Speaker 1: Bloomberg Audio Studios, podcasts, radio news. I'm joined now by
Speaker 1: someone who intimately understands the FED was there for ten
Speaker 1: years and most recently was the FED Vice chair under J. Powell,
Speaker 1: who is still now the chair, and that's of course
Speaker 1: Lale Brainerd. Lale, thank you so much for joining us
Speaker 1: this morning. As we see this standoff between President Trump
Speaker 1: and Governor Cook, we have yet to hear from the
Speaker 1: FED itself. What kind of response do you think we
Speaker 1: can expect from the institution.
Speaker 2: Well, I think the Federal Reserve is an incredibly difficult
Speaker 2: position here, but you have to remember this is not
Speaker 2: about an individual governor. This is really an unprecedented attack
Speaker 2: on the independence of the Federal Reserve as an institution.
Speaker 2: There is nobody in the Federal Open Markets Committee, the
Speaker 2: Monetary Policy Setting Committee that can't be thinking, well, what
Speaker 2: does this mean for me? And so any member of
Speaker 2: the board presumably is going to worry that they too
Speaker 2: could be subject to this kind of political pressure and
Speaker 2: that fundamentally undermines the institutional independence of the FED, which
Speaker 2: means higher inflation, potentially less credibility, even higher long term
Speaker 2: interest rates bad for the economy.
Speaker 1: Do you think this can actually impact how members are
Speaker 1: thinking about monetary policy.
Speaker 2: Well, I just think the implication if any member of
Speaker 2: that board could come under this kind of political pressure
Speaker 2: from the White House, and of course we saw that
Speaker 2: kind of pressure on the chair earlier this year. I
Speaker 2: think that does really put a higher premium on whether
Speaker 2: they're going to be willing to speak their minds to
Speaker 2: sent on key votes if necessary. I think it really
Speaker 2: does create unprecedented risks.
Speaker 1: The letter talked about this mortgage allegation fraud in the
Speaker 1: mortgage world for Governor Cook, what if she was charged
Speaker 1: or convicted?
Speaker 2: Well, I think what is important here is due process
Speaker 2: and undertaking a real investigation and having the facts on
Speaker 2: the table, and the ability for her to defend herself legally.
Speaker 2: None of that has taken place here. The White House
Speaker 2: has preempted the process, and so that is why it's
Speaker 2: really unprecedented. It's very very threatening to the very independence
Speaker 2: of the Federal Reserve, and it should cause concerns, I
Speaker 2: think among investors and more broadly about that fundamental underpinning
Speaker 2: of our strong economy and our strong financial markets.
Speaker 1: Given this is just about one individual, does the Fed
Speaker 1: come out and say something or do they need to
Speaker 1: wait until that due process takes place.
Speaker 2: So the Federal Reserve as an institution is all about
Speaker 2: due process. And there have been individuals who have had
Speaker 2: investigations previously. There's a good process for doing that. That's
Speaker 2: not what's taking place here. This is really about trying
Speaker 2: to overturn the majority of the Board of Governors long
Speaker 2: before any of these governor's terms are up, by threatening
Speaker 2: them with these kinds of investigations and firing without real
Speaker 2: due process and cause. And again, the Federal reserves independence
Speaker 2: really is at stake here, and that means that monetary
Speaker 2: policy will increasingly be overshadowed by concerns that there's political interference,
Speaker 2: whether or not that is actually the case if you
Speaker 2: think about it. J Powell opened the door for an
Speaker 2: interest rate cut in September very clearly that's exactly what
Speaker 2: the president wants, so monetary policy, he's actually moving his way.
Speaker 2: And yet this is a very very aggressive attack on
Speaker 2: the Federal Reserve when monetary policy is doing exactly what
Speaker 2: he's been calling for.
Speaker 1: That speech, the FED chair gave a Jackson hold just
Speaker 1: on Fridays, very different from how he sounded J Powell
Speaker 1: four weeks ago. Do you think the speech was political.
Speaker 2: Well, I think that the Chair was very careful in
Speaker 2: laying out that the balance of risks had shifted. He
Speaker 2: pointed specifically to the possibility that the labor market is
Speaker 2: weakening faster than the members of the FMC had believed
Speaker 2: in their last meeting because of the revisions to three
Speaker 2: months worth of hiring data, and so he laid out
Speaker 2: a very I think strong case based on data and
Speaker 2: the facts, why they were now potentially going to be
Speaker 2: more attentive to that labor market weakening while acknowledging that
Speaker 2: inflation is still likely to go up because of the
Speaker 2: very high tariffs that have been put in place.
