Loretta Mester was president of the Federal Reserve Bank of Cleveland from 2014 to 2024 where her reputation was built on policy expertise, institutional leadership, and a willingness to speak plainly about inflation and rate-setting. She was known for being being willing to dissent when she had a strong view.
I asked her to join me to discuss Fed chair nominee Kevin Warsh’s testimony before the Sentate Banking Committee knowing she would also bring to the table insights from her years at the Federal Reserve Bank of Philadelphia where she rose to be the Director of Research and attended Federal Open Market Committee Meetings while Warsh was also attending them as a Fed governor from 2006 to 2011.
Loretta begins by addressing concerns about Warsh’s wealth, which dominated the early part of the hearing. “I don’t think being wealthy per se disqualifies him for being a Fed chair,” and emphasized his cooperation with the ethics committee. Press reports on this issue have instead focused on Warsh’s unwillingness to give partisan Senators information they request. Warsh has resisted since he already has an agrement with the Ethics Committee to sell his holdings.
With so many people questioning if Warsh will support Fed independence, Loretta points out his strong advocacy for it in his opening remarks. “He emphasized... independence and his commitment to making sure that Fed policy is made independent of short-run political considerations.” She sees this as a deliberate and necessary message given the current political climate: “That was the only topic he brought up in those prepared remarks”
Reflecting on her own experience with Warsh at the FOMC, Loretta describes him as thoughtful and willing to challenge consensus when warranted. “He always had a well-reasoned argument for what he was proposing at any particular meeting, and he showed that he was able to go against... the modal view around the table” She believes this quality would serve him well as Fed chair, enabling both consensus-building and openness to alternative views.
She also weighs in on Warsh’s plan to reduce the Fed’s balance sheet, a position that is being hotly debated as his potential rise to be Fed chair draws closer. “During normal economic times, he would prefer that the interest rate be the tool of monetary policy... the balance sheet really should be reserved as a monetary policy tool during extraordinary times.” She notes that this view is not far from the current FOMC consensus.
Mester also addresses Warsh’s openness to improving inflation measurement, a topic she championed at the Cleveland Fed: “I think he’s on to something... there’s definitely more work that can be done on inflation.” She welcomes Warsh’s support for research into inflation dynamics, especially as the economic environment evolves.
In summary, Mester’s views reflect confidence in Warsh’s qualifications, a strong defense of Fed independence, and a pragmatic approach to both policy tools and institutional focus. So dive in hear more of her insights, drawn from direct experience and careful observation, that provide a balanced assessment that supports Warsh’s suitability for the role of Fed Chair.
Kevin is wealthy...so? 00:00:54:06
Well, I have to say, at the beginning… it was so much about his financial holdings. And there was a back and forth it went on, and on and on. So, he does have a lot of money. A very wealthy person. And, of course, he’s going to divest a lot of the things that a Fed chair or any Fed official should divest.
Some push on his wealth was expected…but it’s complicated 00:01:40:05
Well, I think it was expected that he would be pushed on that. I think he handled it pretty well in terms of <how> he worked with the ethics committees to come up with a plan that he would divest of those assets within 90 days of taking the role. He’s under some kind of nondisclosure, I guess, confidentiality agreement about exactly what investments are in some of those vehicles.
Still…he said the right stuff 00:02:05:11
So he didn’t feel that he could reveal those, so. But, you know, he worked with the ethics committees. I think that’s all we can…expect from someone. And I don’t think being wealthy per se disqualifies him for being a Fed chair. You know, I think some of the other parts of the hearing… where he emphasize… the independence and his commitment to making sure that Fed policy is made independent of short run political considerations. I think that was what he needed to come across today, really conveying in a credible way that he supports independent monetary policy making. And I think he was he succeeded in doing that.
Focused on Fed independence 00:02:51:04
Well, I think he was pretty clear on his saying it was an essential, characteristic of the Fed that it needs to have that independence, that ability to be independent. In fact, his prepared remarks, which of course, are, you know, limited in scope, that was the only topic he brought up in those prepared remarks. You know, a little bit about his background.
