Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: We want to bring in Lale Brainerd, former director of
Speaker 2: the National Economic Council under the Biden administration, for our
Speaker 2: vice Chair of the Federal Reserve, now distinguished fellow at
Speaker 2: the Georgetown Center for Financial Markets and Policies. Laiel, thank
Speaker 2: you so much for joining Bloomberg. I just want to
Speaker 2: pick up on this conversation. President Trump says he's not
Speaker 2: going to fire Jerome Powell. So is this just all
Speaker 2: about trying to see lower rates next week when the
Speaker 2: FMC meets.
Speaker 3: There's probably a few things that are going on.
Speaker 4: One. I think it is an effort to pressure the
Speaker 4: Federal Reserve for lower rates.
Speaker 3: It's also a distraction.
Speaker 4: You know, that was a picture for the Ages yesterday,
Speaker 4: the President standing next to the chairman of the Federal
Speaker 4: Reserve wearing hard hats.
Speaker 3: Quite a story, and.
Speaker 4: It also serves to find a place to have blame
Speaker 4: to the extent that the economy is not as strong
Speaker 4: as the President has said that it would be at
Speaker 4: this juncture. You heard him say that the Federal Reserve
Speaker 4: should be lowering rates, and that's the only thing standing
Speaker 4: in the way. So I think it does serve multiple
Speaker 4: purposes in terms of the storyline.
Speaker 3: But we also know.
Speaker 4: That Federal Reserve chairs go down in history for actually
Speaker 4: following their mandate and not caving to political pressure, and
Speaker 4: those that do cave to political pressures tend not to
Speaker 4: be viewed very favorablely in the history books.
Speaker 1: Lell it's great to have you with us. I want
Speaker 1: to ask you about the op ed that you wrote
Speaker 1: recently in the Washington Post, an opinion piece with the
Speaker 1: headline the real reason Trump wants to fire the FED Chair?
Speaker 1: You say it has everything to do with debt management.
Speaker 1: The President, you're right, one, wants to reduce the debt
Speaker 1: service on the trillions his megabill will add to the
Speaker 1: national debt. So now we're connecting the dots to the
Speaker 1: President's big, beautiful bill. The fact is, and you say
Speaker 1: this in your piece, they are saying it out loud.
Speaker 2: Lael.
Speaker 1: Peter Navarro sat right at this desk a couple of
Speaker 1: days ago and talked about the need to lower infrastrates
Speaker 1: in an effort to save a trillion dollars when it
Speaker 1: comes to our debt. Is this the new Mission Creep?
Speaker 1: We hear a lot about Mission Creep in the Central Bank.
Speaker 1: Is this a version of that in your eyes?
Speaker 4: Well, certainly this is the kind of diversion of the
Speaker 4: Federal Reserve from its core inflation fighting mission to supporting
Speaker 4: the administration's desire to finance this big new increase in
Speaker 4: the national debt cheaply. That is traditionally the way that
Speaker 4: central banks in other countries like Brazil or Turkey Aregentina
Speaker 4: go awry and lose that credibility on inflation fighting. So
Speaker 4: I have to say that I was surprised to hear
Speaker 4: the President say it out loud when he says every
Speaker 4: percentage point reduction in interest rates translates into three hundred
Speaker 4: billion dollars. What he's talking about is interest payments on
Speaker 4: the national debt. And when he says, you know, if
Speaker 4: the Fed will cut by three percentage points down to
Speaker 4: one percentage point, that'll save us a trillion dollars in
Speaker 4: debt service, that's what he's really referring to, and he
Speaker 4: said it quite explicitly, And economists have a term for
Speaker 4: it because it has happened so many times in history.
Speaker 4: It's called fiscal dominance. When debt management becomes more important
Speaker 4: for the central bank than fighting inflation and what happens
Speaker 4: is you lose control of inflation and ultimately long term
Speaker 4: interest rates actually go up.
Speaker 2: Well, we did actually get a different sort of answer
Speaker 2: when we posed this question to Jill Lavarni, a senior
Speaker 2: counselor to the Treasury Secretary Scott Best, and about concerns
Speaker 2: when it comes to the long end of the yield curve.
Speaker 2: He joined us on Balance of Power last week. I
Speaker 2: want to play you with some of his reaction and
Speaker 2: then get your reaction on the other side.
Speaker 5: I don't see how markets are going to be worried
Speaker 5: about that. In fact, if you look at where yields are,
Speaker 5: they're lower than where they started the year. And when
Speaker 5: a lot of the people who are worried about the
Speaker 5: markets selling off because the credibility and things of that sort,
Speaker 5: these are many the same folks who back in April
Speaker 5: said the US was uninvestable, and yet we had Treasury
Speaker 5: data that came out today that should essentially record inflow
Speaker 5: into the market with treasury demand virtually at an all
Speaker 5: time high. So these arguments I don't think hold up
Speaker 5: to really scrutiny into the facts.
Speaker 2: We should say that A response was last week on
Speaker 2: July seventeenth. But Leo, I'm wondering what you make of
Speaker 2: that defense when it comes to this issue.
