1 00:00:02,400 --> 00:00:06,760 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. 2 00:00:11,680 --> 00:00:15,480 Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along 3 00:00:15,520 --> 00:00:18,720 Speaker 2: with Lisa Bromwitz and Amrie Hortern. Join us each day 4 00:00:18,760 --> 00:00:22,280 Speaker 2: for insight from the best in markets, economics, and geopolitics 5 00:00:22,440 --> 00:00:24,880 Speaker 2: from our global headquarters in New York City. We are 6 00:00:24,960 --> 00:00:27,680 Speaker 2: live on Bloomberg Television weekday mornings from six to nine 7 00:00:27,720 --> 00:00:31,319 Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or 8 00:00:31,320 --> 00:00:33,960 Speaker 2: anywhere else you listen, and as always on the Bloomberg 9 00:00:34,040 --> 00:00:35,880 Speaker 2: Terminal and the Bloomberg Business App. 10 00:00:36,200 --> 00:00:39,440 Speaker 3: I'm joined now by someone who intimately understands the FED 11 00:00:39,560 --> 00:00:41,919 Speaker 3: was there for ten years and most recently was the 12 00:00:41,920 --> 00:00:43,839 Speaker 3: FED Vice chair under J. 13 00:00:44,040 --> 00:00:45,320 Speaker 1: Powell, who is still. 14 00:00:45,000 --> 00:00:47,560 Speaker 3: Now the chair, and that's of course Lale Brainerd. Lale, 15 00:00:47,560 --> 00:00:50,360 Speaker 3: thank you so much for joining us this morning. As 16 00:00:50,400 --> 00:00:54,800 Speaker 3: we see this standoff between President Trump and Governor Cook, 17 00:00:55,200 --> 00:00:57,000 Speaker 3: we have yet to hear from the FED itself. 18 00:00:57,080 --> 00:00:58,960 Speaker 1: What kind of response do you think we can expect 19 00:00:58,960 --> 00:00:59,680 Speaker 1: from the institution? 20 00:01:00,480 --> 00:01:04,000 Speaker 4: Well, I think the Federal Reserve is an incredibly difficult 21 00:01:04,000 --> 00:01:06,600 Speaker 4: position here. But you have to remember this is not 22 00:01:07,240 --> 00:01:12,800 Speaker 4: about an individual governor. This is really an unprecedented attack 23 00:01:13,080 --> 00:01:16,920 Speaker 4: on the independence of the Federal Reserve as an institution. 24 00:01:17,560 --> 00:01:22,240 Speaker 4: There is nobody in the Federal Open Markets Committee, the 25 00:01:22,720 --> 00:01:27,080 Speaker 4: Monetary Policy Setting Committee that can't be thinking well, what 26 00:01:27,560 --> 00:01:31,240 Speaker 4: does this mean for me? And so any member of 27 00:01:31,319 --> 00:01:34,960 Speaker 4: the board presumably is going to worry that they too 28 00:01:35,040 --> 00:01:39,080 Speaker 4: could be subject to this kind of political pressure, and 29 00:01:39,160 --> 00:01:44,760 Speaker 4: that fundamentally undermines the institutional independence of the Fed, which 30 00:01:44,880 --> 00:01:51,200 Speaker 4: means higher inflation, potentially less credibility, even higher long term 31 00:01:51,240 --> 00:01:53,080 Speaker 4: interest rates bad for the economy. 32 00:01:53,320 --> 00:01:56,360 Speaker 3: Do you think this can actually impact how members are 33 00:01:56,400 --> 00:01:57,880 Speaker 3: thinking about monetary policy? 34 00:01:58,520 --> 00:02:03,320 Speaker 4: Well, I just think the implication if any member of 35 00:02:03,360 --> 00:02:07,080 Speaker 4: that board could come under this kind of political pressure 36 00:02:07,160 --> 00:02:09,840 Speaker 4: from the White House, and of course we saw that 37 00:02:09,919 --> 00:02:13,880 Speaker 4: kind of pressure on the chair earlier this year. I 38 00:02:13,919 --> 00:02:19,280 Speaker 4: think that does really put a higher premium on whether 39 00:02:19,320 --> 00:02:21,679 Speaker 4: they're going to be willing to speak their minds to 40 00:02:21,680 --> 00:02:24,920 Speaker 4: to sent on key votes if necessary. I think it 41 00:02:24,960 --> 00:02:27,600 Speaker 4: really does create unprecedented risks. 42 00:02:27,760 --> 00:02:31,960 Speaker 3: The President's letter talked about this mortgage allegation fraud in 43 00:02:31,960 --> 00:02:35,120 Speaker 3: the mortgage world for Governor Cook, what if she was 44 00:02:35,280 --> 00:02:36,600 Speaker 3: charged or convicted? 45 00:02:37,520 --> 00:02:40,920 Speaker 4: Well, I think what is important here is due process 46 00:02:41,160 --> 00:02:44,880 Speaker 4: and undertaking a real investigation and having the facts on 47 00:02:44,919 --> 00:02:51,720 Speaker 4: the table, and the ability for her to defend herself legally. 48 00:02:52,240 --> 00:02:56,160 Speaker 4: None of that has taken place here. The White House 49 00:02:56,160 --> 00:02:59,880 Speaker 4: has preempted the process, and so that is why it's 50 00:03:00,120 --> 00:03:04,800 Speaker 4: really unprecedented. It's very, very threatening to the very independence 51 00:03:05,760 --> 00:03:09,560 Speaker 4: of the Federal Reserve, and it should cause concerns, I think, 52 00:03:09,720 --> 00:03:15,360 Speaker 4: among investors and more broadly about that fundamental underpinning of 53 00:03:15,400 --> 00:03:18,239 Speaker 4: our strong economy and our strong financial markets. 54 00:03:18,320 --> 00:03:21,640 Speaker 3: Given this is just about one individual, does the Fed 55 00:03:21,800 --> 00:03:23,880 Speaker 3: come out and say something or do they need to 56 00:03:23,919 --> 00:03:26,359 Speaker 3: wait until that due process takes place. 57 00:03:26,880 --> 00:03:30,280 Speaker 4: So the Federal Reserve as an institution is all about 58 00:03:30,360 --> 00:03:34,680 Speaker 4: due process, and there have been individuals who have had 59 00:03:34,720 --> 00:03:40,360 Speaker 4: investigations previously. There's a good process for doing that. That's 60 00:03:40,400 --> 00:03:43,880 Speaker 4: not what's taking place here. This is really about trying 61 00:03:43,920 --> 00:03:48,920 Speaker 4: to overturn the majority of the Board of Governors, long 62 00:03:49,000 --> 00:03:53,360 Speaker 4: before any of these governor's terms are up, by threatening 63 00:03:53,400 --> 00:03:59,600 Speaker 4: them with these kinds of investigations and firing without real 64 00:03:59,680 --> 00:04:04,920 Speaker 4: due process and cause. And again, the Federal reserves independence 65 00:04:05,000 --> 00:04:08,160 Speaker 4: really is at stake here, and that means that monetary 66 00:04:08,240 --> 00:04:14,320 Speaker 4: policy will increasingly be overshadowed by concerns that there's political interference, 67 00:04:14,440 --> 00:04:17,839 Speaker 4: whether or not that is actually the case if you 68 00:04:17,920 --> 00:04:21,520 Speaker 4: think about it. J Powell opened the door for an 69 00:04:21,520 --> 00:04:26,040 Speaker 4: interest rate cut in September very clearly. That's exactly what 70 00:04:26,120 --> 00:04:30,200 Speaker 4: the president wants, so monetary policy is actually moving his way. 71 00:04:31,200 --> 00:04:35,760 Speaker 4: And yet this is a very very aggressive attack on 72 00:04:35,880 --> 00:04:40,440 Speaker 4: the Federal Reserve when monetary policy is doing exactly what 73 00:04:40,560 --> 00:04:41,680 Speaker 4: he's been calling for. 74 00:04:42,000 --> 00:04:44,320 Speaker 3: That speech the Fed Chair gave a Jackson holl just 75 00:04:44,400 --> 00:04:47,480 Speaker 3: on Fridays, very different from how he sounded J Powell 76 00:04:47,640 --> 00:04:50,960 Speaker 3: four weeks ago. Do you think the speech was political? 