WEBVTT - Trump May Not Be Done With Powell Yet 0:00:00.280 --> 0:00:07.200 Bloomberg Audio Studios, podcasts, radio news. 0:00:08.080 --> 0:00:09.840 I have no intention of firing him. 0:00:10.240 --> 0:00:13.440 I would like to see him be a little more 0:00:13.480 --> 0:00:17.480 active in terms of his idea to lower interest rates. 0:00:26.920 --> 0:00:29.680 I'm Stephanie Flanders, head of Government and Economics at Bloomberg. 0:00:29.800 --> 0:00:33.000 Welcome to Trumperonomics, the podcast that looks at the economic 0:00:33.120 --> 0:00:36.400 world of Donald Trump, how he's already shaped the global economy, 0:00:36.680 --> 0:00:39.680 and what on earth is going to happen next. This week, 0:00:40.040 --> 0:00:43.120 we're looking at what's at stake in the tussle between 0:00:43.159 --> 0:00:47.280 President Donald Trump and the Federal Reserve Chair J Powell. 0:00:48.000 --> 0:00:49.880 At the start of this week, stocks took a dip, 0:00:50.200 --> 0:00:53.600 and this time they weren't reacting to tariff policies. It 0:00:53.720 --> 0:00:56.840 was the president's comments about the Federal Reserve, the US 0:00:56.840 --> 0:01:02.200 Central Bank, and its chair, Jerome or Powell. On Monday, 0:01:02.560 --> 0:01:05.920 the President had posted on social media, there is virtually 0:01:06.000 --> 0:01:09.720 no inflation, pointing to lower energy and egg prices, but 0:01:09.800 --> 0:01:12.839 there can be a slowing of the economy unless mister 0:01:13.040 --> 0:01:18.400 too late, a major loser. Lower's interest rates now in capitals. 0:01:18.720 --> 0:01:22.360 And that followed another post saying Powell's termination quotes could 0:01:22.360 --> 0:01:26.440 not come soon enough. Well late in the day Tuesday, 0:01:26.920 --> 0:01:30.560 after we recorded our discussion this week, President walked back 0:01:30.600 --> 0:01:33.560 some of those remarks, saying he had no intention of 0:01:33.600 --> 0:01:37.199 firing FED Chair Jay Powell, but he couldn't resist adding 0:01:37.200 --> 0:01:38.880 his own take on FED policy. 0:01:39.280 --> 0:01:41.600 It is a perfect time to lower interest rates. 0:01:42.200 --> 0:01:45.480 So the argument between the world's most powerful politician and 0:01:45.520 --> 0:01:49.400 its most powerful central banker isn't over. And we know 0:01:49.440 --> 0:01:52.160 from experience that once Donald Trump has someone in his sights, 0:01:52.560 --> 0:01:55.680 he's likely to keep taking shots, especially if the target 0:01:55.800 --> 0:01:59.040 is someone he can blame for a weakening economy. We 0:01:59.120 --> 0:02:02.160 discussed in detail whether the President can actually fire j 0:02:02.320 --> 0:02:04.880 Powell a few weeks ago, didn't go into that in 0:02:04.920 --> 0:02:08.280 this week's conversation. My focus was on how investors are 0:02:08.320 --> 0:02:12.360 reacting to those comments, those complaints about the FED, and 0:02:12.440 --> 0:02:15.639 more broadly, what is at stake not just for the 0:02:15.760 --> 0:02:20.960 US economy but also the world. And we have the 0:02:20.960 --> 0:02:25.360 perfect people to engage on this, especially from a market perspective. 0:02:25.360 --> 0:02:29.280 We have Krishna Guha, vice chair of Evercore ISI and 0:02:29.520 --> 0:02:33.000 head of the Global Policy and Central Bank Strategy Team there. 