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Trump May Not Be Done With Powell Yet · Trumponomics

0:00
Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
0:08
Speaker 2: I have no intention of firing him.
0:10
Speaker 1: I would like to see him be a little more
0:13
Speaker 1: active in terms of his idea to lower interest rates.
0:26
Speaker 3: I'm Stephanie Flanders, head of Government and Economics at Bloomberg.
0:29
Speaker 3: Welcome to Trumperonomics, the podcast that looks at the economic
0:33
Speaker 3: world of Donald Trump, how he's already shaped the global economy,
0:36
Speaker 3: and what on earth is going to happen next. This week,
0:40
Speaker 3: we're looking at what's at stake in the tussle between
0:43
Speaker 3: President Donald Trump and the Federal Reserve Chair J Powell.
0:48
Speaker 3: At the start of this week, stocks took a dip,
0:50
Speaker 3: and this time they weren't reacting to tariff policies. It
0:53
Speaker 3: was the president's comments about the Federal Reserve, the US
0:56
Speaker 3: Central Bank, and its chair, Jerome or Powell. On Monday,
1:02
Speaker 3: the President had posted on social media, there is virtually
1:06
Speaker 3: no inflation, pointing to lower energy and egg prices, but
1:09
Speaker 3: there can be a slowing of the economy unless mister
1:13
Speaker 3: too late, a major loser. Lower's interest rates now in capitals.
1:18
Speaker 3: And that followed another post saying Powell's termination quotes could
1:22
Speaker 3: not come soon enough. Well late in the day Tuesday,
1:26
Speaker 3: after we recorded our discussion this week, President walked back
1:30
Speaker 3: some of those remarks, saying he had no intention of
1:33
Speaker 3: firing FED Chair Jay Powell, but he couldn't resist adding
1:37
Speaker 3: his own take on FED policy.
1:39
Speaker 1: It is a perfect time to lower interest rates.
1:42
Speaker 3: So the argument between the world's most powerful politician and
1:45
Speaker 3: its most powerful central banker isn't over. And we know
1:49
Speaker 3: from experience that once Donald Trump has someone in his sights,
1:52
Speaker 3: he's likely to keep taking shots, especially if the target
1:55
Speaker 3: is someone he can blame for a weakening economy. We
1:59
Speaker 3: discussed in detail whether the President can actually fire j
2:02
Speaker 3: Powell a few weeks ago, didn't go into that in
2:04
Speaker 3: this week's conversation. My focus was on how investors are
2:08
Speaker 3: reacting to those comments, those complaints about the FED, and
2:12
Speaker 3: more broadly, what is at stake not just for the
2:15
Speaker 3: US economy but also the world. And we have the
2:20
Speaker 3: perfect people to engage on this, especially from a market perspective.
2:25
Speaker 3: We have Krishna Guha, vice chair of Evercore ISI and
2:29
Speaker 3: head of the Global Policy and Central Bank Strategy Team there.
2:33
Speaker 3: Before being at Evercore, Crucially, Krishna was an executive vice
2:36
Speaker 3: president and member of the management committee, head of Communications
2:40
Speaker 3: Group at the New York Federal Reserve, and before that
2:43
Speaker 3: he was a senior writer on global economics and Economic
2:46
Speaker 3: policy at the FT. I think we overlapped briefly. Welcome Krishna.
2:50
Speaker 3: Very good to have you on.
2:52
Speaker 2: Wonderful to be Awathy is there.
2:55
Speaker 3: And our own Kate Davidson back to talk to us,
2:59
Speaker 3: managing Edis, who covers US economic policy for Bloomberg News
3:02
Speaker 3: in Washington. Kate, I think you were actually on the
3:04
Speaker 3: debut episode of Trumpnomics back in January, so I'm surprised
3:08
Speaker 3: it's taking us this long to have you back.
3:10
Speaker 4: Thanks for having me.
3:12
Speaker 3: Thank so, Kate. Let me just ask you right at
3:18
Speaker 3: the start, just to catch us up briefly on how
3:21
Speaker 3: Donald Trump's view of J. Powell has changed, Because, of course,
3:24
Speaker 3: you know, as we keep reminding ourselves, he appointed Jay
3:28
Speaker 3: Powell to succeed Janet Yellen back in I think twenty seventeen,
3:33
Speaker 3: in his first term. How quickly did he sour on him?