77 00:04:51,600 --> 00:04:54,720 Speaker 4: Well, I think that the Chair was very careful in 78 00:04:54,839 --> 00:04:58,839 Speaker 4: laying out that the balance of risks had shifted. He 79 00:04:59,000 --> 00:05:03,520 Speaker 4: pointed specific to the possibility that the labor market is 80 00:05:03,600 --> 00:05:09,320 Speaker 4: weakening faster than the members of the FLMC had believed 81 00:05:09,440 --> 00:05:12,720 Speaker 4: in their last meeting because of the revisions to three 82 00:05:12,760 --> 00:05:16,400 Speaker 4: months worth of hiring data, and so he laid out 83 00:05:16,440 --> 00:05:19,560 Speaker 4: a very I think strong case based on data and 84 00:05:19,600 --> 00:05:23,000 Speaker 4: the facts, why they were now potentially going to be 85 00:05:23,040 --> 00:05:27,359 Speaker 4: more attentive to that labor market weakening, while acknowledging that 86 00:05:27,440 --> 00:05:30,120 Speaker 4: inflation is still likely to go up because of the 87 00:05:30,200 --> 00:05:32,120 Speaker 4: very high tariffs that have been put in place. 88 00:05:32,720 --> 00:05:36,080 Speaker 3: Knowing the data and knowing all the personnel that are 89 00:05:36,120 --> 00:05:38,960 Speaker 3: going to get together at the next FED meeting September seventeenth, 90 00:05:39,000 --> 00:05:41,200 Speaker 3: do you expect them all to walk through that door 91 00:05:41,320 --> 00:05:43,640 Speaker 3: that the FED chair opened up for a cut. 92 00:05:44,040 --> 00:05:46,840 Speaker 4: Well, I don't know if all members of the FMC 93 00:05:47,040 --> 00:05:49,600 Speaker 4: will be in the same place, and of course what 94 00:05:49,640 --> 00:05:52,480 Speaker 4: we should hope for is a really good debate and 95 00:05:52,560 --> 00:05:56,640 Speaker 4: an airing of differing views. But I do think that 96 00:05:56,839 --> 00:06:01,560 Speaker 4: barring something really surprising in the upcoming employment print and 97 00:06:01,839 --> 00:06:06,960 Speaker 4: CPI print, it's more likely than not that they will 98 00:06:07,080 --> 00:06:10,000 Speaker 4: vote for a twenty five basis point reduction in the 99 00:06:10,040 --> 00:06:10,880 Speaker 4: federal funds rate. 100 00:06:11,040 --> 00:06:13,600 Speaker 3: Do you think there's a bias to the labor market 101 00:06:13,680 --> 00:06:14,640 Speaker 3: in this federal reserve? 102 00:06:15,600 --> 00:06:17,960 Speaker 4: So up until this point, I think what we've heard 103 00:06:18,120 --> 00:06:22,039 Speaker 4: is a lot of discussion about the potential risks to inflation. 104 00:06:22,160 --> 00:06:26,120 Speaker 4: Inflation is still high. It is between two and a 105 00:06:26,200 --> 00:06:29,280 Speaker 4: half and three percent, and while this time last year 106 00:06:29,320 --> 00:06:31,680 Speaker 4: it was going in the right direction moving down to 107 00:06:31,720 --> 00:06:35,400 Speaker 4: the two percent target, this year is actually moving up. 108 00:06:35,440 --> 00:06:38,000 Speaker 4: So we have heard a lot of attention to inflation, 109 00:06:38,960 --> 00:06:44,200 Speaker 4: appropriately so, but the Chair acknowledged that they are balancing risks, 110 00:06:44,320 --> 00:06:48,800 Speaker 4: risks of higher inflation risks of lower employment, and that 111 00:06:48,960 --> 00:06:52,400 Speaker 4: is exactly what you expect from tariffs, a stagflationary shock. 112 00:06:52,680 --> 00:06:54,560 Speaker 3: When he was talking about tariff's he said that it's 113 00:06:54,600 --> 00:06:57,320 Speaker 3: not going to come all at once. The impact is 114 00:06:57,320 --> 00:07:00,520 Speaker 3: the fedcher basically signaling to the market and to us 115 00:07:00,600 --> 00:07:03,640 Speaker 3: to just look through any potential hot CPI prints that 116 00:07:03,720 --> 00:07:06,240 Speaker 3: come out between now in the next twelve months. 117 00:07:06,680 --> 00:07:12,400 Speaker 4: So my interpretation of that discussion is simply to acknowledge 118 00:07:12,440 --> 00:07:17,440 Speaker 4: that when the labor market starts to turn down, unemployment 119 00:07:17,520 --> 00:07:21,400 Speaker 4: often doesn't gently move up, and the Federal Reserve doesn't 120 00:07:21,440 --> 00:07:24,840 Speaker 4: have a lot of time to react. Unemployment often jumps higher. 121 00:07:25,400 --> 00:07:29,680 Speaker 4: Whereas because the tariffs have changed a number of times 122 00:07:29,760 --> 00:07:33,480 Speaker 4: and still do not seem to be settled, because businesses 123 00:07:33,480 --> 00:07:36,480 Speaker 4: were so good at getting inventories in ahead of time, 124 00:07:36,960 --> 00:07:40,720 Speaker 4: because consumers did a lot of advanced purchases, those tariffs 125 00:07:40,760 --> 00:07:43,480 Speaker 4: are working their way into prices more slowly. So I 126 00:07:43,480 --> 00:07:47,520 Speaker 4: think it was just an acknowledgement of different potential timing 127 00:07:47,960 --> 00:07:50,040 Speaker 4: on the two legs of the dual mandate. 128 00:07:50,200 --> 00:07:52,680 Speaker 3: It felt like Chair Powell was coming around to how 129 00:07:52,720 --> 00:07:55,360 Speaker 3: Governor Waller thinks, or maybe how Governor Bowman thinks. And 130 00:07:55,360 --> 00:07:57,960 Speaker 3: I want to end on those two individuals their names 131 00:07:57,960 --> 00:07:59,520 Speaker 3: potentially to be the next FED chair. 132 00:08:00,000 --> 00:08:02,080 Speaker 1: Their scenario. People are talking about that. 133 00:08:01,920 --> 00:08:06,360 Speaker 3: All the presidents' terms need to be renewed in February. 134 00:08:06,440 --> 00:08:08,800 Speaker 3: Would you see a situation or risk at the FED 135 00:08:08,920 --> 00:08:13,080 Speaker 3: Board when next multiple presidents at the bidding of the 136 00:08:13,120 --> 00:08:14,960 Speaker 3: President of the United States. 137 00:08:14,760 --> 00:08:19,080 Speaker 4: Well, I think that is exactly the risk that we 138 00:08:19,280 --> 00:08:24,640 Speaker 4: are seeing play out right now. So by moving preemptively 139 00:08:24,800 --> 00:08:29,720 Speaker 4: to remove a governor from the Federal Reserve without going 140 00:08:29,760 --> 00:08:34,120 Speaker 4: through the process, without there being any clear evidence, the 141 00:08:34,760 --> 00:08:39,120 Speaker 4: President essentially is moving to shift the majority of the 142 00:08:39,160 --> 00:08:43,120 Speaker 4: Board of Governors well before what was contemplated in terms 143 00:08:43,240 --> 00:08:46,880 Speaker 4: of the institutional structure in their terms. And that opens 144 00:08:46,920 --> 00:08:50,800 Speaker 4: the door when renewals of all of the Reserve Bank 145 00:08:50,840 --> 00:08:56,000 Speaker 4: presents come up in February, to again take very unprecedented 146 00:08:56,120 --> 00:08:59,680 Speaker 4: actions and potentially not renew some of them in order 147 00:08:59,760 --> 00:09:05,000 Speaker 4: to shift the overall voting majority on the FMC. That 148 00:09:05,360 --> 00:09:09,480 Speaker 4: is an unprecedented attack on the independence of the Federal 149 00:09:09,520 --> 00:09:13,560 Speaker 4: Reserve and it should really concern us about their ability 150 00:09:13,559 --> 00:09:19,080 Speaker 4: to continue to be credible in fighting inflation and keeping 151 00:09:19,559 --> 00:09:21,800 Speaker 4: our economy on a strong course. 