0:02:33.400 --> 0:02:36.840 Before being at Evercore, Crucially, Krishna was an executive vice 0:02:36.840 --> 0:02:40.080 president and member of the management committee, head of Communications 0:02:40.080 --> 0:02:43.080 Group at the New York Federal Reserve, and before that 0:02:43.480 --> 0:02:45.960 he was a senior writer on global economics and Economic 0:02:46.000 --> 0:02:50.520 policy at the FT. I think we overlapped briefly. Welcome Krishna. 0:02:50.880 --> 0:02:51.799 Very good to have you on. 0:02:52.160 --> 0:02:53.959 Wonderful to be Awathy is there. 0:02:55.760 --> 0:02:59.320 And our own Kate Davidson back to talk to us, 0:02:59.320 --> 0:03:02.400 managing Edis, who covers US economic policy for Bloomberg News 0:03:02.400 --> 0:03:04.720 in Washington. Kate, I think you were actually on the 0:03:04.800 --> 0:03:08.280 debut episode of Trumpnomics back in January, so I'm surprised 0:03:08.280 --> 0:03:09.720 it's taking us this long to have you back. 0:03:10.080 --> 0:03:10.840 Thanks for having me. 0:03:12.760 --> 0:03:18.960 Thank so, Kate. Let me just ask you right at 0:03:18.960 --> 0:03:21.359 the start, just to catch us up briefly on how 0:03:21.400 --> 0:03:24.560 Donald Trump's view of J. Powell has changed, Because, of course, 0:03:24.600 --> 0:03:27.919 you know, as we keep reminding ourselves, he appointed Jay 0:03:28.040 --> 0:03:32.959 Powell to succeed Janet Yellen back in I think twenty seventeen, 0:03:33.000 --> 0:03:36.320 in his first term. How quickly did he sour on him? 0:03:36.360 --> 0:03:37.280 How did we get this far? 0:03:38.080 --> 0:03:40.480 Yeah? I did go back. Actually I was curious about 0:03:40.480 --> 0:03:43.360 this myself. I went back and watched that announcement in 0:03:43.400 --> 0:03:46.120 the Rose Garden when he said he had chosen J. 0:03:46.360 --> 0:03:49.560 Powell to succeed Janet Yellen. The question was whether she 0:03:49.600 --> 0:03:52.200 would be nominated for another term. Of course, she wasn't, 0:03:52.200 --> 0:03:55.080 and at the time he said he was confident, based 0:03:55.120 --> 0:03:57.640 on Powell's record, that he had the wisdom and the 0:03:57.720 --> 0:04:01.480 leadership to guide the economy through any challenge. 0:04:01.560 --> 0:04:06.800 He's strong, he's committed, He's smart. Jay has earned the 0:04:06.920 --> 0:04:12.040 respect and admiration of his colleagues for his hard work, expertise, 0:04:12.360 --> 0:04:17.159 and judgment. He has proven to be a consensus builder 0:04:17.279 --> 0:04:23.479 for the sound monetary and financial policy that he so 0:04:23.680 --> 0:04:24.880 strongly believes in. 0:04:25.440 --> 0:04:27.760 He had a lot of praise for j. Powell at 0:04:27.760 --> 0:04:31.560 the time. It soured pretty quickly. If you recall in 0:04:31.680 --> 0:04:35.560 twenty eighteen, shortly after Powell was confirmed, the FED had 0:04:35.600 --> 0:04:38.400 been slowly raising interest rates. Right, We're coming off a 0:04:38.440 --> 0:04:40.880 period of very low rates for a number of years, 0:04:41.279 --> 0:04:43.960 and there was a thinking that among Fed officials they 0:04:43.960 --> 0:04:46.640 wanted to try to get back to something resembling normal. 0:04:46.720 --> 0:04:49.680 They were very slowly turning up the dial, and Trump 0:04:49.720 --> 0:04:52.240 pretty quickly decided he didn't like that. He thought that 0:04:52.279 --> 0:04:55.599 the FED should be helping the US, and the complaints 0:04:55.640 --> 0:04:58.799 turned kind of personal. Right, I can't remember this specific 0:04:59.240 --> 0:05:01.599 choice words, but I once sticks out when he said 0:05:01.600 --> 0:05:04.200 that J. Powell was like a golfer with no touch. 