3:36
Speaker 3: How did we get this far?
3:38
Speaker 4: Yeah? I did go back. Actually I was curious about
3:40
Speaker 4: this myself. I went back and watched that announcement in
3:43
Speaker 4: the Rose Garden when he said he had chosen J.
3:46
Speaker 4: Powell to succeed Janet Yellen. The question was whether she
3:49
Speaker 4: would be nominated for another term. Of course, she wasn't,
3:52
Speaker 4: and at the time he said he was confident, based
3:55
Speaker 4: on Powell's record, that he had the wisdom and the
3:57
Speaker 4: leadership to guide the economy through any challenge.
4:01
Speaker 1: He's strong, he's committed, He's smart. Jay has earned the
4:06
Speaker 1: respect and admiration of his colleagues for his hard work, expertise,
4:12
Speaker 1: and judgment. He has proven to be a consensus builder
4:17
Speaker 1: for the sound monetary and financial policy that he so
4:23
Speaker 1: strongly believes in.
4:25
Speaker 4: He had a lot of praise for j. Powell at
4:27
Speaker 4: the time. It soured pretty quickly. If you recall in
4:31
Speaker 4: twenty eighteen, shortly after Powell was confirmed, the FED had
4:35
Speaker 4: been slowly raising interest rates. Right, We're coming off a
4:38
Speaker 4: period of very low rates for a number of years,
4:41
Speaker 4: and there was a thinking that among Fed officials they
4:43
Speaker 4: wanted to try to get back to something resembling normal.
4:46
Speaker 4: They were very slowly turning up the dial, and Trump
4:49
Speaker 4: pretty quickly decided he didn't like that. He thought that
4:52
Speaker 4: the FED should be helping the US, and the complaints
4:55
Speaker 4: turned kind of personal. Right, I can't remember this specific
4:59
Speaker 4: choice words, but I once sticks out when he said
5:01
Speaker 4: that J. Powell was like a golfer with no touch.
5:04
Speaker 4: You know, he couldn't put I mean, they got fairly colorful.
5:07
Speaker 4: He was really clearly very angry, and it got to
5:10
Speaker 4: the point where Bloomberg reported in December of twenty eighteen,
5:13
Speaker 4: so just about a year after that Rose Garden announcement,
5:16
Speaker 4: reported that Trump was actually considering firing Powell. So similar
5:19
Speaker 4: headlines in the news. Again, he's feeling like this guy
5:22
Speaker 4: that he originally put in there is not helping him.
5:24
Speaker 4: That really feels like the tone of it is that
5:26
Speaker 4: the economy could really be doing so much better if
5:28
Speaker 4: only the FED would get on board and help out
5:30
Speaker 4: by lowering rates.
5:32
Speaker 3: We also saw during COVID and after when Trump was
5:35
Speaker 3: no longer in office, the complaint, insofar as we heard it,
5:38
Speaker 3: tended to be the other way, that the FED had
5:40
Speaker 3: not raised interest rate enough in the Biden administration. In
5:45
Speaker 3: his post over the weekend, when he talks about too
5:47
Speaker 3: late Pale, part of the criticism he has is that
5:51
Speaker 3: the FED was too slow to raise interest rates. So
5:52
Speaker 3: of course he's not the only one, but you have
5:54
Speaker 3: to observe he wants lower interest rates when he's in
5:56
Speaker 3: the administration, when he's in the White House, and tends
5:59
Speaker 3: to want higher ones when someone else's Krishna. This isn't
6:03
Speaker 3: primarily a market show, but we've become one when what's
6:07
Speaker 3: going on in the markets potentially affects the US and
6:10
Speaker 3: global economy significantly. Going slightly back to basis, talk us
6:14
Speaker 3: through how these latest attacks on the FED and potential
6:21
Speaker 3: question marks about its independence are being perceived by markets,
6:26
Speaker 3: and how we're seeing that in asset prices.
6:29
Speaker 2: I think we got a pretty good foretaste in market
6:34
Speaker 2: trading on Monday as to what kind of a train
6:38
Speaker 2: wreck we would have if the President actually tried to
6:41
Speaker 2: fire the FED chairman. So, as you know, we saw
6:46
Speaker 2: a general sell America trade, stocks lower, bonds, lower, dollar lower.