152 00:09:21,640 --> 00:09:22,320 Speaker 1: Which is quickly. 153 00:09:22,360 --> 00:09:25,160 Speaker 3: You know, Governor Bowman and Waller, do you think they 154 00:09:25,160 --> 00:09:27,400 Speaker 3: would be up for that kind of level of revamping. 155 00:09:28,000 --> 00:09:31,600 Speaker 4: So this is really not about individual members of the 156 00:09:31,640 --> 00:09:36,720 Speaker 4: board or the FMC. This is really about whether political 157 00:09:36,760 --> 00:09:41,000 Speaker 4: pressure will continue to be exerted on all members of 158 00:09:41,080 --> 00:09:44,040 Speaker 4: the FLMC in a way that puts them in jeopardy 159 00:09:44,480 --> 00:09:49,520 Speaker 4: and potentially makes them less willing to share their views 160 00:09:49,559 --> 00:09:53,199 Speaker 4: about the economy and appropriate monetary policy with the public 161 00:09:53,640 --> 00:09:58,200 Speaker 4: and also to vote their mind on monetary policy decisions. 162 00:09:58,360 --> 00:10:00,960 Speaker 4: That is what is at stake here, and I think 163 00:10:01,000 --> 00:10:02,319 Speaker 4: it's very concerning. 164 00:10:03,040 --> 00:10:06,559 Speaker 2: Stay with us. More Bloomberg surveillance coming up after this. 165 00:10:15,840 --> 00:10:18,040 Speaker 2: Joining us now to extend the conversation, the former New 166 00:10:18,120 --> 00:10:21,280 Speaker 2: York Fed President Bill Dudley. Bill, welcome to the program. 167 00:10:21,360 --> 00:10:25,000 Speaker 2: Extensive experience the Federal Reserve inside that institution. How do 168 00:10:25,040 --> 00:10:27,400 Speaker 2: you think they'll be responding to this this morning? 169 00:10:28,640 --> 00:10:31,000 Speaker 5: They're going to be very unhappy because this is a 170 00:10:31,000 --> 00:10:33,880 Speaker 5: real assault on the Federal reserves independence. And as we know, 171 00:10:34,360 --> 00:10:38,440 Speaker 5: central banks independence is really important for good economic outcomes. 172 00:10:38,679 --> 00:10:40,960 Speaker 5: There's been a reason why we've been moving in the 173 00:10:41,000 --> 00:10:44,960 Speaker 5: direction of greater central bank independence over the least four decades. 174 00:10:45,000 --> 00:10:48,080 Speaker 5: Across the world because central banks that have independence in 175 00:10:48,120 --> 00:10:51,000 Speaker 5: terms of how they conduct monetary policy to achieve the 176 00:10:51,040 --> 00:10:54,679 Speaker 5: objectives set for them by Congress and the administration do 177 00:10:54,720 --> 00:10:57,480 Speaker 5: a better job in controlling inflation and keeping the economy 178 00:10:57,520 --> 00:10:58,439 Speaker 5: on a stable path. 179 00:10:58,760 --> 00:10:59,959 Speaker 1: So this is assault on that. 180 00:11:00,320 --> 00:11:02,360 Speaker 5: And I'm sorry of surprised that the markets are so 181 00:11:02,559 --> 00:11:03,480 Speaker 5: relaxed about this. 182 00:11:03,960 --> 00:11:04,120 Speaker 1: Now. 183 00:11:04,160 --> 00:11:06,200 Speaker 5: Maybe that's because we don't know where this is going 184 00:11:06,240 --> 00:11:09,320 Speaker 5: to go. We don't know whether Lisa Cook is going 185 00:11:09,360 --> 00:11:12,040 Speaker 5: to be able to stay in office. It certainly looks 186 00:11:12,120 --> 00:11:15,000 Speaker 5: like the barf to getting her out is quite high, 187 00:11:15,040 --> 00:11:19,360 Speaker 5: because it doesn't seem that the for cause would extend 188 00:11:19,400 --> 00:11:23,360 Speaker 5: to the allegations against her. But she certainly a very 189 00:11:23,400 --> 00:11:25,319 Speaker 5: minimum deserves her day in court. 190 00:11:25,679 --> 00:11:28,400 Speaker 6: Well, Bill, it seems like that is the system that 191 00:11:28,520 --> 00:11:32,079 Speaker 6: is emerging, that we're understanding the contours of FED independence 192 00:11:32,480 --> 00:11:35,200 Speaker 6: from the courts. Be it the most recent ruling that 193 00:11:35,280 --> 00:11:39,480 Speaker 6: said other independent agencies could have their heads fired by Trump, 194 00:11:39,559 --> 00:11:43,280 Speaker 6: but not necessarily the FED without cause. This maybe defining 195 00:11:43,360 --> 00:11:45,840 Speaker 6: having the courts define what causes. If you have a 196 00:11:45,840 --> 00:11:48,920 Speaker 6: system where it's not encoded in law but instead is 197 00:11:49,000 --> 00:11:51,720 Speaker 6: being interpreted by the courts, what does that say about 198 00:11:51,720 --> 00:11:55,040 Speaker 6: the fragility or the stability of FED independence. 199 00:11:55,000 --> 00:11:56,760 Speaker 5: Well, it sort of has to be interpreted by the 200 00:11:56,800 --> 00:12:00,080 Speaker 5: course because this is there's no precedence for this. We 201 00:12:00,080 --> 00:12:02,200 Speaker 5: don't really know what the law is until the courts 202 00:12:02,240 --> 00:12:05,720 Speaker 5: actually rule on it. So the courts have to decide 203 00:12:06,520 --> 00:12:10,480 Speaker 5: what's the law intended to do. I think most people 204 00:12:10,520 --> 00:12:13,520 Speaker 5: think that, you know, what Lisa Cook did does not 205 00:12:14,040 --> 00:12:18,480 Speaker 5: represent four clause dismissal from her governorship. But it's up 206 00:12:18,520 --> 00:12:20,360 Speaker 5: for the courts to adjudicate that. 207 00:12:20,920 --> 00:12:22,960 Speaker 6: So, Bill, if we're in a scenario where it seems 208 00:12:23,000 --> 00:12:24,440 Speaker 6: like we might be that this is a FED that 209 00:12:24,480 --> 00:12:27,400 Speaker 6: wants to start to ease policy that it wants to cut, 210 00:12:27,440 --> 00:12:29,640 Speaker 6: but because of all these proceedings in the background, you 211 00:12:29,720 --> 00:12:32,520 Speaker 6: get some real tension on the long end of the curve. 212 00:12:33,000 --> 00:12:35,000 Speaker 6: What would the FED do in that case that it 213 00:12:35,040 --> 00:12:37,560 Speaker 6: wants to cut, it wants to ease, but the markets 214 00:12:37,600 --> 00:12:38,360 Speaker 6: do something different. 