had voted, and the difference between the counterfactual and actual rate can reach up to 150 basis points,” they say, asking “Is the existing decision-making mechanism adopted by the FOMC effective in achieving optimal macroeconomic policy? Is the balance of power between the Federal Reserve Board of Governors and Reserve Bank presidents effective in reflecting the heterogeneity in economic conditions and desired policy choices across districts?”

It’s nice to see this conversation stirring in the White House and in academic economics. The real action will come when it spreads to Congress, which the Constitution gives the power to coin and regulate the value of money.

Here are some facts that are widely forgotten: On the eve of “The Seven Fat Years,” that Robert Bartley wrote about, there was all kinds of political pressure to cut rates. Some of it came from the administration. President Reagan’s Treasury Secretary, Donald Regan, said in October 1981,the New York Times reported at the time, “that he wanted a policy that would allow interest rates to decline slightly.” The Times headlined it “Fed Policy Too Tight for Regan.”

A lot of the pressure, though, came from Congress. A pro-growth Republican congressman, Jack Kemp, also pressed the issue. “Kemp Says Fed Fosters Joblessness” was a January 1982 New York Times headline over an article that began, “Representative Jack Kemp today blamed the Federal Reserve Board's monetary policy for the nation's economic slowdown and high unemployment. The New York Republican said President Reagan should try to get the Fed to change its stance instead of asking Congress for higher taxes.” Kemp went so far as calling for the Fed chairman at the time, Paul Volcker, to resign.

Democrats also piled on against Volcker. Here is the New York Times from June 9, 1982:

Representative Jim Wright, the House majority leader, a strong critic of current monetary policy, called today for the resignation of Paul A. Volcker as the Federal Reserve Board's chairman.

''I would ask for Mr. Volcker's resignation,'' the Texas Democrat said at a breakfast meeting with reporters, in arguing for an easing of monetary policy that some economists contend could lower interest rates.

Congress even eventually passed a resolution, championed by Senator Robert Byrd, the Democratic minority leader: “Resolved, that in recent months the Board of Governors of the Federal Reserve and the Federal Open Market Committee have made a significant contribution to lower interest rates without rekindling inflation and that, with due regard for controlling inflation so as not to have an opposite effect of driving interest rates upward, they should continue to take such actions as are necessary to achieve and maintain a level of interest rates low enough to generate significant economic growth and thereby reduce the current intolerable level of unemployment.”

Rates now are lower than in 1981 or 1982 and unemployment is, too. So the situation is not precisely the same. Much of the 1980s boom was about Reagan’s tax cuts. The conventional narrative of this is that Volcker is a hero for keeping rates high for long enough to vanquish inflation permanently (at least until the Biden administration or the Powell Fed Chairmanship that kept the federal funds rate at zero all the way into March 2022 when Consumer Price Index Inflation was at 8.5 percent.) Another way to look at it is that maybe the heroes are Secretary Regan and Kemp and Wright and Byrd who pressed Volcker eventually to loosen.

Bartley’s “Seven Fat Years” calls Kemp unwise for having “cast his lot with liberal congressmen trying to curb the Fed’s independence.” Far be it from me to quarrel with Bartley, who was a genius, a giant, one of the greatest editors in the history of the planet, and is missed by his former colleagues and neighbors to this day. I am too young to have been paying super-close attention to this sort of thing in 1982. But the Constitution put monetary policy with Congress, not an “independent” Fed, probably because at least the Congress had periodically to face voters and be accountable on both inflation and unemployment. The modern Fed chair, the governors, their staff, and even the regional bank presidents are a lot less accountable. When it comes to Fed policy, everyone is for technocracy rather than democracy so you don’t wind up with Latin America or Weimar Germany style inflation where you have to push your money around in a wheelbarrow. But as Volcker eventually conceded by taking the actions the politicians were recommending, there is no “independence” in the system established by our founders.

Bessent at Milken: Treasury Secretary Bessent spoke this morning at the Milken Institute Global Conference. He concluded:

Before I entered public service, I spent more than 40 years in the asset management business. There, one mantra guides one of the world’s most successful investors: “Never bet against America.”

Warren Buffett coined the phrase—and it’s been his lodestar as long as he’s been in the game.

“Never bet against America” captures a time-tested truth: The U.S. economy is unstoppable.

Throw whatever you will at our capital markets—the Great Depression, two World Wars, 9/11, a global recession, the COVID pandemic, or the last few years of sky-high inflation. Each time the American economy gets knocked down, it gets back up again. And it gets back up even stronger than it was before.

US markets are antifragile. Indeed, the entirety of our economic history can be distilled in just five words: “Up and to the right.” On a long-term horizon, it’s never a bad time to invest in America—but especially now.

The United States is entering a new Golden Age of economic prosperity for both Main Street and Wall Street. And we don’t want anyone to get left behind.