6:53
Speaker 2: That reflects the reduced attractiveness of US assets in a
6:58
Speaker 2: world where the central bank might lose independence. The fact
7:01
Speaker 2: that the currencies weakening at a time when the yield
7:05
Speaker 2: the return supposedly risk free a US government securities is
7:09
Speaker 2: going up is also a sign, of course, of investors
7:13
Speaker 2: reallocating capital, at least of the margin, out of the
7:17
Speaker 2: US and into other market places. We saw a steepening
7:22
Speaker 2: of the yield curve. That's the difference between the shorter
7:25
Speaker 2: dated government securities and the return on the longer dated
7:29
Speaker 2: government securities. Again quite standard fare for this kind of shock.
7:34
Speaker 2: I think if we were to see President Trump actually
7:38
Speaker 2: try to make a move on chair power, which is
7:40
Speaker 2: different from musing about this and threatening it, I think
7:44
Speaker 2: you would see all those trades in multiples of what
7:48
Speaker 2: we saw on Monday, but with one additional twist. Up
7:53
Speaker 2: to this point, one of the really striking features of
7:56
Speaker 2: this whole tariff's market saga is that you I've seen
8:00
Speaker 2: clear evidence of a loss of confidence in the economic
8:03
Speaker 2: policy of the US administration, but no loss of confidence
8:07
Speaker 2: in the credibility of the FED. And we can actually
8:10
Speaker 2: observe that because while the real rates and real risk
8:16
Speaker 2: premiere on US government debts gone up, market inflation compensation
8:22
Speaker 2: has not changed.
8:23
Speaker 3: This is allowing for inflation. Yeah.
8:26
Speaker 2: Now, so up to this point you might have thought
8:29
Speaker 2: this is going to be stagflation trades. It has not
8:32
Speaker 2: been up to this point. But if you actually tried
8:36
Speaker 2: to move on FED independence, you would risk shifting towards
8:40
Speaker 2: a stagflation environment and a stagflation trade in markets. Has
8:46
Speaker 2: people lost faith in the central bank.
8:49
Speaker 3: It's worth lingering on that. In effect, you're saying, as
8:51
Speaker 3: far as the market's concerned, there is something worse than
8:55
Speaker 3: unleashing a really damaging global trade war, and that's also
8:59
Speaker 3: prevent your central bank from responding appropriately to the impact
9:03
Speaker 3: of that trade wark.
9:04
Speaker 2: That's exactly right, yes.
9:06
Speaker 3: And that becomes a stagflation trade because you would be
9:09
Speaker 3: looking at the kind of worse combination of a slowing
9:12
Speaker 3: economy but also a FED that's not trying to reduce
9:16
Speaker 3: the long term impact on inflation.
9:18
Speaker 2: Yes. I mean, what we see in markets right up
9:20
Speaker 2: to this point is that the market has confidence that
9:25
Speaker 2: the FED will do whatever turns out to be necessary
9:28
Speaker 2: to prevent this initial very big wave of one time
9:31
Speaker 2: tariff inflation becoming embedded in the ongoing inflation rate, or
9:36
Speaker 2: if you like, the technical version of this is also
9:38
Speaker 2: in inflation expectations. But that's premised on the idea the
9:42
Speaker 2: FED is free to do what it judges is needed.
9:46
Speaker 2: If you lost confidence that the FED was able to
9:48
Speaker 2: make those judgments independently on the merits, then people would
9:53
Speaker 2: start to expect a higher inflation in the future, more
9:57
Speaker 2: inflation risk and as you know, death, when people start
10:01
Speaker 2: to expect more inflation, it's can very often become a
10:04
Speaker 2: self fulfilling prophecy.
10:06
Speaker 3: Kate just to you. I mean Scott Besson, the Treasury Secretary.
10:10
Speaker 3: You know, up until this point his support for the
10:12
Speaker 3: tariffs that the President is unleashed have sort of led
10:15
Speaker 3: some people to question whether he does still have full
10:19
Speaker 3: confidence of the financial markets. But Scott Besant was considered
10:22
Speaker 3: to be someone who was a markets guy. He has
10:26
Speaker 3: certainly said that he continues to have his weekly meetings
10:29
Speaker 3: with Jay Powell and it's very cordial and everything's fine.