215 00:12:39,440 --> 00:12:41,280 Speaker 5: Well, I think the Federal do what it thinks is 216 00:12:41,320 --> 00:12:45,040 Speaker 5: appropriate to achieve its subjectives on employment and inflation and 217 00:12:45,080 --> 00:12:48,320 Speaker 5: policy certainly signals that his jackson will remarks that he's 218 00:12:48,360 --> 00:12:50,920 Speaker 5: worried about the downside risk to the labor market more 219 00:12:50,920 --> 00:12:53,520 Speaker 5: than he's worried about the upside risk to inflation, and 220 00:12:53,559 --> 00:12:56,760 Speaker 5: so his view that Manterrey policy is currently restrictive. He 221 00:12:56,880 --> 00:12:59,160 Speaker 5: basically set a signal that is highly likely the Fed 222 00:12:59,240 --> 00:13:00,840 Speaker 5: is going to cut rais and September. And I don't 223 00:13:00,840 --> 00:13:03,920 Speaker 5: think this changes any of that. What it does change 224 00:13:04,000 --> 00:13:06,920 Speaker 5: is down the road when the Federal Reserve acts. When 225 00:13:06,920 --> 00:13:09,520 Speaker 5: the Federal Reserve, if they cut rates at subsequent times, 226 00:13:09,559 --> 00:13:11,560 Speaker 5: is that because they think that's the appropriate thing to 227 00:13:11,600 --> 00:13:14,520 Speaker 5: do for the economy, or because it's because they're under 228 00:13:14,520 --> 00:13:17,920 Speaker 5: pressure from the Trump administration. Putting a lot of pressure 229 00:13:17,960 --> 00:13:21,160 Speaker 5: on a central bank is in my mind, somewhat counterproductive 230 00:13:21,400 --> 00:13:24,360 Speaker 5: because it basically causes people to start to wander is 231 00:13:24,400 --> 00:13:27,200 Speaker 5: a central bank doing what is appropriate to achieve its 232 00:13:27,240 --> 00:13:30,640 Speaker 5: objectives or is it caving into pressure from the administration. 233 00:13:30,920 --> 00:13:33,360 Speaker 2: Well, you've got great contacts. Do you sense that shift 234 00:13:33,400 --> 00:13:34,760 Speaker 2: is already underway? 235 00:13:35,720 --> 00:13:38,080 Speaker 5: No, I don't think so. I think there is a 236 00:13:38,240 --> 00:13:41,080 Speaker 5: case to cut rates in September. I'm not sure I 237 00:13:41,080 --> 00:13:44,040 Speaker 5: would be in that camp. I'm not as convinced that 238 00:13:44,080 --> 00:13:47,920 Speaker 5: monetary policy actually is restrictive today, and I am more 239 00:13:47,960 --> 00:13:51,040 Speaker 5: worried that the rise in inflation caused by the path 240 00:13:51,080 --> 00:13:54,200 Speaker 5: through of the tariffs. Will you could be end up 241 00:13:54,240 --> 00:13:58,240 Speaker 5: being more persistent than Paul does. But that's a reasonable 242 00:13:58,280 --> 00:14:02,040 Speaker 5: point of disagreement. I think that if the Fed cuts 243 00:14:02,080 --> 00:14:05,400 Speaker 5: rates in September is not a big event. The market 244 00:14:05,600 --> 00:14:09,040 Speaker 5: certainly anticipates rate cuts over the next year. They expect 245 00:14:09,040 --> 00:14:11,200 Speaker 5: the Fed eventually to cut race back down to what 246 00:14:11,240 --> 00:14:13,440 Speaker 5: they view as sort of a neutral a federal fund 247 00:14:13,520 --> 00:14:15,640 Speaker 5: rate of around three to three and a half percent. 248 00:14:15,559 --> 00:14:18,360 Speaker 2: Go out of interest. Why are you more concerned about inflation? 249 00:14:18,440 --> 00:14:20,920 Speaker 2: In very simple terms, the Fed share has basically come 250 00:14:20,920 --> 00:14:23,120 Speaker 2: out and said he's not worried about upside risk to 251 00:14:23,120 --> 00:14:25,920 Speaker 2: inflation because of the downside risk to employment. 252 00:14:25,960 --> 00:14:28,160 Speaker 1: What makes you more concerned, Well. 253 00:14:28,000 --> 00:14:31,080 Speaker 5: Four years of being above your inflation to objective, and 254 00:14:31,480 --> 00:14:34,680 Speaker 5: every year you're above your inflation objective, that increases the 255 00:14:34,760 --> 00:14:38,040 Speaker 5: risk that people start to view this is the steady state, 256 00:14:38,640 --> 00:14:41,680 Speaker 5: and then that starts to flow into wage settlements, and 257 00:14:41,720 --> 00:14:43,680 Speaker 5: then it becomes very difficult to get rid of the 258 00:14:43,680 --> 00:14:46,080 Speaker 5: inflation that's been embedded in the system at that point. 259 00:14:47,280 --> 00:14:50,880 Speaker 2: Stay with us. More Bloomberg surveillance coming up after. 260 00:14:50,640 --> 00:15:01,120 Speaker 1: This significant escalation. 261 00:15:01,240 --> 00:15:03,600 Speaker 3: When it comes to the President and this standoff with 262 00:15:03,720 --> 00:15:08,560 Speaker 3: Governor Lisa Cook. This really stems from FHAFA director Bill 263 00:15:08,640 --> 00:15:11,760 Speaker 3: Poulti talking about the fact that they think she committed 264 00:15:11,880 --> 00:15:12,600 Speaker 3: mortgage fraud. 265 00:15:12,680 --> 00:15:13,880 Speaker 1: These are allegations. 266 00:15:13,880 --> 00:15:16,160 Speaker 3: The President down has letter last night Jonathan saying the 267 00:15:16,200 --> 00:15:18,640 Speaker 3: American people must be able to have full confidence in 268 00:15:18,680 --> 00:15:21,840 Speaker 3: the honesty of the members entrusted in setting policy and 269 00:15:21,920 --> 00:15:23,440 Speaker 3: overseeing the Federal Reserve. 270 00:15:23,720 --> 00:15:24,920 Speaker 1: We're now joined by. 271 00:15:24,760 --> 00:15:27,720 Speaker 3: Scott Linscombe of the Cato Institute. He works on general 272 00:15:27,760 --> 00:15:31,000 Speaker 3: economics and trade. Scott, thank you so much for joining 273 00:15:31,040 --> 00:15:34,440 Speaker 3: us this morning. Just your reaction to this headline overnight. 274 00:15:36,040 --> 00:15:39,800 Speaker 7: I'm can't say I'm surprised given the run up and 275 00:15:39,920 --> 00:15:44,040 Speaker 7: some of the statements from the Trump administration already. But look, 276 00:15:44,080 --> 00:15:47,640 Speaker 7: that doesn't mean that this isn't a significant move. You know, 277 00:15:47,720 --> 00:15:53,240 Speaker 7: the independence of the FED is extremely important for US 278 00:15:53,320 --> 00:15:58,080 Speaker 7: monetary policy in the US economy. We you, Cato and elsewhere, 279 00:15:58,120 --> 00:16:01,760 Speaker 7: have always been concerned about isization of the FED. But 280 00:16:01,840 --> 00:16:04,240 Speaker 7: this is now going in the wrong direction, right. It 281 00:16:04,360 --> 00:16:09,960 Speaker 7: is pushing us more towards politicized monetary policy, and quite frankly, 282 00:16:10,680 --> 00:16:13,800 Speaker 7: you know, it's not something that appears justified by the 283 00:16:13,920 --> 00:16:17,040 Speaker 7: numbers in terms of absolutely necessitating some. 284 00:16:16,960 --> 00:16:17,680 Speaker 1: Sort of rape cup. 285 00:16:17,720 --> 00:16:21,080 Speaker 7: When you look at core CPI still above three flash 286 00:16:21,120 --> 00:16:25,560 Speaker 7: pm I last week showing significant price pressures. The idea 287 00:16:25,680 --> 00:16:28,960 Speaker 7: that you know, this is just a Racalca Trent FED 288 00:16:29,200 --> 00:16:34,040 Speaker 7: fighting the president's whims our needs is not really held 289 00:16:34,080 --> 00:16:34,640 Speaker 7: up in the data. 290 00:16:35,880 --> 00:16:38,000 Speaker 1: Does the market actually believe it yet? 291 00:16:38,040 --> 00:16:40,680 Speaker 3: How do you see this playing out, this fight between 292 00:16:40,800 --> 00:16:42,840 Speaker 3: Governor Cook and the President of the United States. 