00:00:02 Speaker 1: Bloomberg Audio Studios. 00:00:04 Speaker 2: Podcasts Radio News. 00:00:11 Speaker 3: This is the Bloomberg Surveillance Podcast. I'm Jonathan Farrow, along with Lisa Abramowitz and Anne-Marie Hordern. Join us each day for insight from the best in markets, economics and geopolitics. From our global headquarters in New York City, we are live on Bloomberg Television weekday mornings from 6 to 9 a.m. Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen. And as always, on the Bloomberg Terminal and the Bloomberg Business App. Under surveillance this morning, the pressure on the White House backing off plans for an export ban. 00:00:41 Speaker 2: Mr. 00:00:41 Speaker 3: President, have you decided to ban diesel exports? 00:00:44 Speaker 4: I'm thinking about it. I speak to Chris and Doug about it a lot. They sort of think it'll help diesel, but it might raise the price of other things. And I think we're in a good place because oil prices are going to start to come down. Tremendous oil is coming out of the hormones straight now. We have total control. 00:01:02 Speaker 3: So here's the latest this morning. Diesel holding near all-time highs as President Donald Trump signals he might be calling on the idea of an export ban, acknowledging concerns the move could drive up gasoline prices. Libby Cantrell of PIMCO with this to say on The Outlook, writing President Trump. is mostly constrained in terms of what he can do on affordability, with the bigger, more decisive actions only occurring if Congress acts. Libby joins us now for more. Libby, good morning. Good morning. Is the diesel export ban proposal dead? Is that finished with? 00:01:28 Speaker 5: I think for all intents and purposes, there are a lot of folks who've been close to the White House, who've been in the Oval Office, arguing that there are these unintended consequences, as Tyler just was talking about. We think that maybe you could see some import restrictions on diesel. So maybe that gets you sort of halfway there, sort of helping some of these farm states, obviously, where there are these Senate races. But it seems like the full-on export ban is probably at least on ice for now. 00:01:56 Speaker 6: Do you think that's going to hurt the candidates in Iowa? 00:02:00 Speaker 5: Well, you know, I think this is the big issue. I think the broader kind of issue here is, is this too little too late, right? I mean, all of these actions, I mean, lots of folks have already started actually voting. So does this actually move the needle, you know, at this 11th hour? I think that, you know, obviously the Iowa Senate race is one of the most contested where basically polls are showing that it's effectively a toss-up. Could these things sort of matter at the margin? You know, maybe. But voters, as we've talked about, are really upset, right? They're really upset about gas and groceries, healthcare and housing, AI, data centers. And I think that at this point, any of these things are going to be, I think, viewed in the voters' eyes as just band-aids and not really moving the needle. 00:02:46 Speaker 2: As well as 7% mortgages. 00:02:47 Speaker 7: Yeah. 00:02:48 Speaker 6: This is a president that was going to have potentially a national crisis on housing, try to loosen the housing market. Do they have any means to address this? 00:02:57 Speaker 5: Yeah, so one of the big tools, and we've talked about this as well, is that they can use is, of course, they can direct Fannie and Freddie, which are still part of the government, still in conservatorship, to buy more mortgages. President Trump had announced a big, splashy announcement back in January before the Iran conflict had started that Fannie and Freddie would be buying $ 200 billion from From what we have seen, they still have a lot of that to go. So they have done some buying. They had sort of retreated from that. We think they are still, they're now active in the market once again. I think our expectation is because this is a unilateral lever, Congress does not have jurisdiction over here. This is something that the White House can do by themselves, that they will likely do this. And of course, you know, pressure on the mortgage market is something that we all, people all see, you know, not necessarily are they in the mortgage market, not necessarily. Lots of folks have lower mortgages. 00:03:51 Speaker 2: She looks at Lisa. 00:03:52 Speaker 5: I'm sorry, Lisa. I am unfortunately not one of those people. 00:03:56 Speaker 3: Libby, it's a flex. You don't have to apologize. She feels great about it. 00:04:01 Speaker 5: But it's all part of this zeitgeist, right? People see higher gas prices. They see higher interest rates. They see, of course, higher mortgage rates. And this all just goes into this broader narrative and this sentiment that is just incredibly negative if you're a Republican facing. 00:04:16 Speaker 2: Reelection in November. 