Not a new position for him… 00:03:14:16
And then, right, trying to convince everyone that he would he does support independence. And of course, before he even was nominated, he was a strong advocate of monetary policy independence in the way that you and I understand what independence is, which is really setting policy based on what the economy is doing, where it’s expected to go independent of any kind of influence from elected officials and in terms of sort of wanting to control monetary policy.
Willing to work with others 00:03:46:15
So I think in that way, he came across well, he also told us that, you know, this monetary policy independence is is really important. But he would be wanting to work with Treasury and Congress on other responsibilities that the Fed has been, given in terms of supervision and regulation. And of course, that’s been true in the past, too. We’ve seen the Fed has to work with the other Federal regulators, some of which are part of Treasury. So I don’t think that was that was in any way not supportive of independence of monetary policy making.
Loretta worked with Kevin...knows him… 00:05:18:21
So you’re right, Kathleen, I’ve been to all the meetings where he was a governor, and so I got to see him in action around that FOMC table. And my impression of Kevin and and knowing him after he left, often is that he always was one who thought deeply about issues. He wasn’t someone who just was cavalier about it.
Always prepared; solid arguments- 00:05:43:15
If you look at… transcripts of the FOMC meetings in which he participated, you’ll see that he always has a well reasoned argument for, what you know, he was thwarting at any particular meeting, and he showed that he was able to go against… the modal view around the table. Right. If he had a different view, he was willing to express it. And, he would also be part of sort of the consensus, when it was appropriate. I think Kevin will do the same as chair, if he gets to the nomination process and takes the role of chair, I think he will be a consensus builder. But I think he also wants to hear alternative views.
He understand the Fed already 00:06:36:13
And, you know, one of the things about Kevin is that because he has that experience within the Fed, both in normal economic times as well as during the global financial crisis, I think he’s come to know the institution and, you know, understands the tools that are appropriate during normal economic times and during perhaps when the rate has to be brought down this year. And I think he’s making a distinction about, that in some of his answers about the balance sheet. I mean, I think what he’s trying to say is that during normal economic times, he would prefer that the interest rate be the tool of monetary policy. And, of course, that’s something the FOMC has said in its own framework, is that the interest rate, the Fed funds rate at this and that now, which is the policy rate, is the main tool of monetary policy.
Balance sheet has been used by Fed in Special circumstances- 00:07:30:22
The Fed has used the balance sheet once the Fed funds rate has hit the zero or effective lower bound, because it wants to be more accommodative, using the balance sheet as a way to be more accommodative. Now, I don’t think that’s a controversial, view point is that, you know, one that he’s been espousing before this hearing, but also in the hearing is that you know, the balance sheet really should be reserved as a monetary policy tool during extraordinary times, not during normal economic times.
Some of these ideas already germinate at the Fed 00:08:01:10
So sometimes I think things are attributed as being sort of being very different from where the current FMC, committee is. And I guess my view is that some of the ideas here may be framed a little bit differently, but they’re not very far from where I think the modal view on the committee is, you know, even the idea that the balance sheet could be more streamlined than it is currently. I think there’s support, from, you know, several current committee members about that. And in the past, you know, a lot of us have said, you know, perhaps we should think about ways to reduce the balance sheet, perhaps more quickly than it’s going, perhaps contemplating selling some of the members. Now, Kevin wasn’t specific about how he would go about doing that, but I don’t have a sense that he necessarily would come in. And day one, you know, move the balance sheet down, try and move it down in an exponential way. I think he would be thoughtful about how he would go about doing that. And I don’t think that that there might be, you know, while there’ll be different opinions about that, I don’t think that’s a totally radical idea for the committee.
A man of many seasons 00:09:18:10
Well, it seems to me a lot of people are looking at it very seriously, on both sides. Of course, he’s a, visiting fellow at the Stanford Hoover Institution. So he has been, of course, at the Board of Governors. But he’s been, working in the financial markets. He is an attorney. He is very well-rounded.