293 00:16:43,680 --> 00:16:47,080 Speaker 7: Yeah, I mean, I think some of the calmness in 294 00:16:47,120 --> 00:16:50,320 Speaker 7: the market probably stems from the fact that it's not 295 00:16:50,440 --> 00:16:53,800 Speaker 7: one hundred percent clear that they can do this Cook 296 00:16:54,120 --> 00:16:56,960 Speaker 7: and her legal team saying they're going to fight it. 297 00:16:57,080 --> 00:16:59,880 Speaker 7: In that, you know, it appears to be I think 298 00:17:00,080 --> 00:17:02,160 Speaker 7: giving some people some thoughts that, you know, maybe the 299 00:17:02,440 --> 00:17:06,040 Speaker 7: independence of the FED still intact. But that being said, look, 300 00:17:06,720 --> 00:17:10,000 Speaker 7: this Trump is a persistent guy. We know this, and 301 00:17:10,640 --> 00:17:13,040 Speaker 7: I don't think we should be too confident that this 302 00:17:13,240 --> 00:17:16,680 Speaker 7: is this is going away anytime soon. Regardless of how 303 00:17:16,800 --> 00:17:19,360 Speaker 7: this particular spat turns out. 304 00:17:20,640 --> 00:17:22,560 Speaker 1: Whether it's the FED, whether it's trade. 305 00:17:22,560 --> 00:17:24,800 Speaker 3: We like to see the President United States put his 306 00:17:24,880 --> 00:17:25,720 Speaker 3: thumb on the scale. 307 00:17:25,920 --> 00:17:29,200 Speaker 1: He takes an interventionist approach. You wrote about that this. 308 00:17:29,119 --> 00:17:32,480 Speaker 3: Week in the Washington Post when it comes to Intel. 309 00:17:32,760 --> 00:17:35,720 Speaker 3: What kind of president do you see Trumps setting for 310 00:17:35,880 --> 00:17:37,240 Speaker 3: future administrations. 311 00:17:38,400 --> 00:17:41,000 Speaker 7: It's a lot of troubling precedent. I mean, beyond the 312 00:17:41,040 --> 00:17:44,080 Speaker 7: pressuring the Fed. Now, you know, you have the state 313 00:17:44,320 --> 00:17:50,159 Speaker 7: taking big stakes in private companies like Intel, not during 314 00:17:50,800 --> 00:17:54,560 Speaker 7: a great recession or wartime, but in peacetime and doing 315 00:17:54,600 --> 00:17:59,400 Speaker 7: it clear under a pretty clear pressure and coercion from 316 00:17:59,440 --> 00:18:02,240 Speaker 7: the overall office. Of course, you have all the import 317 00:18:02,320 --> 00:18:07,760 Speaker 7: substitution in tariffs and uncertainty and trade deals, which is 318 00:18:07,800 --> 00:18:11,600 Speaker 7: also all executive power as well. You know, it makes 319 00:18:11,640 --> 00:18:13,720 Speaker 7: you wonder where the heck Congress is all in this, 320 00:18:14,119 --> 00:18:18,440 Speaker 7: But it also makes you think what the next president's 321 00:18:18,480 --> 00:18:18,920 Speaker 7: going to. 322 00:18:18,840 --> 00:18:19,399 Speaker 1: Be able to do. 323 00:18:19,480 --> 00:18:24,000 Speaker 7: You know, Bernie Sanders was cheering Trump's Intel move, and 324 00:18:24,040 --> 00:18:27,040 Speaker 7: you could very well have a Democratic president that picks 325 00:18:27,160 --> 00:18:31,680 Speaker 7: up these very same precedents and pushes even further into 326 00:18:31,960 --> 00:18:35,800 Speaker 7: an interventionist executive branch acting unilaterally, and that's of course 327 00:18:36,119 --> 00:18:39,240 Speaker 7: going to raise serious issues, serious problems for the health 328 00:18:39,280 --> 00:18:40,240 Speaker 7: of the US economy. 329 00:18:41,320 --> 00:18:44,359 Speaker 3: Well, the President also said he would be interested in 330 00:18:44,440 --> 00:18:48,280 Speaker 3: maybe striking more deals like this. Are there companies that 331 00:18:48,320 --> 00:18:51,360 Speaker 3: you're looking at that potentially we can see a similar 332 00:18:51,400 --> 00:18:52,840 Speaker 3: approach from this White House. 333 00:18:53,720 --> 00:18:55,480 Speaker 7: Yeah, you know, as I wrote in the post, if 334 00:18:55,640 --> 00:18:58,840 Speaker 7: any company that's taken subsidies from the US government and 335 00:18:58,960 --> 00:19:02,439 Speaker 7: happens to be located in a strategic industry by the 336 00:19:02,480 --> 00:19:08,119 Speaker 7: executive branches, definition should be a little bit concerned. The 337 00:19:08,119 --> 00:19:12,399 Speaker 7: fact is that we now have national security investigations in 338 00:19:12,440 --> 00:19:15,320 Speaker 7: the trade space on a whole lot of products, not 339 00:19:15,720 --> 00:19:17,919 Speaker 7: just chips and steel and aluminum. 340 00:19:17,920 --> 00:19:18,400 Speaker 1: In others. 341 00:19:18,600 --> 00:19:22,040 Speaker 7: We've already seen a golden share for US steel. We've 342 00:19:22,080 --> 00:19:25,760 Speaker 7: already seen investments in MP materials, which is in the 343 00:19:25,840 --> 00:19:28,919 Speaker 7: rare earth space. So I think there's no question that 344 00:19:29,600 --> 00:19:33,000 Speaker 7: companies that have some sort of dealings with the US 345 00:19:33,160 --> 00:19:37,800 Speaker 7: government in these strategic industries may be the nets to 346 00:19:37,800 --> 00:19:40,040 Speaker 7: get a call from the Oval Office. 347 00:19:40,600 --> 00:19:43,399 Speaker 3: Trump has talked about building the US Sovereign Wealth Fund. 348 00:19:43,520 --> 00:19:45,520 Speaker 3: Is that what all of this is leading towards? 349 00:19:46,440 --> 00:19:46,680 Speaker 1: Well? 350 00:19:46,680 --> 00:19:49,920 Speaker 7: Any C Director Kevin Hassett basically said as much yesterday 351 00:19:50,000 --> 00:19:53,240 Speaker 7: that they're using a lot of the industrial policy that 352 00:19:53,320 --> 00:19:56,880 Speaker 7: was implemented during the Biden years through the Inflation Reduction Act, 353 00:19:56,880 --> 00:20:00,400 Speaker 7: the Chips Act, the Infrastructure Bill, and some other exiscuative 354 00:20:00,440 --> 00:20:04,440 Speaker 7: authorities to basically reverse engineer a Sovereign Wealth Fund, which 355 00:20:04,480 --> 00:20:08,040 Speaker 7: Trump is long wanted. And this, again, I think is 356 00:20:09,400 --> 00:20:12,600 Speaker 7: a concern for companies that have taken some of these, 357 00:20:12,720 --> 00:20:16,000 Speaker 7: you know, ups of trillions of dollars in government subsidies. 358 00:20:16,520 --> 00:20:18,800 Speaker 7: But it's also I think, you know, a cautionary tale 359 00:20:18,840 --> 00:20:23,280 Speaker 7: about US industrial policy generally. Now, this stuff maybe starts targeted, 360 00:20:23,320 --> 00:20:25,960 Speaker 7: but tends to have a way to spiral out of control. 361 00:20:27,160 --> 00:20:29,480 Speaker 3: Scott, I just want to end on another truth last 362 00:20:29,560 --> 00:20:31,920 Speaker 3: night from the President, not getting as much attention what's 363 00:20:31,960 --> 00:20:33,879 Speaker 3: going on at the Federal Reserve, he said he's going 364 00:20:33,920 --> 00:20:36,400 Speaker 3: to stand up to countries that attack US tech because 365 00:20:36,400 --> 00:20:37,840 Speaker 3: of things like digital services. 366 00:20:38,160 --> 00:20:40,240 Speaker 1: What does this mean for the European Union. 367 00:20:40,080 --> 00:20:42,439 Speaker 3: Given the fact that the President has already struck a 368 00:20:42,480 --> 00:20:43,280 Speaker 3: trade deal. 369 00:20:43,040 --> 00:20:46,639 Speaker 7: With them, Well, I think it should tell the European Union, 370 00:20:46,840 --> 00:20:51,520 Speaker 7: Japan and anybody else that these trade deals that they 371 00:20:52,359 --> 00:20:56,720 Speaker 7: signed over the last couple of months are never really finished. 