00:04:17 Speaker 1: Are there going to be more $ 500 checks sent out? 00:04:19 Speaker 5: Well, that's interesting because, of course, you know, he cannot do these sort of $ 5, 000 dividends, these $ 2, 000 kind of Trump tariff refunds or what have you. But he can find some tools where, you know, Congress has already appropriated the money, where there have been maybe some mistakes made to try to, you know, again, kind of grease the wheels, if you will. I think just the broader question is it's a little bit too little too late. And at this point, I mean, you know, we're just basically 30 days from the election. I mean, voter sentiment is pretty calcified. 00:04:55 Speaker 1: Do you think that there is going to be a more concerted effort to remove Jerome Powell as sort of the fall guy at the Federal Reserve or more of an effort to sort of reshape the Fed board to try to lower costs, frankly, and financing costs for the United States? 00:05:09 Speaker 5: Well, of course, I mean, it's the FOMC, and this is something that we always remind our clients of, that while the chairman is important, they're not omnipotent, right? They're only one vote out of 12. And what we just saw with this latest Fed rate decision was that it was a unanimous decision. So I think there's a broader question of how much does, you know, replacing one governor... over another really moved the needle. Most importantly, though, from my perspective, and this will be an implication of the midterms, is if the Senate goes into Democratic hands, or even if Republicans lose a few seats and have a more narrow majority, it will be very difficult for this president to get anybody confirmed, anybody confirmed, who's at all controversial, particularly to the Fed. And remember, the president nominates folks, the Senate confirms you need 50 votes in the Senate. Right now, of course, Republicans have a 53-47 margin. But if that declines to 50-50, or then, of course, if Democrats take back the Senate, you're going to see all of those potential controversial nominees, you know, basically being put on ice. So it's something that we're not really worried about. We think there are a lot of guardrails happening. to protect the independence of the Fed within the institution, plus the fact that you have this check and balance. And I think people sort of underestimate this check really does work. There's a lot of back-channeling between the White House and the Senate about who is actually confirmable. And I think we've actually seen this work over the last 18 months or so as well. 00:06:34 Speaker 3: Stay with us. More Bloomberg surveillance coming up after this. Let's talk about the Federal Reserve sounding the alarm on inflation following a unanimous decision to hike interest rates in the last month. Diesel prices sitting near record highs, raising expectations for higher costs in the face of a strong U.S. economy. Minneapolis Fed President Neil Kashkari speaking at an event here in New York. saying, quote, talk to companies. Shipping costs are going up all around the world, all around the economy, both because of fuel prices and labor availability. Fed President Kashkari joins us around the table for more. Neil, good morning. 00:07:13 Speaker 2: Good to see you. 00:07:14 Speaker 8: Good morning. Good to see you. 00:07:15 Speaker 3: This economy is looking strong. 00:07:16 Speaker 2: It is. 00:07:16 Speaker 3: Would you say it's strengthening? That's a different kind of assessment. 00:07:19 Speaker 8: Yeah, I think the broad economy is strong. There are obviously pockets of weakness. Housing is weak, as you all have discussed many times. And anything related to AI is growing. Overall, the economy is growing. And it keeps surprising me how resilient it has been in the face of tariffs and the conflict in Iran. 00:07:36 Speaker 3: And in the face of high yields as well, which raises the question whether your policy effort is going to work, is going to be effective. Do you think it will be and why? What's the channel for that effectiveness? 00:07:46 Speaker 8: It will be effective. I mean, we will do what we need to do to get inflation back down to our target. Now, the question is ultimately how high. Of course, what you're asking is how high do rates have to go? I don't know the answer to that. You know, you think about you were both just talking about massive demand for investment capital I think about that in the context of what does it do to the neutral rate? The neutral rate is set by the balance of savings and investment in the economy. And if there's massive demand for investment capital, that has to come from savings. Ultimately, that is a higher clearing price for that capital. And that means rates go higher. 