Ackman warns on Harvard’s finances: Money manager and Harvard watchdog Bill Ackman went on CNBC this morning and spoke about Harvard’s finances: He said in part:

Harvard is not in a good financial position. This is something I think is not well appreciated. They nominally have a $53 billion endowment. I don’t believe the carrying values of their endowment. Eighty percent of the assets are invested in real estate, private equity and venture capital. It’s not liquid. Apparently they are selling a billion dollar slice of their private equity. Watch where that gets priced relative to the carrying value of the portfolio. My guess is it could be 30 to 40 percent below the current carrying value to get a bid. In my business, if I owned a slice of something, I sold a piece of it at a 30 to 40 percent discount, I’d have to re-mark my entire portfolio. So, one, the endowment in my view is massively overstated in terms of what it’s really worth. The second thing is, no one talks about the fact that Harvard now has $8 billion of debt. I read the prospectus for the recent bond issue. You have $53 billion of overstated assets that are illiquid and you have $7.9 billion of debt which you owe. As a donor, do you want to give money to a non profit institution that is going to go out the door to pay interest to bondholders?

Ackman was asked whether it was fair to take away Harvard’s tax exempt status. He said he thought so. “Harvard became over time a political advocacy organization for one party. When a university goes from being a university to effectively becoming a political advocacy organization, it doesn’t deserve nonprofit status,” Ackman said.

Buffett on the federal budget: At the Berkshire Hathaway annual meeting over the weekend, which is looking like Warren Buffett’s final one as CEO, Buffett was asked a question about whether the Department of Government Efficiency would be net positive or negative for America. He responded in part:

I think the problem of how you control revenue and expenses in government is the one that is never fully solved and has really hurt dramatically many civilizations. I don’t think we’re immune from it, and we’ve come close to it.

We’re operating at a fiscal deficit now that is unsustainable over a very long period of time. We don’t know whether that means two years or 20 years because there’s never been a country like the United States. But as Herbert Stein, the famous economist, said, “If something can’t go on forever, it will end.” We are doing something that is unsustainable, and it has the aspect to it that it gets uncontrollable to a certain point.

Paul Volcker kept that from happening in the United States, but we came close. We’ve come close multiple times. We’ve still had very substantial inflation in the United States, but it’s never been runaway yet. That’s not something you want to try and experiment with because it feeds on itself.

I wouldn’t want the job of trying to correct what’s going on in revenue and expenditures of the United States with roughly a 7% [of GDP] gap when probably a 3% gap is sustainable. The further away you get from that, the more you get to where the uncontrollable begins. It’s a job I don’t want, but it’s a job I think should be done. And Congress does not seem good at doing it.

Looks like Buffett is in the credit-Volcker camp, not the credit-Jack Kemp camp.

Robert Rubin dances through the raindrops: Robert Rubin, the former co-chairman of Goldman Sachs and former member of the Harvard Corporation who was Treasury Secretary during the Clinton administration, surfaces in a front-page New York Times article about Harvard president Alan Garber to declare that Garber is a big proponent of viewpoint diversity. From the Times story:

Even before the protests over the war in Gaza, people who have worked with Dr. Garber at Harvard said that he had expressed disappointment with a political climate on campus that could be intolerant of dissent.

“I think that troubled him a lot, actually,” said Robert E. Rubin, a former Treasury secretary under President Bill Clinton and a former long-serving member of the Harvard Corporation, the university’s powerful governing body. “Because he felt that universities should be a place for exchanging all views, as opposed to a place where people exclude certain views. And I happen to agree with that.”

This is pretty rich, that person the Times and Garber produce to verify Garber’s supposed commitment to viewpoint diversity is a former Clinton cabinet secretary and the author, with current Harvard Corporation member and 2024 Democratic National Convention speaker Kenneth Chenault, of a July 8, 2024, New York Times essay headlined “The Enormous Risks a Second Trump Term Poses to Our Economy.”

Where was Robert Rubin publicly campaigning for increased viewpoint diversity at Harvard before Trump threatened to cut off the tax exemption and the $3 billion in federal funding? Federal Election Commission records show Rubin gave more than $300,000 to Democratic political causes in 2024. I don’t doubt Rubin’s sincerity or Garber’s, but they’ve been running Harvard for decades, and the viewpoint diversity has been diminishing, not increasing.

The issue isn’t whether Garber, publicly or privately, “expressed disappointment” with the Harvard political climate, but whether he was able to improve it rapidly enough when he wasn’t facing a threat from Washington. A professor at Harvard Law School, Jesse Fried, offered an interesting analysis in the May newsletter of the Harvard Jewish Alumni Alliance, concluding, “Trump’s intervention may well increase the pace of change at Harvard.” Fried doesn’t directly say it, but the implication I drew was that that might not be such a bad thing.

Recent work: “Is Harvard Complying With the Tax Code?” is the headline over my latest article for the Wall Street Journal. Please check the article out over at the Journal if you are interested and have access.

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