372 00:20:57,240 --> 00:20:59,720 Speaker 7: You know, digital services taxes were supposed to be an 373 00:20:59,760 --> 00:21:05,080 Speaker 7: issue you in the EU negotiations. The Europeans resisted any changes. 374 00:21:05,880 --> 00:21:09,760 Speaker 7: They signed this big deal, which most people saw as 375 00:21:09,800 --> 00:21:13,320 Speaker 7: a pretty huge cave by the Europeans. And here we 376 00:21:13,400 --> 00:21:15,320 Speaker 7: are just a couple of weeks later and Trump's asking 377 00:21:15,359 --> 00:21:18,199 Speaker 7: for more. So, you know, for those who think, especially 378 00:21:18,240 --> 00:21:21,120 Speaker 7: in the market, who think these trade deals have settled 379 00:21:21,119 --> 00:21:24,639 Speaker 7: down the tariff space, well think again. 380 00:21:25,840 --> 00:21:29,360 Speaker 2: Stay with us multil impax surveillance coming up after this, 381 00:21:38,359 --> 00:21:41,320 Speaker 2: John Guess around a table, Tolston smock of Apollo Toaston, 382 00:21:41,359 --> 00:21:44,240 Speaker 2: good monic, Morning morning. Your reaction to this one. 383 00:21:44,680 --> 00:21:48,040 Speaker 8: Well, obviously the market reaction here is a little bit 384 00:21:48,080 --> 00:21:50,840 Speaker 8: surprising in the sense that the stock market is basically 385 00:21:50,880 --> 00:21:53,240 Speaker 8: now want changed, at least before we opened. By what 386 00:21:53,280 --> 00:21:56,280 Speaker 8: you're seeing in the long end is certainly somewhat worries 387 00:21:56,320 --> 00:21:58,800 Speaker 8: on the Yulcovist evening telling you that the market is 388 00:21:58,840 --> 00:22:01,760 Speaker 8: expecting that ray cuts are coming, because this seems to 389 00:22:01,800 --> 00:22:04,320 Speaker 8: be at least more likely given recent discussions including j. 390 00:22:04,400 --> 00:22:06,720 Speaker 8: Powell on Friday, but also that the long end has 391 00:22:06,760 --> 00:22:10,080 Speaker 8: moved higher. It's obviously equivalent to beginning to think about 392 00:22:10,080 --> 00:22:12,360 Speaker 8: that maybe there is a risk that inflation is going 393 00:22:12,359 --> 00:22:14,840 Speaker 8: to be a problem for a longer period than what 394 00:22:14,920 --> 00:22:17,560 Speaker 8: people thought just a few days ago. The conclusion from 395 00:22:17,640 --> 00:22:21,840 Speaker 8: a broader perspective is obviously a discussion around well, maybe 396 00:22:22,040 --> 00:22:23,680 Speaker 8: we should just begin to think about when we say 397 00:22:23,760 --> 00:22:26,000 Speaker 8: rates are higher for longer, then maybe it's long rates 398 00:22:26,040 --> 00:22:28,200 Speaker 8: that will be higher for longer, not only for fiscal reasons, 399 00:22:28,480 --> 00:22:31,360 Speaker 8: but also now because of this emerging debate, not only 400 00:22:31,359 --> 00:22:34,080 Speaker 8: because of what Powell said last Friday in Jackson Hole 401 00:22:34,280 --> 00:22:37,040 Speaker 8: about the framework, but also about this issue now about well, 402 00:22:37,080 --> 00:22:39,560 Speaker 8: what would the composition of THEBC look like? Are they 403 00:22:39,600 --> 00:22:42,640 Speaker 8: going to allow essentially the inflation target to be higher 404 00:22:42,680 --> 00:22:45,280 Speaker 8: than what it has been just for the last several years. 405 00:22:45,440 --> 00:22:47,760 Speaker 6: Trsten really zeroing in on the shape of the yield 406 00:22:47,800 --> 00:22:50,440 Speaker 6: curve though, and talking about duration getting hit. 407 00:22:50,880 --> 00:22:52,399 Speaker 1: It is the thirty year yield. 408 00:22:52,480 --> 00:22:54,600 Speaker 6: It's a ten year yield which hasn't moved as much, 409 00:22:54,640 --> 00:22:57,840 Speaker 6: and you'd expect if the issue is is more persistent inflation, 410 00:22:58,240 --> 00:23:00,480 Speaker 6: the ten year yield also would be moving on higher 411 00:23:00,680 --> 00:23:03,360 Speaker 6: tens thirties curve is the steepest since twenty twenty one. 412 00:23:03,680 --> 00:23:06,720 Speaker 6: Why is the thirty yearield specifically acting as the release valve. 413 00:23:06,800 --> 00:23:09,119 Speaker 8: Well, there's just more sensitivity in the form of duration 414 00:23:09,440 --> 00:23:11,280 Speaker 8: and the very long end. So ten year rates of 415 00:23:11,320 --> 00:23:13,680 Speaker 8: course are not down as much as two year rates are. 416 00:23:13,760 --> 00:23:15,600 Speaker 8: So really it is the whole yeel curve that is 417 00:23:15,640 --> 00:23:18,320 Speaker 8: just steeper, And you're right the tenure rate basically being 418 00:23:18,560 --> 00:23:20,439 Speaker 8: only down a little bit here as we speak, is 419 00:23:20,480 --> 00:23:22,640 Speaker 8: certainly also telling us that it really is the very 420 00:23:22,680 --> 00:23:26,320 Speaker 8: long duration exposure. Those with very long duration exposure relative 421 00:23:26,359 --> 00:23:29,000 Speaker 8: to matching their long duration liabilities, they are the ones 422 00:23:29,040 --> 00:23:31,720 Speaker 8: that are reacting to this, mainly worrying about that thirty 423 00:23:31,800 --> 00:23:33,840 Speaker 8: year is where most of the action has been. But 424 00:23:33,880 --> 00:23:36,240 Speaker 8: you're right, it is a little bit peculiar. We look 425 00:23:36,240 --> 00:23:38,160 Speaker 8: at it here and say, well, why thirty is moving 426 00:23:38,200 --> 00:23:40,280 Speaker 8: so much more than tens But I think it is 427 00:23:40,359 --> 00:23:42,080 Speaker 8: just the reflection of the whole yell curve s deepening 428 00:23:42,080 --> 00:23:44,399 Speaker 8: here that is going to take some time now to digest. 429 00:23:44,400 --> 00:23:47,000 Speaker 8: And as Mike also was just saying, well, what exactly 430 00:23:47,119 --> 00:23:49,160 Speaker 8: will be this scenario we have now ahead of us. 431 00:23:49,320 --> 00:23:52,080 Speaker 8: Is this going to change the composition of their FIRMC 432 00:23:52,680 --> 00:23:55,080 Speaker 8: or what will their FIRMCEE then look like, especially when 433 00:23:55,119 --> 00:23:56,080 Speaker 8: we come to the other side of. 434 00:23:56,040 --> 00:23:56,840 Speaker 1: February next year. 435 00:23:56,880 --> 00:23:59,159 Speaker 6: So is it your assumption, if we get more doves 436 00:23:59,160 --> 00:24:02,639 Speaker 6: appointed to the FOMC, more people who are maybe willing 437 00:24:02,640 --> 00:24:04,679 Speaker 6: to listen to the arguments of the White House, that 438 00:24:04,760 --> 00:24:06,800 Speaker 6: it's the inflation target that changes that. 439 00:24:06,800 --> 00:24:09,280 Speaker 8: That's the main mechanism I absolutely think that we should 440 00:24:09,320 --> 00:24:11,760 Speaker 8: all think of this as essentially a change in the 441 00:24:11,800 --> 00:24:14,600 Speaker 8: inflation target. We have now for thirty forty years, been 442 00:24:14,720 --> 00:24:17,560 Speaker 8: used to the inflation target is two percent. If I 443 00:24:17,680 --> 00:24:20,840 Speaker 8: own treasuries, my fixed income PORTFOLI will