WEBVTT - Former Fed Vice Chair Lael Brainard Talks Pressure on Jay Powell

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio News.

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<v Speaker 2>We want to bring in Lale Brainerd, former director of

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<v Speaker 2>the National Economic Council under the Biden administration, for our

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<v Speaker 2>vice Chair of the Federal Reserve, now distinguished fellow at

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<v Speaker 2>the Georgetown Center for Financial Markets and Policies. Laiel, thank

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<v Speaker 2>you so much for joining Bloomberg. I just want to

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<v Speaker 2>pick up on this conversation. President Trump says he's not

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<v Speaker 2>going to fire Jerome Powell. So is this just all

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<v Speaker 2>about trying to see lower rates next week when the

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<v Speaker 2>FMC meets.

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<v Speaker 3>There's probably a few things that are going on.

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<v Speaker 4>One. I think it is an effort to pressure the

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<v Speaker 4>Federal Reserve for lower rates.

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<v Speaker 3>It's also a distraction.

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<v Speaker 4>You know, that was a picture for the Ages yesterday,

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<v Speaker 4>the President standing next to the chairman of the Federal

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<v Speaker 4>Reserve wearing hard hats.

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<v Speaker 3>Quite a story, and.

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<v Speaker 4>It also serves to find a place to have blame

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<v Speaker 4>to the extent that the economy is not as strong

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<v Speaker 4>as the President has said that it would be at

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<v Speaker 4>this juncture. You heard him say that the Federal Reserve

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<v Speaker 4>should be lowering rates, and that's the only thing standing

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<v Speaker 4>in the way. So I think it does serve multiple

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<v Speaker 4>purposes in terms of the storyline.

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<v Speaker 3>But we also know.

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<v Speaker 4>That Federal Reserve chairs go down in history for actually

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<v Speaker 4>following their mandate and not caving to political pressure, and

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<v Speaker 4>those that do cave to political pressures tend not to

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<v Speaker 4>be viewed very favorablely in the history books.

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<v Speaker 1>Lell it's great to have you with us. I want

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<v Speaker 1>to ask you about the op ed that you wrote

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<v Speaker 1>recently in the Washington Post, an opinion piece with the

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<v Speaker 1>headline the real reason Trump wants to fire the FED Chair?

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<v Speaker 1>You say it has everything to do with debt management.

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<v Speaker 1>The President, you're right, one, wants to reduce the debt

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<v Speaker 1>service on the trillions his megabill will add to the

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<v Speaker 1>national debt. So now we're connecting the dots to the

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<v Speaker 1>President's big, beautiful bill. The fact is, and you say

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<v Speaker 1>this in your piece, they are saying it out loud.

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<v Speaker 2>Lael.

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<v Speaker 1>Peter Navarro sat right at this desk a couple of

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<v Speaker 1>days ago and talked about the need to lower infrastrates

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<v Speaker 1>in an effort to save a trillion dollars when it

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<v Speaker 1>comes to our debt. Is this the new Mission Creep?

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<v Speaker 1>We hear a lot about Mission Creep in the Central Bank.

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<v Speaker 1>Is this a version of that in your eyes?

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<v Speaker 4>Well, certainly this is the kind of diversion of the

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<v Speaker 4>Federal Reserve from its core inflation fighting mission to supporting

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<v Speaker 4>the administration's desire to finance this big new increase in

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<v Speaker 4>the national debt cheaply. That is traditionally the way that

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<v Speaker 4>central banks in other countries like Brazil or Turkey Aregentina

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<v Speaker 4>go awry and lose that credibility on inflation fighting. So

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<v Speaker 4>I have to say that I was surprised to hear

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<v Speaker 4>the President say it out loud when he says every

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<v Speaker 4>percentage point reduction in interest rates translates into three hundred

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<v Speaker 4>billion dollars. What he's talking about is interest payments on

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<v Speaker 4>the national debt. And when he says, you know, if

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<v Speaker 4>the Fed will cut by three percentage points down to

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<v Speaker 4>one percentage point, that'll save us a trillion dollars in

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<v Speaker 4>debt service, that's what he's really referring to, and he

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<v Speaker 4>said it quite explicitly, And economists have a term for

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<v Speaker 4>it because it has happened so many times in history.