10:33
Speaker 3: Do you have a sense of that that Scott Besant
10:36
Speaker 3: is trying to prevent this going beyond just a criticism
10:40
Speaker 3: of j Powell.
10:42
Speaker 4: Yes, I mean I think he is certainly in the
10:44
Speaker 4: camp that has and is continuing to make the argument
10:49
Speaker 4: that it's not worth it, right. I mean, it's worth
10:51
Speaker 4: remembering that the Jay Powell's term as chairman is up
10:54
Speaker 4: in May of next year, so the Trump administration is
10:58
Speaker 4: within a few months is going to starting to explore
11:02
Speaker 4: who would they replace Powell with, regardless of whether he's
11:04
Speaker 4: fired or not, just simply because his term is up,
11:07
Speaker 4: you have to go through the vetting process, the Senate
11:09
Speaker 4: confirmation process, that's going to take some time if you
11:12
Speaker 4: got rid of Powell, if there's not a lengthy, drawn
11:14
Speaker 4: out court battle, which we can assume there would be.
11:17
Speaker 4: This is not like, you know, the next day, put
11:19
Speaker 4: your person in there and they flip the interest rates,
11:21
Speaker 4: which it just doesn't work this way. And so I
11:23
Speaker 4: think that the argument from Besson and perhaps some others
11:25
Speaker 4: that are close to the president is it's not worth
11:28
Speaker 4: setting off the market chaos that Krishna just laid out
11:32
Speaker 4: when you'll have the opportunity to do this in a
11:35
Speaker 4: matter of months.
11:36
Speaker 3: Anyway, school present, i think, has publicly made references to
11:39
Speaker 3: the independence of the FED being a jewel box, and
11:42
Speaker 3: you sort of think, well, maybe that's the sort of
11:44
Speaker 3: veiled way of saying this isn't something you should mess with, Krishna.
11:47
Speaker 3: We do have someone potentially in the wings who is
11:50
Speaker 3: a perfectly credible replacement for j Powell. Kevin Walsh, someone
11:54
Speaker 3: who was also in the running last time, is perceived
11:57
Speaker 3: to be positioning himself as a tr Trump pick to
12:01
Speaker 3: replace j Powell. If Trump were to say, look as
12:03
Speaker 3: long as I replace Jay Powell with someone who markets like,
12:08
Speaker 3: what's the problem.
12:09
Speaker 2: The issue is whether you're setting up the next chair.
12:14
Speaker 2: Let's hypothesize that it's Kevin Walsh. Are you setting him
12:17
Speaker 2: up for success or are you setting him up for failure.
12:20
Speaker 2: If Trump were to appoint Wash or a similarly qualified
12:24
Speaker 2: candidate under regular order when Powell's term is up, I
12:30
Speaker 2: think Wash, or indeed potentially one of several other potential
12:34
Speaker 2: Trump picks, would be well positioned to service fed chair
12:39
Speaker 2: and continue to command the confidence and credibility in the marketplace.
12:44
Speaker 2: The problem is if you fire Powell and put somebody
12:48
Speaker 2: in his place. Now, even if that person is individually credible,
12:52
Speaker 2: for instance, like Kevin Walsh, you set them up to
12:56
Speaker 2: fail because no one would ever believe that they were
12:59
Speaker 2: making decision truly independently of the White House, to quote
13:03
Speaker 2: the words of one commentator, Then the chair put in
13:07
Speaker 2: that context would be seen as Trump's sock puppet, right,
13:12
Speaker 2: and so it would be incredibly difficult for that person
13:16
Speaker 2: to command the confidence of markets. And remember, if that
13:20
Speaker 2: person did try to behave in an independent way that
13:24
Speaker 2: are points crossed the President's preferences, the risk would be
13:29
Speaker 2: that that person too could get fired.
13:31
Speaker 3: Well, and I guess and the only way that you
13:33
Speaker 3: show your independence to the markets is potentially to not
13:36
Speaker 3: cut interest rates. If you're Donald Trump, you're not going
13:40
Speaker 3: to get what you initially wanted when you replace him
13:42
Speaker 3: in the first place.