00:08:18 Speaker 7: One of the questions that arises out of that, though, is what time frame are you looking at for neutral? Because we're having this enormous spend on AI, which is boosting the neutral rate. Everyone kind of agrees. But how long does that last? And can you get yourself offside by moving too much? 00:08:36 Speaker 8: Yeah, it's a great question. So the SEP has this long run dot, which is a theoretical dot, theoretical interest rate that balances all of this out when all the shocks have passed the economy. It's like this nirvana state that we'll never actually experience sometime in the future. I also have a concept of a near-term neutral, which is what you're getting at, Mike. Then the question is, how long does this AI boom continue? And are the returns to this investment, do they materialize the way that the investors expect? If AI proves to be as productive as people hope it will be, then this investment cycle could go on for a long time. If it ends up being not as productive as the investors are hoping, then maybe it won't go on for as long. So I just don't know the answer to that right now. 00:09:22 Speaker 7: Now, for a long time, the Fed was driving what the yield curve looked like because they were buying bonds. 00:09:28 Speaker 2: You're not doing that anymore. 00:09:30 Speaker 7: Are you getting the kind of cleaner signal that Kevin Warr says he wants in terms of what the market thinks prices should be? 00:09:38 Speaker 4: Well, I think. 00:09:39 Speaker 8: Place where I'm focusing right now, the long end is obviously getting a lot of attention. There's a big gap between the two-year and the short rates. So, for example, my staff and I computed an implied two-year yield from the SEP dots. If you take the SEP median, you can calculate an implied two-year yield. This is the biggest gap between the actual two-year yield. and the implied two-year yield from the SEP. The actual two-year is around 488 or 490. My implied two-year yield from the SEP is around a little above four. That's a very, very large gap. There have been other times where there have been gaps before. So I actually think markets are pretty good when they want to send a signal they will send a signal, regardless of what the Fed is telling them. If you go back in time, post the financial crisis, the Fed, through the dot plot, kept forecasting that they were going to raise rates. And the markets said, no, you're wrong. It turns out the markets were more right than the Fed was. So, you know, there's a little bit of looking in the mirror. The markets are looking at us. We're looking at the markets. But I also have a lot of confidence when markets have a view, they're not shy about expressing those views. 00:10:44 Speaker 7: What is your view of what the market is telling you now? And I ask because I was speaking with one of your colleagues yesterday who told me that they don't think that it's inflation in the sense that people don't trust the Fed anymore, that your move last month basically gave people confidence that the Fed is going to fight inflation. So it's a combination of a lot of other things. 00:11:06 Speaker 8: I think that's right. But there is this magical thing we call the term premium, which is the residual of all the stuff we can't really explain with any kind of confidence. One of those elements might be this thing called an inflation risk premium. So markets say, yes, we believe the Fed. You're going to keep inflation at 2% over the next 10 years. But we want a little extra compensation just in case we're wrong. All right, that's like, if it's an inflation risk premium, that's like the cousin of inflation expectations. That doesn't give me much comfort if that's why investors are seeking, because there's a term premium embedded in the nominal curve, but there's a term premium embedded in the real curve. And to the extent that it's investors wanting compensation for potential inflation mistakes in the future, That's something that we need to pay attention to. 00:11:53 Speaker 1: There's been a lot of concerns about the efficacy of Fed policy given how much debt is outstanding and given that a lot of the areas that are driving inflation are kind of less sensitive to rates. I'm talking about AI spending. Do you, not like, but feel some comfort when something like Aura is taken off the market in terms of an IPO and the capital markets activity starts to slow down because of concerns that maybe we're mispricing rates? 00:12:18 Speaker 8: I think, I mean, I do look at capital markets activity as one imperfect signal of the stance of monetary policy. If deals are getting done, you know, record, they're oversubscribed and oversubscribed and markets are wide open, that makes me question, is policy as tight as I previously thought it was? And so I'm not celebrating anybody's IPO being shelved, but I think to the extent that there are some tentativeness creeping into broad financial markets, that indicates, okay, this rate environment may be having some effect. 