Speaker 1: Knowing the data and knowing all the personnel that are
Speaker 1: going to get together at the next FED meeting September seventeenth,
Speaker 1: do you expect them all to walk through that door
Speaker 1: that the FED chair opened up for a cut.
Speaker 2: Well, I don't know if all members of the FMC
Speaker 2: will be in the same place, and of course what
Speaker 2: we should hope for is a really good debate and
Speaker 2: an airing of differing views. But I do think that
Speaker 2: barring something really surprising in the upcoming employment print and
Speaker 2: CPI print, it's more likely than not that they will
Speaker 2: vote for a twenty five basis point reduction in the
Speaker 2: federal funds rate.
Speaker 1: Do you think there's a bias to the labor market
Speaker 1: in this federal reserve?
Speaker 2: So up until this point, I think what we've heard
Speaker 2: is a lot of discussion about the potential risks to inflation.
Speaker 2: Inflation is still high. It is between two and a
Speaker 2: half and three percent, and while this time last year
Speaker 2: it was going in the right direction moving down to
Speaker 2: the two percent target, this year is actually moving up.
Speaker 2: So we have heard a lot of attention to inflation,
Speaker 2: appropriately so, but the chair acknowledged that they are balancing risks,
Speaker 2: risks of higher inflation, risks of lower employment, and that
Speaker 2: is exactly what you expect from tariffs, a stagflationary shock.
Speaker 1: When he was talking about tariffs, he said that it's
Speaker 1: not going to come all at once. The impact is
Speaker 1: the fedcher basically signaling to the market and to us
Speaker 1: to just look through any potential hot CPI prints that
Speaker 1: come out between now in the next twelve months.
Speaker 2: So my interpretation of that discussion is simply to acknowledge
Speaker 2: that when the labor market starts to turn down, unemployment
Speaker 2: often doesn't gently move up, and the Federal Reserve doesn't
Speaker 2: have a lot of time to react. Unemployment often jumps higher.
Speaker 2: Whereas because the tariffs have changed a number of times
Speaker 2: and still do not seem to be settled. Because businesses
Speaker 2: were so good at getting inventories in ahead of time,
Speaker 2: because consumers did a lot of advanced purchases, those tariffs
Speaker 2: are working their way into prices more slowly. So I
Speaker 2: think it was just an acknowledgement of different potential timing
Speaker 2: on the two legs of the dual mandate.
Speaker 1: It felt like Chair Powell was coming around to how
Speaker 1: Governor Waller thinks, or maybe how Governor Bowman thinks. And
Speaker 1: I want to end on those two individuals their names
Speaker 1: potentially to be the next FED chair, but their scenario.
Speaker 1: People are talking about that all the presidents terms need
Speaker 1: to be renewed in February. Would you see a situation
Speaker 1: or risk at the FED Board, would next multiple presidents
Speaker 1: at the bidding of the President of the United States.
Speaker 2: Well, I think that is exactly the risk that we
Speaker 2: are seeing play out right now. So by moving preemptively
Speaker 2: to remove a governor from the Federal Reserve without going
Speaker 2: through the process, without there being any clear evidence. The
Speaker 2: President essentially is moving to shift the majority of the
Speaker 2: Board of Governors well before what was contemplated in terms
Speaker 2: of the institutional structure in their terms, and that opens
Speaker 2: the door when renewals of all of the Reserve Bank
Speaker 2: presents come up in February, to again take very unprecedented
Speaker 2: actions and potentially not renew some of them in order
Speaker 2: to shift the overall voting majority on the FMC. That
Speaker 2: is an unprecedented attack on the independence of the Federal
Speaker 2: Reserve and it should really concern us about their ability
Speaker 2: to continue to be credible in fighting inflation and keeping
Speaker 2: our economy on a strong course.
Speaker 1: Which is quickly. You know, Governor Bowman and Waller, do
Speaker 1: you think they would be up for that kind of
Speaker 1: level of revamping.
Speaker 2: This is really not about individual members of the Board
Speaker 2: or the FLMC. This is really about whether political pressure
Speaker 2: will continue to be exerted on all members of the
Speaker 2: FLMC in a way that puts them in jeopardy and
Speaker 2: potentially makes them less willing to share their views about
Speaker 2: the economy and appropriate monetary policy with the public and
Speaker 2: also to vote their mind on monetary policy decisions. That
Speaker 2: is what is at stake here, and I think it's
Speaker 2: very concerning