13:43
Speaker 2: Well, this is just an example step of how self
13:45
Speaker 2: defeating this whole exercise is, because if you're the president
13:50
Speaker 2: and you want the FED to cut rates, the best
13:54
Speaker 2: way to maximize the likelihood that the FED cuts rates
13:57
Speaker 2: and cuts them soon is not to raise any concerns
14:01
Speaker 2: about FED independence. That might also lead to a lot
14:05
Speaker 2: of confidence in inflation expectations and so forth, if the
14:09
Speaker 2: president is able to take a deep breath and step
14:12
Speaker 2: back from this, I actually think Powell is indicating that
14:15
Speaker 2: the FED would in principle be prepared to cut rates
14:19
Speaker 2: once unemployment moves up materially, even in the face of
14:22
Speaker 2: a big one off tariff inflation wave, provided those expectations
14:27
Speaker 2: and underlying inflation remained well behaved.
14:30
Speaker 3: Kate, are we overdoing this in the sense that over
14:32
Speaker 3: the years, maybe not so much recently before Donald Trump,
14:36
Speaker 3: but you know, over the years, it's been pretty common
14:38
Speaker 3: for presidents to complain about their FED chairs, to complain
14:43
Speaker 3: that the FED wasn't cutting rates when they wanted them
14:45
Speaker 3: to cut rates. Is there something different here than just
14:48
Speaker 3: going back to the kind of old fashioned nineteen sixties
14:50
Speaker 3: nineteen seventies of presidents complaining about the FED.
14:53
Speaker 4: Well, I think what is certainly different from the first
14:56
Speaker 4: Trump administration is the fact that you have people who
15:00
Speaker 4: were otherwise viewed as mainstream quote unquote reasonable people who've
15:04
Speaker 4: supported FED independence in the past, kind of you know,
15:07
Speaker 4: not really coming to the Fed's defense. For example, you
15:10
Speaker 4: had Kevin Hassett the White House, a National Economic Council director,
15:14
Speaker 4: saying yes, the President is exploring this. I think this whole,
15:17
Speaker 4: the whole legal question that's now been introduced around whether
15:20
Speaker 4: the White House has the authority to fire heads of
15:23
Speaker 4: independent agencies has introduced a new element here. I think
15:27
Speaker 4: that that really raises the stakes. Whereas previously, I think
15:30
Speaker 4: that central bankers felt that they had that protection and
15:33
Speaker 4: it made it easier, certainly for them to ignore the noise.
15:36
Speaker 4: And now, of course j. Powell and the FED is
15:38
Speaker 4: going to say, they'll continue to ignore the noise. You know,
15:40
Speaker 4: their job number one is to do what's best for
15:43
Speaker 4: the economy, and they'll keep doing it. But it just
15:45
Speaker 4: becomes that much harder to tune it out, and I
15:47
Speaker 4: think it becomes kind of as Krishna was alluding to,
15:49
Speaker 4: it's difficult to message around. Okay, maybe they do want
15:52
Speaker 4: to cut rates, but how will it look now if
15:53
Speaker 4: they've done it after Trump has been rating them and
15:55
Speaker 4: insisting that they do it. It adds another element.
15:59
Speaker 3: Quite apart from whether or not it was a safe
16:01
Speaker 3: haven or the global reserve currency or anything else, or
16:04
Speaker 3: the global superpower for that matter, It's had years and
16:07
Speaker 3: years of hoovering up the line's share of global investment flows.
16:10
Speaker 3: You know, investors have found year after year that the
16:13
Speaker 3: US was beating other markets and was finding reluctantly maybe
16:16
Speaker 3: that they had to keep putting their money in a
16:18
Speaker 3: market which all the normal metrics said was overvalued. So
16:22
Speaker 3: is part of this it's just an excuse. We're sort
16:24
Speaker 3: of blaming Donald Trump, but actually its excuse for a
16:27
Speaker 3: rebalancing in global investment that many people have expected to
16:32
Speaker 3: see long before now.