00:12:47 Speaker 1: And ultimately, we're seeing it have effect. I mean, we're seeing that in terms of market performance of the more consumer, the more rate-sensitive sides of the markets. Is there sort of one channel left that the Fed has, the wealth channel, the idea that markets kind of can't be at this level and engendering that kind of spending among the wealthiest of individuals to bring inflation down, that that's sort of the tool ultimately the Fed really has? 00:13:09 Speaker 3: That is a tool. 00:13:10 Speaker 8: But I think on the margin, when yields go up, so yields have gone up for a lot of reasons. You all have been discussing it. Part of it is Fed policy. 00:13:18 Speaker 2: Part of it is. 00:13:18 Speaker 8: Credibility of the Fed. Part of it is the growth environment. That all does price into even data centers. How are they able to fund themselves? At what rates? How many more data centers are going to get built? How much are they going to invest? All of this stuff on the margin does have an effect on on these investment decisions that are taking place. 00:13:35 Speaker 3: Many people have come on this program and talked about the rate insensitivity of that data center build-out. And they've suggested that if you want to go after that, you'll have to hike rates even more. And in the meantime, you'll just keep beating up the parts of the economy that are already beaten up. I imagine you don't see it the same way. Could you articulate how you see it? 00:13:52 Speaker 8: No, I mean, I do think that housing market's under a lot of pressure, and anything adjacent to housing is under a lot of pressure. There's no question about that. But let me step back and say, let's first ask, why are mortgage rates where they are? In a market economy, capital gets reallocated to its highest return. So if a trillion dollars is going to go into data center related investment, that capital comes from somewhere. The market is taking it from housing and reallocating it to data centers. The mechanism is higher mortgage rates. So that, first of all, I just want to say that's not only Fed policy of why mortgage rates are where they are. 00:14:25 Speaker 2: But you're right. 00:14:26 Speaker 8: If we continue raising rates, and it's not a forecast, but if we continue raising rates, it will put different pressure on different sectors of the economy. And the lower return sectors of investment will feel it most acutely. 00:14:38 Speaker 3: But that's the tool that we have. What's the source of inflation right now? And I think that's part of this conversation. And if the tool that you have goes after the part of the economy that's not generating inflation right now, and fails to go after the part of the economy that arguably is, the tool that you have might not be effective. 00:14:55 Speaker 8: Well, I wouldn't say that one is creating inflation and one is not. I think that there are different sectors of the economy that are all contributing. Consumer spending is up. I mean, consumer spending is strong across the economy. I've heard bank CEOs say that it's not just their wealthy customers who are spending, it's their lower-income customers who are doing well and who are spending. The unemployment rate is 4.1%, which is good. Layoffs are low. Unemployment claims are low. The labor market broadly is healthy. So overall, it's not just an AI economy. Overall, it is a robust economy that's proven to be quite resilient. And I think monetary policy can have an imprint on that. 00:15:31 Speaker 1: You talked about bond yields and why they are as high as they are. And you mentioned a whole host of reasons, one of them being Fed credibility. What do you think the Fed needs to do to regain Fed credibility? Or do you think that ultimately this is coming from the outside with calls for Jerome Powell to step down and other potential attacks coming from the White House? 00:15:51 Speaker 8: I think the best thing we can do is what we've been doing, which is focusing on the data, focusing on the analysis, make our best call that we can, and explain the data that we're looking at and what's leading us to those conclusions. That's the best thing that we can do. 00:16:04 Speaker 7: I was in the Midwest this week and basically hearing from business people that diesel, diesel, diesel is their concern because that's spreading in terms of inflation. And also they're worried about the level of interest rates because right now they're starting to invest again. What are you hearing in your district about those things? What's credit allocation like in the northern part of the country? 00:16:30 Speaker 8: I hear a lot from, we have a lot of farmers and a lot of manufacturing and diesel is certainly top of mind. Also availability of truck drivers to drive those loads. So that's top of mind for folks. I don't hear as much pushback on interest rate. I hear from people who want to buy homes. and people in housing-related sectors who are frustrated by 7.5% mortgages. But in the business community, I'm not hearing as much about interest rates. I am still hearing about inflation broadly. I'm hearing people say, my gosh, I can't keep up. A small businessman told me over the weekend how he just lost his business because he couldn't keep up with inflation. He basically came to me and said, when are you guys going to get inflation back down? And he was quite distressed by the fact that he spent seven years building a business And in his view, inflation just made it untenable for him. And so I hear more about inflation broadly than I do about interest rates specifically, other than in the housing sector. 