be eroded by 444 00:24:20,840 --> 00:24:23,639 Speaker 8: two percent every year, and inflation now is allowed to 445 00:24:23,680 --> 00:24:26,560 Speaker 8: be higher for longer, and if Jpower now last Friday 446 00:24:26,600 --> 00:24:29,119 Speaker 8: is said that the change and framework away from flexible 447 00:24:29,160 --> 00:24:31,760 Speaker 8: average inflation targeting also will allow inflation to be higher 448 00:24:31,800 --> 00:24:34,439 Speaker 8: for longer. That means that bond investors should begin to 449 00:24:34,480 --> 00:24:36,840 Speaker 8: think about that. It is simply the same as saying 450 00:24:36,840 --> 00:24:40,080 Speaker 8: that the inflation target will also be higher, not necessarily 451 00:24:40,160 --> 00:24:42,520 Speaker 8: significantly higher than two, but even if we grow up 452 00:24:42,560 --> 00:24:44,680 Speaker 8: to two and a half and three over time, that's 453 00:24:44,680 --> 00:24:47,960 Speaker 8: a fairly significant erosion for fixed income investors, especially in 454 00:24:47,960 --> 00:24:48,560 Speaker 8: public markets. 455 00:24:48,560 --> 00:24:51,959 Speaker 2: Houston, They's some really important, critical, serious points. But this 456 00:24:52,000 --> 00:24:55,639 Speaker 2: has happened independent of the pressure on central bank independence. 457 00:24:55,680 --> 00:24:58,440 Speaker 2: The whole points of central bank independence is to make 458 00:24:58,480 --> 00:25:01,480 Speaker 2: the tough decisions divorced from political cycle, to make sure 459 00:25:01,520 --> 00:25:03,840 Speaker 2: that you hit your two percent target. So what is 460 00:25:03,880 --> 00:25:06,439 Speaker 2: the excuse for Shair and Pound and the Federal Reserve 461 00:25:06,720 --> 00:25:09,120 Speaker 2: to miss this target for so many years. 462 00:25:09,320 --> 00:25:11,639 Speaker 8: Well, the issue, of course at the moment is that 463 00:25:11,760 --> 00:25:15,639 Speaker 8: normally the dual mandate, meaning inflation and unemployment, normally points 464 00:25:15,640 --> 00:25:17,880 Speaker 8: in the same direction. If you have a strong economy, 465 00:25:17,960 --> 00:25:20,080 Speaker 8: an employment rate goes down, inflation goes up, and you 466 00:25:20,080 --> 00:25:22,119 Speaker 8: should hike rates. If you have a weak economy, the 467 00:25:22,119 --> 00:25:24,960 Speaker 8: opposite happens. Of course, inflation goes down and growth goes down. 468 00:25:24,960 --> 00:25:27,080 Speaker 8: Of course you should be cutting rates. Now there is 469 00:25:27,119 --> 00:25:29,560 Speaker 8: this tension in the dual mandate, and that is what 470 00:25:29,600 --> 00:25:32,080 Speaker 8: brings this discussion to the table. Maybe that now the 471 00:25:32,160 --> 00:25:35,160 Speaker 8: dual mandate is pulling in different directions. Inflation is saying 472 00:25:35,200 --> 00:25:37,800 Speaker 8: the feed should be hiking. And if we have upward momentum, 473 00:25:37,840 --> 00:25:39,920 Speaker 8: if I look at ECFC go on my Bloomberg screen, 474 00:25:39,960 --> 00:25:42,320 Speaker 8: the CONTENTSUS expecs inflation for the next twelve months to 475 00:25:42,400 --> 00:25:45,080 Speaker 8: be three percent for the next four quarters. That's a 476 00:25:45,200 --> 00:25:47,280 Speaker 8: very high level of inflation when the target is two. 477 00:25:47,600 --> 00:25:50,240 Speaker 8: That says that the Fed should even consider hiking rates. 478 00:25:50,359 --> 00:25:52,680 Speaker 8: But at the same time, Pial very clearly last Friday 479 00:25:52,800 --> 00:25:54,640 Speaker 8: said no, no, we're not going to put much more 480 00:25:54,640 --> 00:25:56,960 Speaker 8: weight on the slowdown on the label market, and with 481 00:25:57,040 --> 00:25:59,640 Speaker 8: the anchoring in the long term inflation expectations. That could 482 00:25:59,640 --> 00:26:02,200 Speaker 8: be the use and the reason the small door out 483 00:26:02,200 --> 00:26:03,639 Speaker 8: of saying well, maybe we don't need to worry so 484 00:26:03,720 --> 00:26:05,359 Speaker 8: much about inflation, maybe we can focus more on the 485 00:26:05,400 --> 00:26:07,720 Speaker 8: label market. So the answer to your question is it's 486 00:26:07,760 --> 00:26:10,480 Speaker 8: because of the tension in the dual mandate that one 487 00:26:10,480 --> 00:26:12,000 Speaker 8: part of the dual mandate it says that should be 488 00:26:12,080 --> 00:26:14,080 Speaker 8: hiking and the other part says it should be cutting. 489 00:26:14,160 --> 00:26:16,480 Speaker 8: And that's what brings this discussion to the table at 490 00:26:16,480 --> 00:26:19,440 Speaker 8: the moment about what exactly is the best decision. 491 00:26:19,040 --> 00:26:19,720 Speaker 1: As you know the weather. 492 00:26:19,800 --> 00:26:22,080 Speaker 2: Addressing that at the moment is to say, essentially, and 493 00:26:22,080 --> 00:26:24,120 Speaker 2: this is coming from the FED share governor want of shares, 494 00:26:24,160 --> 00:26:27,080 Speaker 2: this view, the labor market's not sufficiently tight enough to 495 00:26:27,080 --> 00:26:30,240 Speaker 2: worry about second round effects that this inflation story will 496 00:26:30,280 --> 00:26:32,919 Speaker 2: ultimately be. They won't say it, but they're basically spanning 497 00:26:32,960 --> 00:26:35,560 Speaker 2: it out transit tree, which you push back against that. 498 00:26:35,760 --> 00:26:37,360 Speaker 8: Well, the risk is that we don't know if that's 499 00:26:37,400 --> 00:26:39,399 Speaker 8: the case. But Hammock at the Cleveland Fed has been 500 00:26:39,440 --> 00:26:42,159 Speaker 8: pointing out that companies and her district are beginning to 501 00:26:42,280 --> 00:26:45,480 Speaker 8: raise prices, even those that are not impacted by teriffs. 502 00:26:45,760 --> 00:26:48,480 Speaker 8: So the risk is also in services inflation. Services makes 503 00:26:48,520 --> 00:26:51,359 Speaker 8: up two thirds of GDP, and the ism prices paid 504 00:26:51,359 --> 00:26:54,120 Speaker 8: in services has really started going up, and that suggests 505 00:26:54,160 --> 00:26:56,239 Speaker 8: that even and Austin Goldby was also pointing to this, 506 00:26:56,480 --> 00:26:58,920 Speaker 8: that even the service part of the CPI index could 507 00:26:59,040 --> 00:27:01,200 Speaker 8: begin to show some up pressure. So we just don't 508 00:27:01,240 --> 00:27:03,359 Speaker 8: quite know if we're out of the woods on the 509 00:27:03,359 --> 00:27:06,359 Speaker 8: inflation front. So that's also why inflation swaps in twelve 510 00:27:06,400 --> 00:27:09,640 Speaker 8: month's time uprising that inflation will be in one year's 511 00:27:09,680 --> 00:27:12,800 Speaker 8: time three point four percent. That is dramatically higher than 512 00:27:12,840 --> 00:27:14,760 Speaker 8: the fifth two percent target. And that is the fear, 513 00:27:14,760 --> 00:27:16,760 Speaker 8: of course that some people in the market have, nameing 514 00:27:16,800 --> 00:27:20,840 Speaker 8: that maybe inflation is going to be not only translitorially higher, 515 00:27:20,840 --> 00:27:22,119 Speaker 8: but maybe there is a risk that it could be 516 00:27:22,200 --> 00:27:24,399 Speaker 8: more permanently higher, in the sense that we will have 517 00:27:24,480 --> 00:27:26,840 Speaker 8: inflation higher for longer. And that's of course the risk 518 00:27:27,000 --> 00:27:29,080 Speaker 8: that we could have a policy mistake here by focusing 519 00:27:29,080 --> 00:27:30,320 Speaker 8: too much on the leave of market. 