16:34
Speaker 2: I think you raised some very important points. I would
16:36
Speaker 2: frame it a little differently. The way I think about
16:39
Speaker 2: it is that initial conditions were such that the entire
16:43
Speaker 2: world was essentially over allocated to the US. After years
16:48
Speaker 2: in which the US was the only game in town
16:51
Speaker 2: for asset markets, and so in those circumstances, it doesn't
16:56
Speaker 2: take a very large shift in global preferences for people
17:02
Speaker 2: to want to move capital out of the US and
17:05
Speaker 2: into other markets, into other currencies, into other economies. But
17:10
Speaker 2: the way I would think about that is that you
17:13
Speaker 2: have to be additionally careful then if you are the
17:16
Speaker 2: US administration, because you are starting from a position where
17:21
Speaker 2: a lot of people don't really have a lot of
17:23
Speaker 2: reason to add to their positions in the US. And
17:27
Speaker 2: of course if you're running a fiscal deficit in particular,
17:30
Speaker 2: you do need to continue to attract global capital into
17:34
Speaker 2: the US to help fund the government deficit. More broadly,
17:38
Speaker 2: it's the avowed intention of the Trump administration to attract
17:43
Speaker 2: capital to come in to invest in the private sector
17:46
Speaker 2: in the US as well. So I think the starting
17:51
Speaker 2: point of the overallocation to the US is part of
17:54
Speaker 2: the story here. But it's very clear that what's driving
17:57
Speaker 2: this reallocation is a collapse of confidence in US growth
18:03
Speaker 2: exceptionalism on the one hand, and some meaningful at the
18:09
Speaker 2: margin erosion of confidence in US assets from a safe
18:13
Speaker 2: haven perspective, and.
18:14
Speaker 3: Just following on from that, because you also mentioned it
18:16
Speaker 3: in a note that you've put out on that if
18:19
Speaker 3: there was an actual attempt to fire J Powell, even
18:21
Speaker 3: if it ended up going through the courts, and we've
18:23
Speaker 3: established on this show before that there would be big
18:25
Speaker 3: question marks about whether it would succeed if he actively
18:29
Speaker 3: attempted to and we saw that kind of what you
18:33
Speaker 3: call the stagflation trade playing out in US markets. You
18:39
Speaker 3: have said that would also increase the chance of the
18:43
Speaker 3: tariff crisis morphing into a more Liz Trust style fiscal crisis.
18:48
Speaker 3: So just talk us through that. How does it take
18:50
Speaker 3: us a bit closer to that even to have more
18:53
Speaker 3: questioning of FED independence.
18:55
Speaker 2: So I think the starting point for all of this
18:58
Speaker 2: is to understand as I know everyone on this podcast does,
19:01
Speaker 2: but members of the administration appear not to understand, which
19:05
Speaker 2: is that the trades more strictly current account deficit is
19:10
Speaker 2: the capital surplus. They are one and the same thing.
19:12
Speaker 2: They're just two ways of describing the same thing.
19:15
Speaker 3: If you're buying more from other countries than other countries
19:18
Speaker 3: are buying from you, you need to borrow the money
19:20
Speaker 3: to pay for those goods from someone.
19:23
Speaker 2: But the point, though truly I think that I'm trying
19:25
Speaker 2: to make here is that you can't conceptually think of
19:29
Speaker 2: the external account, the trade balance, completely independent from the
19:34
Speaker 2: capital account and the flows that are coming into the US,
19:37
Speaker 2: including to finance the US government deficits. That's the sort
19:41
Speaker 2: of conceptual point that we start from. The risk in
19:45
Speaker 2: the current conjecture, the serious risk, that sort of more
19:49
Speaker 2: than tail risk that's certainly not highly probable at this point,
19:53
Speaker 2: is that the tariff crisis ultimately morphs into more of
19:56
Speaker 2: a Liz Trust style fiscal crisis. And the path by
20:01
Speaker 2: which that would happen is a global buyer's strike in
20:05
Speaker 2: the treasury market at a time when the already very
20:08
Speaker 2: large US structural deficit blew out further on an economic downturn,
20:13
Speaker 2: a lack of serious fiscal consolidation in the legislation before Congress,
20:17
Speaker 2: and the possibility that the administration might try to add
20:20
Speaker 2: more unfunded tax cuts to try to buy its way
20:23
Speaker 2: out of a recession. Now, to be very clear, the
20:27
Speaker 2: US is not the UK. The US is the most
20:30
Speaker 2: core market in the world, the most core economy in
20:33
Speaker 2: the world, the most core bond market, the most core
20:36
Speaker 2: currency market. The investments in the US are far stickier
20:41
Speaker 2: than in any discretionary market like the UK. So we
20:45
Speaker 2: must be very careful not to jump quickly to the
20:48
Speaker 2: idea that the US will behave like the UK. But
20:52
Speaker 2: even now without an actual assault on FED independence, merely
20:57
Speaker 2: it threats to this. Given what's happening in terms of
21:01
Speaker 2: the US withdrawal from international economic engagement, from trade, a
21:05
Speaker 2: large trade integration, and so forth, there is a non
21:08
Speaker 2: trivial risk that this could morph from a tariff crisis
21:13
Speaker 2: to a fiscal crisis. If you also layer it on
21:17
Speaker 2: top of that an effort to fire the central bank
21:20
Speaker 2: chief and to bring the central bank under government control.