00:17:23 Speaker 6: But if you hike interest rates, you can't get more diesel flowing and you can't get more gasoline flowing. 00:17:29 Speaker 3: So what's the impact? 00:17:31 Speaker 8: No, I hear you, but this goes back to the fundamental question of if it's a one-time supply shock, should monetary policy respond to it? And my view on that has evolved. If it's truly a one-time supply shock, fine. If it's five years of a sequence of one-time supply shocks, at the end of the day, it's the Fed's job. to get inflation back down. I did this exercise a few months ago where I had different AI tools go back and read all the transcripts from the 1970s. And I said, go back and read it, summarize all of the arguments for raising rates for not. The diagnosis in the 1970s was not that different. They said, oh my gosh, it's an oil supply shock. Monetary policy can't do anything about that. We shouldn't respond. I mean, there were many echoes of the same arguments that we're having today. Now, there were some differences. They did see evidence of a wage price spiral, which is clearly not happening today. But, you know, five years into this, at some point, you have to say, hey, it's the Fed's job to get inflation back down, regardless of what the causes are. 00:18:25 Speaker 3: Let's finish on pain. Your friend and colleague, Chicago Fed President Austin Gorsby, talked about this not being painless. It raised questions about the potential for unemployment climbing. Do you think that is necessary to get inflation back to target? 00:18:37 Speaker 8: I don't think it's necessary because the labor market is not the primary source of inflation today. So I don't think it's necessary, but I also don't want to rule it out. We have a dual mandate. One side of our mandate looks quite good right now. One side of our mandate's been missing for five plus years. 00:18:52 Speaker 3: Can we finish on what it's like on the Fed board at the moment, just in terms of the FOMC? 00:18:55 Speaker 8: Sure. 00:18:56 Speaker 3: Can you take us inside? What's the vibe like? You know, the way people describe it, it's almost like Governor Powell and Governor Barr might be in a corner sort of sniggering as Chair Walsh comes on board and tries to make changes. Can you describe what it has been like? under new leadership? 00:19:07 Speaker 8: Yeah, it's been remarkably consistent. I mean, Kevin Warsh is a very experienced person. He spent five or six years at the board before. He leads the same kind of meeting. We have the same go-arounds where people talk about the economy, talk about policy. Austin Goolsbee sits next to me. We're usually making jokes at each other's expense a little bit, which will come out years later. In the transcripts? In the transcripts. But everybody's very professional. Everybody takes it very seriously. It's what you would hope and expect it to be. 00:19:38 Speaker 3: Stay with us. More Bloomberg surveillance coming up after this. So here's the latest this morning. The White House continuing a push to reshape global trade. Unresolved issues remaining with top economic partners, including Canada, the European Union and China. 00:20:01 Speaker 8: U.S. 00:20:01 Speaker 3: Trade Representative Jameson Greer hosting G20 ministers for another round of talks in Wisconsin and joins us now for more. Ambassador, it's good to see you, sir. It's always good to catch up. There is a phrase that's dominated talks like these for a long time. It's dumping. And we often think about steel and overcapacity, overproduction from certain countries, including the likes of China. Ambassador, could you detail where the U.S. effort is right now on that? 00:20:26 Speaker 9: Yeah, thanks, and good to see you all this morning. We're covering several topics. 00:20:30 Speaker 2: The U.S. 00:20:31 Speaker 9: This year is chairing the G20, and so for trade, we came to Milwaukee. Sometimes you go to a beach town or a resort town, but we wanted to come somewhere that has a history of manufacturing because of the dumping and subsidized production and unfair trading practices overseas. So one of our main topics is, in fact, structural excess capacity and production. And we're having a pretty vigorous conversation because when you look at the G20s, the 20 largest economies in the world, some of these countries really are victims of excess capacity in production and have massive trade deficits, have lost manufacturing. And then a lot of the other countries, China, Vietnam's not here, but China and some others in Asia, they're actually the proponents of excess capacity. And that's a challenge. And so it's been interesting to have these conversations. And as you might imagine, some countries are much more apt to fight against excess capacity and others are much more apt to say, well, we're just trying to produce to demand. 