520 00:27:30,320 --> 00:27:32,680 Speaker 2: Well, let's talk about how policy might evolve. There's three 521 00:27:32,720 --> 00:27:34,960 Speaker 2: time frames that think about here. Danny told about two 522 00:27:34,960 --> 00:27:38,160 Speaker 2: of them a little bit earlier, the September than everything else. 523 00:27:38,359 --> 00:27:40,840 Speaker 2: But the September everything else, and then there's life after 524 00:27:40,880 --> 00:27:43,520 Speaker 2: power from May onwards. And I just wonder whether you 525 00:27:43,520 --> 00:27:46,080 Speaker 2: think perhaps we're getting ahead of ourselves here that beyond 526 00:27:46,119 --> 00:27:48,480 Speaker 2: September there's still a lot to apply for. 527 00:27:48,720 --> 00:27:50,440 Speaker 8: I do think that it's a good idea to take 528 00:27:50,440 --> 00:27:52,359 Speaker 8: a deep breath and go for a long walk in 529 00:27:52,400 --> 00:27:54,399 Speaker 8: a green park and say, you know what, touch grass. 530 00:27:54,440 --> 00:27:55,320 Speaker 1: There's a lot of. 531 00:27:55,280 --> 00:27:57,720 Speaker 8: Things going on at the moment, which of course are 532 00:27:57,880 --> 00:28:00,720 Speaker 8: somewhat unusual, including of course the topic of the But 533 00:28:00,960 --> 00:28:02,639 Speaker 8: let's see what the data is telling us. We have 534 00:28:02,680 --> 00:28:04,720 Speaker 8: a lot of data points before we get even to 535 00:28:04,840 --> 00:28:07,359 Speaker 8: the December meeting, so the market is currently only prising 536 00:28:07,359 --> 00:28:10,320 Speaker 8: a content in September and December, but getting into next year, 537 00:28:10,359 --> 00:28:12,119 Speaker 8: the economy could be in a very different place. We 538 00:28:12,119 --> 00:28:14,080 Speaker 8: could either have a scenario where infleation is a lot 539 00:28:14,119 --> 00:28:16,200 Speaker 8: higher and we have a whole different discussion, But it 540 00:28:16,240 --> 00:28:18,760 Speaker 8: could also be a scenario where we have growth slow down, 541 00:28:18,760 --> 00:28:20,840 Speaker 8: that's a lot weaker and therefore the fit we'll be 542 00:28:20,880 --> 00:28:22,520 Speaker 8: cutting a lot more. So let's take the data as 543 00:28:22,560 --> 00:28:25,720 Speaker 8: it comes in and watch exactly how it plays our relative. 544 00:28:25,400 --> 00:28:26,800 Speaker 2: To the dual main day for the fed who don't 545 00:28:26,800 --> 00:28:28,439 Speaker 2: be talked about the same thing. If you're in the 546 00:28:28,440 --> 00:28:31,439 Speaker 2: threes gone into twenty twenty six, this guits harder and 547 00:28:31,520 --> 00:28:32,240 Speaker 2: harder to count. 548 00:28:32,280 --> 00:28:33,639 Speaker 6: It does get a lot harder, But I think it's 549 00:28:33,680 --> 00:28:34,760 Speaker 6: going to be really instructive. 550 00:28:34,800 --> 00:28:36,639 Speaker 1: On Thursday, Governor Waller is. 551 00:28:36,600 --> 00:28:39,280 Speaker 6: Going to be giving a full fledged monetary policy and 552 00:28:39,360 --> 00:28:42,880 Speaker 6: economy speech. Considering Powell's come around to his camp and 553 00:28:42,960 --> 00:28:45,400 Speaker 6: he's up for the FED chair. I think that's really 554 00:28:45,440 --> 00:28:48,440 Speaker 6: also going to determine maybe that medium term plus longer 555 00:28:48,520 --> 00:28:49,520 Speaker 6: term trajectory of the. 556 00:28:49,440 --> 00:28:51,520 Speaker 2: FAT and empower can take notes and basically use the 557 00:28:51,520 --> 00:28:53,600 Speaker 2: same notes in the news conference. This is basically what 558 00:28:53,640 --> 00:28:56,080 Speaker 2: the speech was on Friday. Anyway, less of my snark, 559 00:28:56,280 --> 00:28:58,200 Speaker 2: I want to finish on with you where you think 560 00:28:58,200 --> 00:29:00,960 Speaker 2: this is ultimately heading. Care you believe we do end 561 00:29:01,040 --> 00:29:04,800 Speaker 2: up in this situation where we are facing stagflation and 562 00:29:04,840 --> 00:29:08,120 Speaker 2: this federal reserve is ultimately paralyzed and that dubbish bias 563 00:29:08,440 --> 00:29:10,840 Speaker 2: is constrained, because at the moment what we hear is 564 00:29:10,880 --> 00:29:13,320 Speaker 2: the dubbish bias isn't constrained. Do you think that's the 565 00:29:13,400 --> 00:29:14,760 Speaker 2: ultimate destination though. 566 00:29:14,760 --> 00:29:17,880 Speaker 8: I absolutely thank the ultimate destination exactly because the issue 567 00:29:17,920 --> 00:29:22,280 Speaker 8: is normally fit policy is very straightforward because both parts 568 00:29:22,320 --> 00:29:24,720 Speaker 8: of the dual made it are actually designed to point 569 00:29:24,720 --> 00:29:26,480 Speaker 8: in the same direction, with the business siding. When the 570 00:29:26,520 --> 00:29:28,719 Speaker 8: economy is good, you should be hiking. When the economy 571 00:29:28,760 --> 00:29:30,840 Speaker 8: is bad, you should be cutting. But now because of 572 00:29:30,920 --> 00:29:34,120 Speaker 8: this tacflationary impulse coming not only from tariffs but also 573 00:29:34,120 --> 00:29:37,760 Speaker 8: coming from immigration restrictions and deportations, lowering labor supply and 574 00:29:37,800 --> 00:29:39,840 Speaker 8: putting up by pressure on wages in the sectors where 575 00:29:39,880 --> 00:29:43,920 Speaker 8: unauthorized immigrants are working, namely agricultural construction, hotels, and restaurants. 576 00:29:44,080 --> 00:29:48,040 Speaker 8: That's taclationary impulse is creating this very complex situation for 577 00:29:48,080 --> 00:29:50,240 Speaker 8: the FED where it becomes a matter of do you 578 00:29:50,280 --> 00:29:52,560 Speaker 8: like atmosphere like oranges as the fit chair or as 579 00:29:52,560 --> 00:29:54,840 Speaker 8: the FMC, do it like inflation or do it like 580 00:29:54,840 --> 00:29:55,680 Speaker 8: the slow down and growth? 581 00:29:55,680 --> 00:29:56,640 Speaker 1: And where do you put your weight? 582 00:29:56,680 --> 00:29:58,800 Speaker 8: And that does indeed depend a lot on what is 583 00:29:58,800 --> 00:30:00,000 Speaker 8: the composition of the committee. 584 00:30:00,880 --> 00:30:04,440 Speaker 2: This is the Bloomberg Surveillance podcast, bringing you the best 585 00:30:04,440 --> 00:30:07,760 Speaker 2: in markets, economics, and geopolitics. You can watch the show 586 00:30:07,840 --> 00:30:10,760 Speaker 2: live on Bloomberg TV weekday mornings from six am to 587 00:30:10,920 --> 00:30:14,680 Speaker 2: nine am Eastern. Subscribe to the podcast on Apple, Spotify, 588 00:30:14,800 --> 00:30:17,040 Speaker 2: or anywhere else you listen, and as always, on the 589 00:30:17,040 --> 00:30:19,480 Speaker 2: Bloomberg terminal and the Bloomberg Business app.