21:24
Speaker 2: I think the risk of that global bias strike that
21:27
Speaker 2: would take you from a tariff crisis to a sovereign
21:29
Speaker 2: debt crisis would go up a lot kate.
21:33
Speaker 3: The US is not the UK for sure. Even if
21:36
Speaker 3: we were halfway, there is a question mark about how
21:39
Speaker 3: the administration would respond. I mean, the classic way to
21:42
Speaker 3: respond to that kind of bias strike, or even a
21:45
Speaker 3: hint of a bias strike, would be to reassure markets
21:49
Speaker 3: that the authorities are willing to raise interest rates to
21:53
Speaker 3: support US assets, to support the currency. Combined with potentially
21:58
Speaker 3: fiscal tightening. How likely do you think that would be
22:02
Speaker 3: in this administration?
22:04
Speaker 4: Well, I might have said this last time, staff, I
22:07
Speaker 4: sound like a broken record in the newsroom anyway.
22:09
Speaker 3: But we quite rightly started talking about the bomb market
22:12
Speaker 3: at the beginning of the series. I suspect we will
22:13
Speaker 3: keep getting back to it. But yeah, that's right.
22:15
Speaker 4: No, But I think beyond doge, if you want to
22:18
Speaker 4: consider that a serious effort to tighten belt, so to speak,
22:23
Speaker 4: I don't think that there's really much of a real
22:25
Speaker 4: effort by the administration to make the deep kinds of
22:29
Speaker 4: cuts to spending that you would actually need to do
22:32
Speaker 4: to restore fiscal sustainability. Right at the end of the day,
22:36
Speaker 4: what Congress has typically done is they've come together to
22:39
Speaker 4: make deals. Whether that's to enact spending, you know, and
22:43
Speaker 4: continue funding the government, or to raise the debt ceiling.
22:45
Speaker 4: They come together and they agree to spend more money.
22:48
Speaker 4: And I think even right now that package that's under consideration,
22:51
Speaker 4: there are some conversations about some Republicans saying that they
22:55
Speaker 4: want to pay for all of that tax cut, they
22:57
Speaker 4: want to offset it, they don't want to add to deficits.
22:59
Speaker 4: But I think I think just looking at the record,
23:02
Speaker 4: it's really hard to believe that there'd be any serious
23:05
Speaker 4: effort to do that. So it's not a good situation
23:09
Speaker 4: for sure, if that were to happen.
23:10
Speaker 3: To put it mildly, kay, if the US seems an
23:14
Speaker 3: unreliable place to park your money. There is a cost
23:18
Speaker 3: to the world potentially of just not having a global
23:22
Speaker 3: reserve currency that's kind of as attractive as what we
23:25
Speaker 3: had before. It's not that it's going to be replaced,
23:27
Speaker 3: it's just sort of we've lost that as a sort
23:30
Speaker 3: of global public good, having a single reserve asset. I
23:33
Speaker 3: guess the equivalent for US voters and US households is
23:37
Speaker 3: that they're just their interest rates will just be that
23:40
Speaker 3: much higher. I mean, they're not going to move into
23:42
Speaker 3: some other currency, they're not going to change what they
23:44
Speaker 3: invest in, but there could be just a sort of
23:47
Speaker 3: significant premium on, for example, mortgage rates that will stick
23:52
Speaker 3: around for a long time.
23:54
Speaker 4: I think that's right. I think that if you think
23:56
Speaker 4: about it from the Fed's perspective and what some of
23:58
Speaker 4: them have said, they prefer that the American people don't
24:01
Speaker 4: really know that much about what they do and who
24:02
Speaker 4: they are, right if they're kind of below the radar.