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<v Speaker 4>It's called fiscal dominance. When debt management becomes more important

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<v Speaker 4>for the central bank than fighting inflation and what happens

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<v Speaker 4>is you lose control of inflation and ultimately long term

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<v Speaker 4>interest rates actually go up.

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<v Speaker 2>Well, we did actually get a different sort of answer

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<v Speaker 2>when we posed this question to Jill Lavarni, a senior

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<v Speaker 2>counselor to the Treasury Secretary Scott Best, and about concerns

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<v Speaker 2>when it comes to the long end of the yield curve.

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<v Speaker 2>He joined us on Balance of Power last week. I

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<v Speaker 2>want to play you with some of his reaction and

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<v Speaker 2>then get your reaction on the other side.

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<v Speaker 5>I don't see how markets are going to be worried

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<v Speaker 5>about that. In fact, if you look at where yields are,

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<v Speaker 5>they're lower than where they started the year. And when

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<v Speaker 5>a lot of the people who are worried about the

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<v Speaker 5>markets selling off because the credibility and things of that sort,

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<v Speaker 5>these are many the same folks who back in April

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<v Speaker 5>said the US was uninvestable, and yet we had Treasury

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<v Speaker 5>data that came out today that should essentially record inflow

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<v Speaker 5>into the market with treasury demand virtually at an all

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<v Speaker 5>time high. So these arguments I don't think hold up

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<v Speaker 5>to really scrutiny into the facts.

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<v Speaker 2>We should say that A response was last week on

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<v Speaker 2>July seventeenth. But Leo, I'm wondering what you make of

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<v Speaker 2>that defense when it comes to this issue.

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<v Speaker 4>Well, what we did see when the markets were really

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<v Speaker 4>reacting to news that this administration would really pressure the

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<v Speaker 4>Federal Reserve and might fire the chair of the Federal

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<v Speaker 4>Reserve back in April, that was the first time I

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<v Speaker 4>think market participants really were digesting that news, and there

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<v Speaker 4>was a lot of repositioning, as you'll recall, And what

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<v Speaker 4>we saw is that the long end of the curve

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<v Speaker 4>did actually go up quite a bit and the dollar weekend.

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<v Speaker 4>That is the kind of response that you tend to

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<v Speaker 4>see in circumstances where central banks lose credibility on the

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<v Speaker 4>fight against inflation because investors demand more compensation to hold

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<v Speaker 4>longer term securities, sovereigns securities, treasury securities if they think

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<v Speaker 4>that the currency is going to be weaker and inflation

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<v Speaker 4>is going to go up. So that is just the

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<v Speaker 4>traditional kind of market reaction we have seen it. We

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<v Speaker 4>certainly saw it back in April. Now leave markets, I

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<v Speaker 4>have seen the President back down say that he's not

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<v Speaker 4>going to fire the Federal Reserve chair. Yesterday he was

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<v Speaker 4>even somewhat complimentary, and I think that's why you're not

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<v Speaker 4>seeing those kinds of reactions right now in markets. But

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<v Speaker 4>I do think the reaction we saw in April was

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<v Speaker 4>a cautionary tale.

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<v Speaker 1>It did seem the President came fixing for a bit

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<v Speaker 1>of a fight yesterday, Leale. I'm sure you were watching

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<v Speaker 1>as the two wore hard hats. The President pulled a

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<v Speaker 1>piece of paper out of his suit jacket to prove

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<v Speaker 1>to the Fed chair that not only was the renovation

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<v Speaker 1>at the Echoes Building running over in terms of money,

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<v Speaker 1>but more than he thought, and he added a whole

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<v Speaker 1>new building to the list. Let's bring everybody back to

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<v Speaker 1>the construction site. Watch and listen.

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<v Speaker 4>It looks like it's about three point one billion, one

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<v Speaker 4>up a little bit for a lot.