0:05:04.240 --> 0:05:07.040 You know, he couldn't put I mean, they got fairly colorful. 0:05:07.440 --> 0:05:10.000 He was really clearly very angry, and it got to 0:05:10.040 --> 0:05:13.200 the point where Bloomberg reported in December of twenty eighteen, 0:05:13.360 --> 0:05:15.839 so just about a year after that Rose Garden announcement, 0:05:16.040 --> 0:05:19.279 reported that Trump was actually considering firing Powell. So similar 0:05:19.320 --> 0:05:22.000 headlines in the news. Again, he's feeling like this guy 0:05:22.040 --> 0:05:24.320 that he originally put in there is not helping him. 0:05:24.360 --> 0:05:26.240 That really feels like the tone of it is that 0:05:26.320 --> 0:05:28.760 the economy could really be doing so much better if 0:05:28.800 --> 0:05:30.920 only the FED would get on board and help out 0:05:30.960 --> 0:05:31.760 by lowering rates. 0:05:32.200 --> 0:05:35.159 We also saw during COVID and after when Trump was 0:05:35.200 --> 0:05:38.320 no longer in office, the complaint, insofar as we heard it, 0:05:38.320 --> 0:05:40.360 tended to be the other way, that the FED had 0:05:40.400 --> 0:05:44.960 not raised interest rate enough in the Biden administration. In 0:05:45.000 --> 0:05:47.520 his post over the weekend, when he talks about too 0:05:47.560 --> 0:05:50.960 late Pale, part of the criticism he has is that 0:05:51.000 --> 0:05:52.920 the FED was too slow to raise interest rates. So 0:05:52.920 --> 0:05:54.320 of course he's not the only one, but you have 0:05:54.400 --> 0:05:56.960 to observe he wants lower interest rates when he's in 0:05:56.960 --> 0:05:59.560 the administration, when he's in the White House, and tends 0:05:59.600 --> 0:06:03.320 to want higher ones when someone else's Krishna. This isn't 0:06:03.720 --> 0:06:07.320 primarily a market show, but we've become one when what's 0:06:07.360 --> 0:06:10.240 going on in the markets potentially affects the US and 0:06:10.320 --> 0:06:14.440 global economy significantly. Going slightly back to basis, talk us 0:06:14.480 --> 0:06:21.120 through how these latest attacks on the FED and potential 0:06:21.240 --> 0:06:26.479 question marks about its independence are being perceived by markets, 0:06:26.480 --> 0:06:28.800 and how we're seeing that in asset prices. 0:06:29.480 --> 0:06:34.080 I think we got a pretty good foretaste in market 0:06:34.160 --> 0:06:37.960 trading on Monday as to what kind of a train 0:06:38.000 --> 0:06:41.440 wreck we would have if the President actually tried to 0:06:41.560 --> 0:06:45.880 fire the FED chairman. So, as you know, we saw 0:06:46.200 --> 0:06:53.080 a general sell America trade, stocks lower, bonds, lower, dollar lower. 0:06:53.480 --> 0:06:58.080 That reflects the reduced attractiveness of US assets in a 0:06:58.080 --> 0:07:01.960 world where the central bank might lose independence. The fact 0:07:01.960 --> 0:07:05.479 that the currencies weakening at a time when the yield 0:07:05.560 --> 0:07:09.920 the return supposedly risk free a US government securities is 0:07:09.960 --> 0:07:13.760 going up is also a sign, of course, of investors 0:07:13.800 --> 0:07:16.920 reallocating capital, at least of the margin, out of the 0:07:17.040 --> 0:07:22.400 US and into other market places. We saw a steepening 0:07:22.440 --> 0:07:25.480 of the yield curve. That's the difference between the shorter 0:07:25.640 --> 0:07:29.760 dated government securities and the return on the longer dated 0:07:29.840 --> 0:07:34.280 government securities. Again quite standard fare for this kind of shock. 