24:04
Speaker 4: That's a good thing, and as we saw in the
24:07
Speaker 4: last few years, with inflation getting as high as it was,
24:09
Speaker 4: the FED has become very unpopular again. I think if
24:13
Speaker 4: interest rates were to be just in some higher place
24:16
Speaker 4: because of this effort to undermine the Central Bank's credibility,
24:19
Speaker 4: that would obviously have a huge impact on American households.
24:23
Speaker 4: And it's hard to see how that is quickly reversed
24:29
Speaker 4: right by perhaps the President interest installing someone new, even
24:32
Speaker 4: if that person is credible and highly regarded. I think
24:35
Speaker 4: that it's not just a financial market issue that we're
24:38
Speaker 4: talking about. It's a real problem that will affect everyday
24:41
Speaker 4: Americans for quite some time.
24:43
Speaker 3: We'll give the last word to Krishna. You've obviously been
24:46
Speaker 3: on different sides of this as a journalist, as an official,
24:50
Speaker 3: and now as a very expert earn list for investors.
24:55
Speaker 3: You're thinking about how to rate the probability of the
24:59
Speaker 3: kind of exp dream scenario that you've laid out as
25:02
Speaker 3: you try and advise investors. How are you thinking about
25:05
Speaker 3: that in your gut? Is this something that will be
25:07
Speaker 3: within the range of possible impacts on bouts of selling
25:11
Speaker 3: of US assets that we've had in some previous eras
25:15
Speaker 3: around two thousand and eight, for example, or do you
25:18
Speaker 3: think you're seeing something more fundamental.
25:20
Speaker 2: At this point in time. I'd sort of take the
25:22
Speaker 2: middle position, which is, this is absolutely not business as usual.
25:28
Speaker 2: Right to see upward pressure on US government yields real
25:32
Speaker 2: yields when the economy outlook is somewhere between near recession
25:36
Speaker 2: or recession, it's extremely abnormal. To see the yields go
25:40
Speaker 2: up and the dollar go down on the same day,
25:43
Speaker 2: which has happened repeatedly in the last few weeks, is
25:47
Speaker 2: extremely abnormal. This is more like emerging market type behavior.
25:52
Speaker 2: On the other side, I think it is way too
25:56
Speaker 2: premature to declare the end of the dollar based global
26:00
Speaker 2: regime and to proclaim a shift to some new global
26:05
Speaker 2: international economic order. Maybe we end up there, but we're
26:09
Speaker 2: certainly not there today and it's certainly not the dominant
26:12
Speaker 2: probability going forward. So at the moment, I think we're
26:15
Speaker 2: in the sort of an intermediate position where we are
26:19
Speaker 2: seeing things that are extremely unusual and the very significant
26:24
Speaker 2: in terms of reallocation away from the US. The imposition
26:28
Speaker 2: of some risk premium on US assets, at least relative
26:32
Speaker 2: to the truly riskless state that US assets previously exhibited,
26:39
Speaker 2: and I think that is partly associated with some erosion
26:43
Speaker 2: at the margin of the unique attractiveness of holding US
26:48
Speaker 2: assets in a dollar based world, which is itself in
26:52
Speaker 2: part related to the current policy choices of the administration
26:55
Speaker 2: and partly to the possibility that some bigger regime ship
27:00
Speaker 2: could lie ahead. So this is serious business cities not normal.
27:04
Speaker 2: We are not yet at the point of a regime shift.
27:09
Speaker 3: Christa Gurha, Kate Davidson, thank you so much, Thanks Steph,
27:13
Speaker 3: Thank you, step Thanks for listening to Trumpnomics from Bloomberg.
27:20
Speaker 3: It was hosted by me, Stephanie Flanders, and I was
27:22
Speaker 3: joined by evercore A Size, Krishna Guha and Bloomberg's Kate Davidson.
27:27
Speaker 3: Trumponomics is produced by Summersadi and Moses and with help
27:31
Speaker 3: from Chris Martlu and Amy Keen, with special thanks this
27:34
Speaker 3: week to Rachel Lewis Chrisky. Sound design is by Blake
27:38
Speaker 3: Maples and Brendan Francis. Newden is our executive producer. To
27:42
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Speaker 3: and review it wherever you listen to podcasts.