Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: President Trump is ramping up criticism of FED chair Jerome Pal,
Speaker 2: so let's discuss now with Claudia Salm. She's new Century
Speaker 2: Advisor's chief economists and former FED economists. Claudia, great to
Speaker 2: have you with us. There was a note from wynthin
Speaker 2: over at BBH this morning saying that the admission that
Speaker 2: this is being studied at all should be taken very
Speaker 2: seriously and very negatively. And Claudia, I'm curious, how seriously
Speaker 2: are you taking the possibility that we do see Trump
Speaker 2: try to remove your own Pal.
Speaker 3: I take it very seriously, and I you know, this
Speaker 3: administration has taken steps, whether it's with the tariffs or
Speaker 3: with downsides in the government, that really were, you know,
Speaker 3: beyond expectations. So I you know, the unthinkable is thinkable
Speaker 3: with this administration. So it is a risk to take seriously.
Speaker 3: But I do think when the administration sits down and
Speaker 3: studies the options, they'll come to the right conclusion that
Speaker 3: this really isn't the path they want to go down.
Speaker 4: Now.
Speaker 1: I also want to talk about the precedent here because
Speaker 1: people often point to what had happened in the Kennedy
Speaker 1: era in the Johnson era. In the Nixon era, people
Speaker 1: often pointed Nixon burns. The difference now is the amount
Speaker 1: of tools in the toolkit. I think that the FED
Speaker 1: has brought out in terms of quantitative easing, emergency measures
Speaker 1: during crises. The power of the FED has grown. So
Speaker 1: what does this mean to have this kind of political
Speaker 1: pressure on the FED in an era where the economy
Speaker 1: is so fragile?
Speaker 4: Right, So the FED needs to be independent.
Speaker 3: But the FED absolutely must be accountable, and it is
Speaker 3: Congress created the FED.
Speaker 4: It has amended the Federal Reserve Act.
Speaker 3: Over time, the FED has to report to the public,
Speaker 3: report to Congress. And you know, there are times where
Speaker 3: FED has used tools, such as in the Great Financial Crisis,
Speaker 3: they did emergency lending and then after the fact Congress
Speaker 3: said they amended the Federal Reserve Act with the DoD
Speaker 3: Frank and said you know what to do that you're
Speaker 3: going to need treasuries buy in.
Speaker 4: And that happened during COVID.
Speaker 3: So there are times where we watch the powers of
Speaker 3: the FED and Congress, you know, put some controls on them.
Speaker 3: But that operational independence, that ability to set interest rates
Speaker 3: with monetary policy, not just in the US, but around
Speaker 3: the world has been come to be understood as very
Speaker 3: important to keeping inflation low.
Speaker 4: And this is we're seeing it.
Speaker 3: This is the moment why we need FED independence where
Speaker 3: you have strong views kind of clashing between the President.
Speaker 4: And the FED. It's not personal, it's just the experience
Speaker 4: is we need the.
Speaker 3: FED bill to make the decisions that they think are best,
Speaker 3: and we can hold them accountable for that after the fact,
Speaker 3: but like.
Speaker 4: They need to be able to make those decisions.
Speaker 2: It's a good reminder too that we all have bosses,
Speaker 2: including the FED and Jerome Pal's case, it's Congress. But
Speaker 2: I want to go back to what you were saying
Speaker 2: in your first answer, that you think that they're going
Speaker 2: to study the options the administration that is, and that
Speaker 2: they'll arrive at the conclusion and won't go through with this.
Speaker 2: And I'm curious to see the confidence when they look
Speaker 2: at the options. What do you think that they'll see.
Speaker 3: It's in the absolute best interest of the president, with
Speaker 3: his economic agenda that he has set to give the
Speaker 3: FED its face to make its policy decisions. One of
Speaker 3: the things that you know the FED is they're uncertain
Speaker 3: about what happens with inflation, particular becomes embedded.
Speaker 4: So they are.
Speaker 3: Really trying to you know, we're the inflation fighter. We're
Speaker 3: going to be credible on this. We've seen market expectations.