0:07:34.840 --> 0:07:38.200 I think if we were to see President Trump actually 0:07:38.280 --> 0:07:40.880 try to make a move on chair power, which is 0:07:40.920 --> 0:07:44.720 different from musing about this and threatening it, I think 0:07:44.720 --> 0:07:48.000 you would see all those trades in multiples of what 0:07:48.040 --> 0:07:53.080 we saw on Monday, but with one additional twist. Up 0:07:53.120 --> 0:07:56.240 to this point, one of the really striking features of 0:07:56.280 --> 0:08:00.400 this whole tariff's market saga is that you I've seen 0:08:00.400 --> 0:08:03.400 clear evidence of a loss of confidence in the economic 0:08:03.440 --> 0:08:07.320 policy of the US administration, but no loss of confidence 0:08:07.640 --> 0:08:10.800 in the credibility of the FED. And we can actually 0:08:10.840 --> 0:08:16.560 observe that because while the real rates and real risk 0:08:16.640 --> 0:08:21.360 premiere on US government debts gone up, market inflation compensation 0:08:22.280 --> 0:08:23.520 has not changed. 0:08:23.920 --> 0:08:26.320 This is allowing for inflation. Yeah. 0:08:26.680 --> 0:08:29.080 Now, so up to this point you might have thought 0:08:29.440 --> 0:08:32.720 this is going to be stagflation trades. It has not 0:08:32.960 --> 0:08:36.480 been up to this point. But if you actually tried 0:08:36.520 --> 0:08:40.520 to move on FED independence, you would risk shifting towards 0:08:40.800 --> 0:08:46.600 a stagflation environment and a stagflation trade in markets. Has 0:08:46.640 --> 0:08:49.199 people lost faith in the central bank. 0:08:49.280 --> 0:08:51.880 It's worth lingering on that. In effect, you're saying, as 0:08:51.880 --> 0:08:55.040 far as the market's concerned, there is something worse than 0:08:55.120 --> 0:08:59.120 unleashing a really damaging global trade war, and that's also 0:08:59.559 --> 0:09:03.480 prevent your central bank from responding appropriately to the impact 0:09:03.480 --> 0:09:04.280 of that trade wark. 0:09:04.640 --> 0:09:05.959 That's exactly right, yes. 0:09:06.000 --> 0:09:09.480 And that becomes a stagflation trade because you would be 0:09:09.480 --> 0:09:12.600 looking at the kind of worse combination of a slowing 0:09:12.640 --> 0:09:16.319 economy but also a FED that's not trying to reduce 0:09:16.360 --> 0:09:17.880 the long term impact on inflation. 0:09:18.920 --> 0:09:20.960 Yes. I mean, what we see in markets right up 0:09:20.960 --> 0:09:25.000 to this point is that the market has confidence that 0:09:25.080 --> 0:09:27.640 the FED will do whatever turns out to be necessary 0:09:28.080 --> 0:09:31.480 to prevent this initial very big wave of one time 0:09:31.600 --> 0:09:36.280 tariff inflation becoming embedded in the ongoing inflation rate, or 0:09:36.280 --> 0:09:38.559 if you like, the technical version of this is also 0:09:38.600 --> 0:09:42.760 in inflation expectations. But that's premised on the idea the 0:09:42.760 --> 0:09:45.520 FED is free to do what it judges is needed. 0:09:46.200 --> 0:09:48.760 If you lost confidence that the FED was able to 0:09:48.800 --> 0:09:53.680 make those judgments independently on the merits, then people would 0:09:53.720 --> 0:09:57.679 start to expect a higher inflation in the future, more 0:09:57.720 --> 0:10:01.320 inflation risk and as you know, death, when people start 0:10:01.360 --> 0:10:04.680 to expect more inflation, it's can very often become a 0:10:04.720 --> 0:10:06.480 self fulfilling prophecy. 