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<v Speaker 1>So the two point seven is now three point one.

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<v Speaker 5>Yeah, it just came out. I haven't heard that from

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<v Speaker 5>anybody that you're including the Martin renovation.

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<v Speaker 3>You just added into third buildings.

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<v Speaker 2>What that is?

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<v Speaker 5>That's a third building.

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<v Speaker 3>It's a building that's being built, it's been it was

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<v Speaker 3>built five years ago.

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<v Speaker 1>Well, I'd love him to lower interest, Rachel.

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<v Speaker 3>Other than that, what can I tell you?

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<v Speaker 1>Complete with a knock on the back there, Lail I'm wondering,

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<v Speaker 1>as you watched this and had a chance to digest

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<v Speaker 1>everything that happened yesterday, does this go down as a

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<v Speaker 1>good day for fed independence.

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<v Speaker 4>Well, I think what was interesting is that the Federal

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<v Speaker 4>Reserve had a chance to explain what was going on

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<v Speaker 4>with their renovations.

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<v Speaker 3>These are very old buildings.

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<v Speaker 4>They have two buildings that really haven't been renovated I

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<v Speaker 4>think since the nineteen thirties and one that just was

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<v Speaker 4>renovated for the first time since the nineteen seventies. And

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<v Speaker 4>I thought what was interesting is that the President really

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<v Speaker 4>came out of those discussions, you know, really showing his

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<v Speaker 4>long experience as a real estate developer. You know, he

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<v Speaker 4>talked about how hard it is to build on a

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<v Speaker 4>former swamp and the kind of very expensive renovations that

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<v Speaker 4>are necessary to you know, really be secure in pushing

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<v Speaker 4>down when there are concerns about the water table. So

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<v Speaker 4>in a way, it was interesting to see the President

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<v Speaker 4>getting into the complexities of the renovation in that sense. Yes,

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<v Speaker 4>I think it was a good day just for transparency

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<v Speaker 4>around the Federal Reserve, which is so important because the

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<v Speaker 4>Federal Reserve has to be accountable to the public.

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<v Speaker 2>Well, I do want to go back to this idea

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<v Speaker 2>of so called mission creep that Joe had mentioned earlier.

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<v Speaker 2>We've heard this critique from Treasury Secretary Scott Besson, from

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<v Speaker 2>Kevin Worris, who we know is potentially in the running

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<v Speaker 2>to be the next FED chair. Do you think that

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<v Speaker 2>it would be healthy for the FED to conduct a

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<v Speaker 2>review of its non monetary policy activities? Is that something

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<v Speaker 2>that you think would actually be a good thing for

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<v Speaker 2>the FED to look into, whether or not that's an

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<v Speaker 2>external review, for example.

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<v Speaker 4>So I always think that the Federal Reserve benefits from

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<v Speaker 4>being accountable and transparent to the.

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<v Speaker 3>Public and particularly to Congress.

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<v Speaker 4>And it's really Congress who has oversight of the Federal

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<v Speaker 4>Reserve who wrote the Federal Reserve Act that governs the

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<v Speaker 4>monetary policy and the Dodd Frank Act that governs their

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<v Speaker 4>responsibilities in financial stability policy. So I do think those

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<v Speaker 4>kinds of reviews are very beneficial, and there are many

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<v Speaker 4>mechanisms that the Federal Reserve could use to undertake such

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<v Speaker 4>a review.

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<v Speaker 3>The thing that.

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<v Speaker 4>Would concern me I have heard the Secretary of the

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<v Speaker 4>Treasury saying that the administration would undertake a review, and

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<v Speaker 4>that does raise some concerns.

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<v Speaker 1>Well, I'm sorry, we're out of time. Sorry, I'd love

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<v Speaker 1>to have you come back to finish this conversation. It's

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<v Speaker 1>wonderful to have you back on balance of power. Former

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<v Speaker 1>director National Economic Council, former vice Chair of the Federal

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<v Speaker 1>Reserve Laalel Brainerd whether us live from Washington, Only here

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<v Speaker 1>on Bloomberg TV and radio.