Speaker 3: They don't expect the tariffs maybe to lift inflation this
Speaker 3: year but then come back down. That is exactly I mean,
Speaker 3: that is the path that the President would want to see,
Speaker 3: you know, with the tariffs, not to have it be
Speaker 3: long term inflation.
Speaker 4: So let the FED do their job.
Speaker 3: If the President undercuts this FED, it will not just undercut,
Speaker 3: you know, remove Jay Palette, undercuts any future FED chairs
Speaker 3: that that Trump would put in place, and it really
Speaker 3: could cause a lot of disruptions.
Speaker 4: And if he removes pal he's not going to get
Speaker 4: interest rates down anyways.
Speaker 3: They're going to go because the inflation expectations would go
Speaker 3: go bisarre. So I absolutely understand why the President is
Speaker 3: critical of the Fed's stance right now, but this isn't
Speaker 3: the way to do interact with the FED.
Speaker 2: Well, Claudia, you touched on something that Chanel and I
Speaker 2: were discussing earlier, that you think about Kevin worsh who
Speaker 2: has been reported as in consideration. Other outlets have reported
Speaker 2: that he too, has urged the President not to necessarily
Speaker 2: end Jerome Pal's term early exactly for that reason that
Speaker 2: if he was then made FED chair, that he would
Speaker 2: be dealing with a loss of credibility at the institution itself.
Speaker 3: Right, And we have to look back the credibility that
Speaker 3: the FED gained in terms of being inflation fighting, much
Speaker 3: of that was.
Speaker 4: One during the Pole Vulgar FED and that.
Speaker 3: Was a very severe recession, very high interest rates to
Speaker 3: break the inflation mentality like, we do not want to
Speaker 3: go back, No one wants to go back there.
Speaker 4: So that, Yeah, the.
Speaker 3: FED is an institution, It plays an important role. It
Speaker 3: doesn't always get it right. And the president could be
Speaker 3: and there is a case for preemptive interest rate cuts.
Speaker 3: It's just that's not a case that he should be making.
Speaker 3: And he's in certainly removing or even threatening to remove
Speaker 3: the FED chair. That's just that's creating more uncertainty in
Speaker 3: a world right now that frankly is dealing with a
Speaker 3: lot of uncertainty in terms of the economy and financial market.
Speaker 4: So this would be a great time to de escalate this.
Speaker 1: Well, Claudie, I want to bring up something that was
Speaker 1: brought up befrom Neil Datta of Renaissance Macro this morning.
Speaker 1: This is exactly what he wrote that forget the legal
Speaker 1: obstacles to fire Powell, getting rid of him in such
Speaker 1: a dramatic fashion would upset the bond market. Risk premiums
Speaker 1: would rise sharply as investors questioned the central banks independence,
Speaker 1: and longer run interest rates would surge. That was from
Speaker 1: run Maac this morning. But then you also have this
Speaker 1: morning we were talking about a little ker Katie and
Speaker 1: I were talking about it. You have the president this
Speaker 1: morning not saying he wanted to fire the FED chair.
Speaker 1: He said that he wanted him to lower interest rates.
Speaker 1: You saw on the heels of that just the tenure
Speaker 1: lose some of its selloff. Do you think this is
Speaker 1: turning in to a negotiation tactic more than a reality.
Speaker 4: It's it's really hard. It's hard to.
Speaker 3: Judge, right, Like I don't under you know, know where
Speaker 3: the President is going from this?
Speaker 4: I did.
Speaker 3: It's great to see this morning's message on true social
Speaker 3: did not include a threat of termination.
Speaker 4: It is also problematic.
Speaker 3: To be having this if you call it a negotiation
Speaker 3: in public, right because now it does so.
Speaker 4: Suppose the Fed meets and they cut interest rates? Did
Speaker 4: they do it?
Speaker 3: Because the president told them to, right Like, this is
Speaker 3: just not this is not a healthy.
Speaker 4: Discussion to be having. I mean, I understand it.
Speaker 3: Again, the president at many presidents is nowhere near a
Speaker 3: unique in this.
Speaker 4: Don't like what the FED does?