00:21:26 Speaker 6: Well, when it comes to, you know, a partner like the European Union, where do they stand with you? Because right now they have historically low steel production. Their exports have fallen and they are absolutely being hit by China's overcapacity. 00:21:42 Speaker 9: On the one hand, we have an agreement that we concluded last summer with the European Union, the term barrier agreement. And the Europeans, they've executed on an important part of that. They've reduced all their tariffs towards U.S. industrial exports. They've given us duty-free quotas. for important ag products. So our trade deficit with the EU has really cut down over the past year. You're talking about this is one of the economies that has been hit by excess capacity in production in other countries, but at the same time, they have not taken sufficient measures to manage this. Whether they have empty factories over there, Because of other countries or because of their own policy decisions, all I know is it affects us. 00:22:24 Speaker 2: If they have empty factories, it. 00:22:26 Speaker 9: Reduces an incentive to inject more investment into the global system. 00:22:29 Speaker 2: There's a finite amount of demand. 00:22:31 Speaker 9: And as long as Europe is sluggish, whether it's because of their own policy choices, which makes up part of it, or because they're suffering from a flood of Chinese imports, that's another problem. 00:22:42 Speaker 2: But what they need is to act. And if they don't act, we will. 00:22:45 Speaker 6: Has the diesel export ban come up with these counterparts that you're meeting with in Milwaukee? 00:22:51 Speaker 9: It comes up on a bilateral basis, so it's not a topic in the plenary sessions, but we have a handful of countries who have talked about the diesel issue. We know the prices on diesel are high, and I heard President Kashkari talking about it a little bit as, is this a one-time spike or something longer? 00:23:11 Speaker 2: Our sense is it's a one-time spike. 00:23:13 Speaker 9: Now, remember, though, the Europeans, they're sitting on reserves of diesel, and our sense would be they should probably release some of these if they're feeling like they're having a spike in Europe. The price is higher in Europe than it is in the U.S. 00:23:24 Speaker 6: Well, right, and there's a Reuters report that U.S. officials have told Germany, France they need to do this. 00:23:29 Speaker 3: Have you discussed that. 00:23:30 Speaker 2: With your counterpart? Yes, I have. 00:23:34 Speaker 4: I have. 00:23:34 Speaker 9: I spoke with my French counterpart yesterday. Very good conversation. Neither he nor I are the energy minister, but we are trade ministers. And so I let him know that this is an idea that we've had in the U.S. We'd love to have a collaborative response to this. That's what we'd like to see happen. And I'll meet with my European Union officials and counterparts today, and I'll carry the same message. 00:23:56 Speaker 6: You also, of course, we could just finish on this. The Canadian minister of international trade I know you'll be meeting with What's the status of the relationship? Are we moving back to potentially signing an agreement? 00:24:07 Speaker 9: Well, the Canadian minister who's here, Manny Sidhu, he manages what we call. 00:24:12 Speaker 2: Their plurilateral or multilateral trade. 00:24:15 Speaker 9: My direct counterpart for U.S.-Canada trade is Dominic LeBlanc, and he typically doesn't come to these meetings, so he's not here. I've already met with the Canadian representative. 00:24:23 Speaker 2: Who is here. 00:24:24 Speaker 9: We are mostly focused on the G20 issues. I speak pretty frequently to Dominic LeBlanc. I mean, you've heard the president talk about this. Most recently, he said, well, we may have a deal with Canada in a few weeks. I'd emphasize the may in that part of the situation. We've always been open to a deal with Canada, like we've been open to a deal with all kinds of countries. And we've made deals with all kinds of countries recently. The question is, does Canada want to get to yes on some. 00:24:51 Speaker 2: Of these things? 00:24:53 Speaker 9: We have a trade policy where we're not inclined to go to zero tariffs because we're trying to reshore, and it's being very effective. We're bringing back manufacturing, 60,000 net manufacturing jobs this year. We want to see that continue, so we want to be very careful about the terms of any deal, and there are gaps remaining between Canada and the United States. 00:25:10 Speaker 3: This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, and geopolitics. You can watch the show live on Bloomberg TV, weekday mornings from 6am to 9am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen. And as always, on the Bloomberg Terminal and the Bloomberg Business App.