Wants to get to structural underlying inflation…00:10:26:22
Now I think he’s on to something. I mean, we did create the Inflation Research Center at the Cleveland Fed, under my tenure there. And it was so funny because I remember when we, you know, established people were saying why you establish something like that, inflation’s low. You know, we kind of solving inflation around. But it was clear, right, that you have to do good policy to maintain a low inflation rate. So I don’t think you should ever take for granted if inflation is low that it’s going to stay low. And so we thought there’s a lot more to understand about the inflation dynamics, of course. And they’ve changed over time. And understanding that I think is important. And some of that’s about measurement. So as you said, you know, the Cleveland side puts out some measurements that I found very helpful when I was doing policy and having to, you know, really understand what the trend in inflation was going to be going forward.
Expectations 00:11:19:24
Some of it’s about inflation expectations. Of course, we all have said and believe that maintaining stable medium to long run inflation expectations is critical. In order to get inflation back down to 2% after it’s been up, for more than five years now. But really understanding how are those inflation expectations formulate, that’s another area where, you know, we need work.
Credibility… 00:11:47:05
We need research that really understands and inflation expectations process. So I think that there’s a there is definitely more work that can be done on inflation. And as different people start getting their news from different sources, understanding that how they formulate their views of inflation and how they formulate their views about the credibility of the statements coming out of the Fed about wanting to get back, to 2% and being willing to do what it takes to get back at 2%.
Understanding inflation 00:12:17:10
I think that’s a ripe area for research. So I think everyone should welcome the fact that a Federal Reserve chair, right, wants to support understanding the dynamics of the inflation process, especially in a world where it’s pretty clear, I think, that supply shocks may become more frequent, and more of an important driver of inflation measures, than they perhaps were in the past. And how should the Fed and other central banks do monetary policy in a world where supply considerations and demand considerations matter for the installation process?
Mission creep or bad communications? 00:13:26:22
Well, I think that it’s important for the Fed the best way the Fed can build trust with the public… That means making sure that prices are stable and the economy stays on maximum employment. So that’s job one. And that’s important. I personally think that it wasn’t really mission creep. I think that was a communication problem. There’s good reason to think that, you know, we want to have the Fed understanding the implications of climate change for the economy. And that could be because it influences supply chains. It could be that influences insurance rates. It could be that it influences, you know, changes to the electrical, grid that then influences inflation or, and increases inflationary pressures in particular ways. So I think it wasn’t mission creep for part of the Fed to be studying those issues. I think we didn’t do a good enough job of explaining why it was relevant to the mission of the said that they should, you know, study these things. And in fact, when I was at the Cleveland said, one of the things I did because I sort of could see, you know, that you could get out of your lane is we set of eyes.
Fed needs to achieve its goals 00:15:18:00
…I would interpret, what Kevin’s saying is, you know, it’s important for the Fed to really achieve those goals that are really given to it by Congress, and to be accountable for achieving those goals and to keep its focus on those goals.
Focus on dual mandate 00:16:01:04
And to the extent that other things, you know, perhaps, maybe, you know, could be construed as being outside the lanes, that he’s going to really make sure that the Fed concentrates on achieving and maintaining the dual mandate goals. And I don’t think that’s wrong. I think that’s the way I would approach it as well, is that, you know, there are many, many things, that are important for researchers to study. But the Fed has to be focused on what it’s within its purview, and that’s what’s going to drive the economy in terms of inflationary pressures, deflationary pressures, maximum employment, labor market trends.
Tough times for vetting 00:17:53:23
You know, we’re in a politicized moment with respect to the Fed. And, you know, I think that he handled those kind of questions as well as one could expect somebody to handle them given the situation we’re in. I think it’s very unfortunate. That at one point when they asked, you know, how what his view of the economy is and how he would view sort of interest rate cuts in this current environment, you know, it seemed like anybody who would, you know, favor at some point, cutting rates is going to be viewed with skepticism.
Trump puts his nominee over a barrel 00:18:34:03
And that’s why President Trump has really done damage in the sense that he’s made it much more challenging for whoever the new chair coming in comes in, because it could very well be that at some point, the economy evolves in a way where an interest rate cut is the proper thing to do, and yet it’s going to be looked at with skepticism by some as being just succumbing to political pressure.
Job one for Warsh 00:19:31:17
When things get politicized as they have been under this administration, we’re going to have skepticism. And that’s why, you know, Kevin’s first job getting there, if he gets there as chair, is to really show that this institution is credible, that the Fed is going to be making its monetary policy decisions based on sound judgment economics, data in a way that is independent of political considerations and that in the environment has been now made much more challenging given the attacks on the Fed. And that’s unfortunate.
