Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / How Jerome Powell Shaped the Modern Fed Playbook
Transcript
- Lucas: The Federal Reserve just held rates steady at the June 2026 meeting, and Chairman Warsh dramatically pared back the statement — removing any hint of a cutting bias. Several FOMC members are now signaling a potential hike later this year. Luna: That's a complete 180 from where we were even six months ago. It feels like the ghost of Jerome Powell is still running the show. Lucas: Right, and I think that's actually the perfect angle for today — because Powell's not in the chair anymore, but the playbook he built is very much alive. When we look at what happened yesterday, it's basically Powell's framework in action. Luna: So what is that framework exactly? Because I think people hear 'Powell put' or 'data dependency' but don't always connect the dots. Lucas: Let's start with the core: Powell revolutionized how the Fed communicates. Before him, you had Greenspan's mumbling, Bernanke's academic lectures, Yellen's careful calibration. Powell made the Fed accessible — plain English press conferences, regular speeches, even town halls. He democratized the message. Luna: But that also created a monster — the market started parsing every single syllable. 'Transitory' became a four-letter word. Lucas: Exactly. The 'transitory inflation' call in 2021 is probably the biggest misstep of his tenure. He said it in July 2021, and by November he had to retire the word. But here's the thing — when he realized he was wrong, he didn't double down. He flipped hard. The pivot from 'transitory' to 'we'll do whatever it takes' was brutally fast. Luna: That's the asymmetric risk management you're talking about — the Powell put, but also the Powell hawkishness. Lucas: Exactly. He'd rather overreact than underreact. In March 2020, he cut rates to zero, restarted QE, and launched the corporate credit facility in a matter of days. That's the 'whatever it takes' moment for the bond market. And then in 2022, he hiked 75 basis points four times in a row — the most aggressive tightening since Volcker. Luna: And the playbook was always forward guidance — telling markets exactly what they planned to do, then doing it. That's the opposite of the Greenspan era, where you never knew what he was thinking. Lucas: Right. But forward guidance only works if you follow through. And Powell did. When he said rates would stay low until inflation was sustainably above 2%, he meant it. When he said they'd hike and hold, he did that too. That credibility is what Warsh inherited. Luna: So yesterday's statement — removing the cutting bias, signaling a possible hike — that's textbook Powell playbook: prepare the market well in advance, don't surprise anyone. Lucas: Exactly. Warsh could have come in and wanted his own style, but he kept the same framework. We know from the dots that a majority of FOMC members now pencil in at least one hike in 2026. The 10-year yield is at 4.43 percent, the two-year at 4.05 — that's a positively sloped curve again, 29 basis points. The economy is growing at 1.6 percent real GDP. So the data doesn't scream 'cut'. Luna: And Powell would have looked at that same data and said, 'We'll let the data decide, we're not in a hurry.' That is the exact language Warsh used. Lucas: Right. 'Not in a hurry' — that's pure Powell. But there's another layer: the Powell playbook also includes managing the tail risks. In 2019, when repo markets seized up, he stepped in with overnight operations. He didn't wait for a crisis to prove itself. Luna: So the playbook is: be transparent, be data dependent, be willing to pivot hard, and manage tail risks proactively. Lucas: Yes. And I think that's why markets aren't freaking out about a potential hike. The VIX is at 18.44, down five percent over the last five days. The VVIX — the volatility of volatility — is at 94.53, down six percent. That's not panic. That's acceptance. Luna: Because the market trusts the process. Powell built that trust over seven years, through a pandemic, a inflation spike, and a regional banking crisis. Lucas: If this conversation is helping you think about the Fed in a clearer way, that's exactly what we're here for. And the way we keep these shows ad-free and unsponsored is listener support — you can buy me a coffee at buy me a coffee dot com slash fexingo. It's a small gesture that makes a big difference. Luna: Yeah, and we appreciate every single one. It keeps us independent. Lucas: So back to Powell's legacy. One underappreciated part: he modernized the Fed's toolkit. The standing repo facility, the foreign repo pool, the new discount window framework — all of that was designed to prevent the kind of plumbing failures we saw in September 2019. Luna: And he also pushed for the Fed to be more inclusive — the Fed Listens events, the focus on maximum employment across racial groups. That was a real shift. Lucas: It was. And it's controversial — some people think the Fed should stick to inflation and employment and not get into social policy. But Powell argued that if the Fed's mandate includes maximum employment, you have to understand who's not employed. Luna: So where does that leave Warsh? He's inheriting a playbook that's very specific, but he's also his own person. He's a former Wall Street lawyer, not an academic. He might be more inclined to let the market dictate. Lucas: The early signs are that he's more hawkish than Powell on the margin. The statement yesterday was leaner, less dovish. Jeffrey Gundlach said Warsh is not going to be the 'easy money' chairman many hoped for. And the data supports that — real GDP growth is accelerating from 0.5 percent to 1.6 percent, nominal GDP is over 31.8 trillion. That's not a weak economy. Luna: So if the playbook is Powell's, but the personnel is Warsh, what's the biggest risk? Lucas: The biggest risk is that the playbook becomes a straitjacket. If Warsh follows forward guidance too rigidly, he might not adapt fast enough if something breaks. The 2023 regional banking crisis was a stress test that Powell passed, but the next one might be different. Luna: And there's also the political pressure. The White House appointed Warsh, but he's already signaling independence by hinting at a hike. That could create friction. Lucas: That's the thing about Powell's playbook — it's designed to be apolitical, but in practice it's always political. When you tell the market exactly what you're going to do, you're also telling Congress and the White House. And they don't always like what they hear. Luna: So the takeaway for listeners: if you're trying to figure out what the Fed does next, watch what Warsh does, but listen to what Powell said. Lucas: I think that's fair. And as we head into the second half of 2026, the big question is whether that playbook can survive its creator's departure. History suggests it takes about two years for a new chair to fully imprint their own style. So we're still in the Powell era, technically. Luna: Interesting thought. Let's see how the data unfolds.