Speaker 3: Right That's again, that's part of why we need the
Speaker 3: independence of the FED is just having this debate in
Speaker 3: public and putting this pressure on. It's one of those
Speaker 3: be careful what you wish for, right Like, if the
Speaker 3: FED caves, it would be really bad.
Speaker 4: I don't expect the Fed decay on this, but it
Speaker 4: would be really bad.
Speaker 3: And it makes a very complicated policy decisions for the
Speaker 3: FED this year even harder if they have it with
Speaker 3: all of this political tension and these conversations going.
Speaker 1: On To that end, also, how do you see the
Speaker 1: reaction from the bond market, not just in the short
Speaker 1: term but in longer term rates. You think about the
Speaker 1: ten year yield flirting with four point four percent this morning,
Speaker 1: now closer to four point three four percent. Is there
Speaker 1: a risk that a deep recession would drive down those
Speaker 1: longer term bond yields significantly, or that fiscal pressures of
Speaker 1: the United States will supersede all of that, And you
Speaker 1: actually see those longer term rates go higher.
Speaker 3: So everything is on the table as part of the
Speaker 3: problem right now, and there really is a lot of uncertainty.
Speaker 3: We're doing major policy changes from trade to fiscal to immigration,
Speaker 3: and then if you want to put you know, FED
Speaker 3: independence on the table too. It's just a lot for
Speaker 3: anybody who's trying to look out in the future, which
Speaker 3: is exactly what financial markets are trying to do.
Speaker 4: They're trying to look out in the future and price it.
Speaker 3: And honestly, I think the one thing that we should
Speaker 3: be very comfortable with is we're going to see a
Speaker 3: lot of volatility. We're going to see a lot of
Speaker 3: shifting narratives until that uncertainty is pulled out. And the
Speaker 3: president again has a very unique position and that he
Speaker 3: can pull some of that uncertainty out right now.
Speaker 2: Yeah, definitely. I mean a lot of this uncertainty came
Speaker 2: from his desk itself, and obviously, like you say, he
Speaker 2: has the levers to pull to remove that uncertainty. But
Speaker 2: I want to talk about the numbers that the FED
Speaker 2: has in front of them. Politics aside. When Jerome pal
Speaker 2: and his colleagues are sitting down to make policy, they
Speaker 2: have of course inflation. They have what the labor market
Speaker 2: is doing, and they have of course what we're seeing
Speaker 2: in terms of break even inflation expectations. And the President
Speaker 2: Trump in history social post this morning said that you
Speaker 2: have energy costs way down, you have food costs way down.
Speaker 2: You also have most other things trending down. And as
Speaker 2: such he concludes, there's actually no inflation. What are you seeing, though, Claudia,
Speaker 2: what is the actual read on inflation right now? When
Speaker 2: you take a look at this data.
Speaker 3: Well, are broad based measures of inflation, so not just
Speaker 3: picking out particular series like energy. They show that inflation
Speaker 3: continues to be elevated relative to the FEDS two percent target.
Speaker 3: And it's been that way for you know, since twenty
Speaker 3: twenty one.
Speaker 4: We've been making progress.
Speaker 3: And honestly, the conversation we would be having right now
Speaker 3: is about the upcoming FED rate cut because of progress
Speaker 3: on inflation and the good economy if it were not
Speaker 3: for some very big changes that have been made in
Speaker 3: economic policy going forward. Above all else the tariffs, which
Speaker 3: just aren't in the data yet, right, and the Fed
Speaker 3: has to think about that. I mean, the markets are
Speaker 3: thinking about everybody's thinking about what's coming ahead.
Speaker 4: So yes, it is good that we've made progress on inflation.
Speaker 3: That is, that is amazing where labor market is great,
Speaker 3: but that does not tell us necessarily where we are
Speaker 3: going over the coming months. And the FED, with all
Speaker 3: this uncertainty about the policy, is their weight and see
Speaker 3: approach to this I think makes a lot a lot
Speaker 3: of sense. And so we're gonna but they're gonna want
Speaker 3: they need to see the data and above all else.
Speaker 4: They need to see that the inflation stays under control.
Speaker 1: Claudia, we got to leave it there. We thank you
Speaker 1: so much for your time this morning. Claudiasam of New
Speaker 1: Century Advisors