The building project was a responsibility of the Board 00:20:52:14
… it was a board of governors building so that it was never discussed with the Federal Reserve president. So I was never in a discussion about the overruns or, you know, what was happening there other than whatever was out in the public domain. Thom Tillis was the one who spent time talking about, the building overruns.
Tillis blocking the vote 00:21:15:16
And basically, you know, he’s also the senator who said that unless the charges are dropped against or the investigation from the DOJ against Jay Powell, which has been stated about it’s been about the building overruns, but I think it’s more valid trying to influence independence of the Fed monetary policy. Anyway. He was a senator who was basically going to hold up the nomination process until that is dropped. So I think it was interesting that he was the one who had addressed, not questions to Kevin, but addressed some of the charges of against the building and what from what he presented is, you know, there are reasons for the overruns and that it isn’t malfeasance or a criminal case could be brought against Chair Powell.
There is a pecking order 00:22:10:00
So again, I think that was how he chose to use his time. And I think it just underscores, right, that again, we’re in an environment that’s become, you know, of said environment that’s become politicized. Now, the Senate does have, you know, oversight responsibility over the Federal Reserve. And so that is the purview of the, the Congress to look into that.
A credibility rebuild 00:22:37:21
Up to now, they haven’t had a problem. Wasn’t until the court case. So or the accusations from DOJ. So again, you know, political environment not good for the institution. Whoever becomes chair is going to have to rebuild that credibility with the public. And that’s job one. And I think that was probably why the focus of Kevin Walsh’s are opening statement was on independence, because I think that’s one important facet of the credibility of the institution.
Need a balance sheet framework 00:24:18:03
Yeah I mean the balance sheet, you know, there’s there is scope, I think, for thinking about the balance sheet. We don’t really have a framework. It’s not really a framework for how to think about the balance. You need the normalization principles over time that changed and amended. But we don’t really have a framework for thinking of a balance sheet. So I think there would be many committee members that would welcome that. We have the operating process, you know, procedures that have gone from a scarce reserves regime to an ample reserve regime. I didn’t hear anything today or previously that, Kevin wants to go back to scarce reserves, but there’s ways of making the balance sheet smaller, even within, in the ample reserves operating, regime. And I think those are the kinds of things that, he would want to investigate, perhaps bringing together a working group to investigate ways that could be done and other people at the FOMC, and externally, FOMC have, you know, thought through these issues. Right. And there are ways that you can sort of make the balance sheet smaller, perhaps change the maturity structure so that it’s short term versus more long term.
A useful tool in the right’ unusual’ times 00:25:29:10
And that actually would free up some space if we did get into a zero lower bound situation again, where you’d have more balance sheet scope to be able to use that tool in those, you know, unnormal extraordinary times. So again, I don’t think this is something that’s controversial. I think there had a concern that you’d come in day one, you know, and, and do something that would be disruptive.
An evolution; not a revolution 00:25:53:11
In fact, he even said that this would be an evolution. You know, I don’t remember the exact quote, but he gave right his view that it would take it took 18 years to get the balance sheet as large as it is, it’s not going to get down in size in 18 days.
Trump has made Warsh’s job and his transition harder 00:27:02:23
Well, nominees are always appointed by a president who has been part of a party. So I don’t think that’s that unusual. I think there’s more scrutiny this time because of the conditions that President Trump has set up here. So again, he’s made this much more challenging for the new Fed chair. Right? I mean, he’s made it so that, you know, Kevin has to spend most of his time right, emphasizing the independence of the Federal Reserve. Whereas in other times that hasn’t been really the central point of the nomination hearings. But again, you know, it’s it could have been avoided if the attacks against the Fed were handled in a different way.
Warsh will be a good chair…well experienced 00:28:40:03
Well, I think Kevin is going to be a good chair. I think he is experienced as a central banker. Again, he served as a governor both in the global financial crisis, but importantly during more normal economic times. So I think he understands the difference. He’s been at the Fed, so he understands the Fed culture. Both the pros of that culture and some of the negatives, which he pointed out today in terms of, you know, maybe less prone to, to change, as all large institutions are.