Speaker 4: Well, what we did see when the markets were really
Speaker 4: reacting to news that this administration would really pressure the
Speaker 4: Federal Reserve and might fire the chair of the Federal
Speaker 4: Reserve back in April, that was the first time I
Speaker 4: think market participants really were digesting that news, and there
Speaker 4: was a lot of repositioning, as you'll recall, And what
Speaker 4: we saw is that the long end of the curve
Speaker 4: did actually go up quite a bit and the dollar weekend.
Speaker 4: That is the kind of response that you tend to
Speaker 4: see in circumstances where central banks lose credibility on the
Speaker 4: fight against inflation because investors demand more compensation to hold
Speaker 4: longer term securities, sovereigns securities, treasury securities if they think
Speaker 4: that the currency is going to be weaker and inflation
Speaker 4: is going to go up. So that is just the
Speaker 4: traditional kind of market reaction we have seen it. We
Speaker 4: certainly saw it back in April. Now leave markets, I
Speaker 4: have seen the President back down say that he's not
Speaker 4: going to fire the Federal Reserve chair. Yesterday he was
Speaker 4: even somewhat complimentary, and I think that's why you're not
Speaker 4: seeing those kinds of reactions right now in markets. But
Speaker 4: I do think the reaction we saw in April was
Speaker 4: a cautionary tale.
Speaker 1: It did seem the President came fixing for a bit
Speaker 1: of a fight yesterday, Leale. I'm sure you were watching
Speaker 1: as the two wore hard hats. The President pulled a
Speaker 1: piece of paper out of his suit jacket to prove
Speaker 1: to the Fed chair that not only was the renovation
Speaker 1: at the Echoes Building running over in terms of money,
Speaker 1: but more than he thought, and he added a whole
Speaker 1: new building to the list. Let's bring everybody back to
Speaker 1: the construction site. Watch and listen.
Speaker 4: It looks like it's about three point one billion, one
Speaker 4: up a little bit for a lot.
Speaker 1: So the two point seven is now three point one.
Speaker 5: Yeah, it just came out. I haven't heard that from
Speaker 5: anybody that you're including the Martin renovation.
Speaker 3: You just added into third buildings.
Speaker 2: What that is?
Speaker 5: That's a third building.
Speaker 3: It's a building that's being built, it's been it was
Speaker 3: built five years ago.
Speaker 1: Well, I'd love him to lower interest, Rachel.
Speaker 3: Other than that, what can I tell you?
Speaker 1: Complete with a knock on the back there, Lail I'm wondering,
Speaker 1: as you watched this and had a chance to digest
Speaker 1: everything that happened yesterday, does this go down as a
Speaker 1: good day for fed independence.
Speaker 4: Well, I think what was interesting is that the Federal
Speaker 4: Reserve had a chance to explain what was going on
Speaker 4: with their renovations.
Speaker 3: These are very old buildings.
Speaker 4: They have two buildings that really haven't been renovated I
Speaker 4: think since the nineteen thirties and one that just was
Speaker 4: renovated for the first time since the nineteen seventies. And
Speaker 4: I thought what was interesting is that the President really
Speaker 4: came out of those discussions, you know, really showing his
Speaker 4: long experience as a real estate developer. You know, he
Speaker 4: talked about how hard it is to build on a
Speaker 4: former swamp and the kind of very expensive renovations that
Speaker 4: are necessary to you know, really be secure in pushing
Speaker 4: down when there are concerns about the water table. So
Speaker 4: in a way, it was interesting to see the President
Speaker 4: getting into the complexities of the renovation in that sense. Yes,
Speaker 4: I think it was a good day just for transparency
Speaker 4: around the Federal Reserve, which is so important because the
Speaker 4: Federal Reserve has to be accountable to the public.
Speaker 2: Well, I do want to go back to this idea
Speaker 2: of so called mission creep that Joe had mentioned earlier.
Speaker 2: We've heard this critique from Treasury Secretary Scott Besson, from
Speaker 2: Kevin Worris, who we know is potentially in the running
Speaker 2: to be the next FED chair. Do you think that
Speaker 2: it would be healthy for the FED to conduct a
Speaker 2: review of its non monetary policy activities? Is that something
Speaker 2: that you think would actually be a good thing for
Speaker 2: the FED to look into, whether or not that's an
Speaker 2: external review, for example.
Speaker 4: So I always think that the Federal Reserve benefits from
Speaker 4: being accountable and transparent to the.
Speaker 3: Public and particularly to Congress.
Speaker 4: And it's really Congress who has oversight of the Federal
Speaker 4: Reserve who wrote the Federal Reserve Act that governs the
Speaker 4: monetary policy and the Dodd Frank Act that governs their
Speaker 4: responsibilities in financial stability policy. So I do think those
Speaker 4: kinds of reviews are very beneficial, and there are many
Speaker 4: mechanisms that the Federal Reserve could use to undertake such
Speaker 4: a review.
Speaker 3: The thing that.
Speaker 4: Would concern me I have heard the Secretary of the
Speaker 4: Treasury saying that the administration would undertake a review, and
Speaker 4: that does raise some concerns.
Speaker 1: Well, I'm sorry, we're out of time. Sorry, I'd love
Speaker 1: to have you come back to finish this conversation. It's
Speaker 1: wonderful to have you back on balance of power. Former
Speaker 1: director National Economic Council, former vice Chair of the Federal
Speaker 1: Reserve Laalel Brainerd whether us live from Washington, Only here
Speaker 1: on Bloomberg TV and radio.