…supported by a talented staff 00:29:14:07
But I think he’s also benefited, from the really high level expertise of the staff at both the Reserve Bank’s and the Board of governors. So he values that staff expertise. He’s been a financial market practitioner. So he brings the knowledge of the role the Fed plays in promoting financial stability as well as macroeconomic stability. And I think putting those together, is, is is really important.
…has been immersed in discussion of financial stability V policy 00:29:42:24
And even in the framework, thinking about a financial stability interaction and the nexus between financial stability and monetary policy, I think it’s going to be important. And I would point out that because he’s been at Hoover, he’s really been exposed to and engaged in that scholarly exchange of views which can often be disparaged. And he’s seen how that actually can lead to better conclusion. So I think that experience and seeing how academics go back and forth with one another in a collegial way, is going to serve him well in the chair role. So I think he came through the hearing as well as one could expect, given the climate we’re in. And, you’re right, we don’t know really what’s going to happen next, whether this is going to be, you know, go more smoothly now, or what’s going to happen on the other end of it.
So wait and see but… expect independence on monetary policy from Kevin 00:30:38:07
But… I think we’ll have to wait and see. I, given my knowledge of Kevin, I think he will be independent in terms of how he approaches monetary policy. That doesn’t mean I would always necessarily agree with his read on the economy. But in any point in time, given the uncertainties, around the economy and the dynamics and your views on the trade offs between the two goals, which sometimes are not, sometimes are in trade off, I think it’s very reasonable to have disparate views occasionally. And that’s actually healthy for the institution.
Loretta J. Mester
Loretta J. Mester was president and chief executive officer of the Federal Reserve Bank of Cleveland from June 1, 2014 through June 30, 2024. In that role, she participated in the formulation of US monetary policy and oversaw more than 1,000 employees based at the Bank’s Cleveland office and Branch offices in Cincinnati and Pittsburgh who conduct economic research, supervise banking institutions, promote community development, and provide payment services to depository institutions and the US Treasury. Mester was the 11th president of the Cleveland Fed and represented the Fourth District on the Federal Open Market Committee (FOMC).
Mester began her career at the Federal Reserve Bank of Philadelphia in 1985 as an economist and was executive vice president and director of research at the Federal Reserve Bank of Philadelphia prior to her appointment as president and CEO of the Cleveland Fed on June 1, 2014.
Mester is an adjunct professor of finance at the Wharton School of the University of Pennsylvania and a Senior Fellow with the Wharton Initiative on Financial Policy and Regulation. She is also a Senior Scholar at the Griswold Center for Economic Policy Studies at Princeton University. Mester has also taught in the undergraduate finance and MBA programs at Wharton and in the PhD program in finance at New York University.
Mester is a member of the board of directors of Renaissance Re and of the Haverford Trust Company, a member of the advisory council of the Visa Economic Empowerment Institute, and a contributor to CNBC, the business and financial news network.
In addition, she is a trustee of the Cleveland Clinic, a trustee of the Musical Arts Association (Cleveland Orchestra), a director of the Council for Economic Education, a founding director of the Financial Intermediation Research Society, a member of the CNBC Global Financial Wellness Advisory Board, a member of the Global Interdependence Center’s College of Central Bankers, a fellow of the National Association of Business Economics, a member of the senior council of the Central Bank Research Association (CEBRA), a member of the advisory board of the Financial Intermediation Network of European Studies (FINEST), and an editor of the Journal of Financial Services Research. She is a member of the American Economic Association, the American Finance Association, and the Econometric Society.
Mester was born in Baltimore. She graduated summa cum laude with a bachelor of arts degree in mathematics and economics from Barnard College of Columbia University. She earned MA and PhD degrees in economics from Princeton University, where she was a National Science Foundation Fellow.
Given his being in the Epstein files and in light of his full throttle belligerent, Bondi style of evading answers to the hard questions at the hearing and his obvious loyalty to his king Trump rather than Federal Reserve independence, DO NOT CONFIRM KEVIN WARSH FOR FEDERAL RESERVE CHAIR!