0:10:06.559 --> 0:10:09.960 Kate just to you. I mean Scott Besson, the Treasury Secretary. 0:10:10.000 --> 0:10:12.200 You know, up until this point his support for the 0:10:12.240 --> 0:10:15.360 tariffs that the President is unleashed have sort of led 0:10:15.400 --> 0:10:19.480 some people to question whether he does still have full 0:10:19.800 --> 0:10:22.800 confidence of the financial markets. But Scott Besant was considered 0:10:22.840 --> 0:10:26.880 to be someone who was a markets guy. He has 0:10:26.920 --> 0:10:29.600 certainly said that he continues to have his weekly meetings 0:10:29.600 --> 0:10:32.640 with Jay Powell and it's very cordial and everything's fine. 0:10:33.240 --> 0:10:35.720 Do you have a sense of that that Scott Besant 0:10:36.160 --> 0:10:40.760 is trying to prevent this going beyond just a criticism 0:10:40.880 --> 0:10:41.880 of j Powell. 0:10:42.200 --> 0:10:44.240 Yes, I mean I think he is certainly in the 0:10:44.320 --> 0:10:49.000 camp that has and is continuing to make the argument 0:10:49.120 --> 0:10:51.080 that it's not worth it, right. I mean, it's worth 0:10:51.120 --> 0:10:54.800 remembering that the Jay Powell's term as chairman is up 0:10:54.920 --> 0:10:58.720 in May of next year, so the Trump administration is 0:10:58.800 --> 0:11:01.920 within a few months is going to starting to explore 0:11:02.080 --> 0:11:04.920 who would they replace Powell with, regardless of whether he's 0:11:04.960 --> 0:11:07.080 fired or not, just simply because his term is up, 0:11:07.120 --> 0:11:09.480 you have to go through the vetting process, the Senate 0:11:09.520 --> 0:11:12.240 confirmation process, that's going to take some time if you 0:11:12.280 --> 0:11:14.680 got rid of Powell, if there's not a lengthy, drawn 0:11:14.679 --> 0:11:16.719 out court battle, which we can assume there would be. 0:11:17.040 --> 0:11:19.240 This is not like, you know, the next day, put 0:11:19.240 --> 0:11:21.040 your person in there and they flip the interest rates, 0:11:21.040 --> 0:11:23.040 which it just doesn't work this way. And so I 0:11:23.080 --> 0:11:25.640 think that the argument from Besson and perhaps some others 0:11:25.640 --> 0:11:28.120 that are close to the president is it's not worth 0:11:28.280 --> 0:11:31.920 setting off the market chaos that Krishna just laid out 0:11:32.160 --> 0:11:35.320 when you'll have the opportunity to do this in a 0:11:35.360 --> 0:11:36.200 matter of months. 0:11:36.360 --> 0:11:39.679 Anyway, school present, i think, has publicly made references to 0:11:39.720 --> 0:11:42.160 the independence of the FED being a jewel box, and 0:11:42.200 --> 0:11:43.680 you sort of think, well, maybe that's the sort of 0:11:44.240 --> 0:11:47.760 veiled way of saying this isn't something you should mess with, Krishna. 0:11:47.840 --> 0:11:50.559 We do have someone potentially in the wings who is 0:11:50.600 --> 0:11:54.720 a perfectly credible replacement for j Powell. Kevin Walsh, someone 0:11:54.720 --> 0:11:57.720 who was also in the running last time, is perceived 0:11:57.720 --> 0:12:01.040 to be positioning himself as a tr Trump pick to 0:12:01.160 --> 0:12:03.760 replace j Powell. If Trump were to say, look as 0:12:03.760 --> 0:12:07.880 long as I replace Jay Powell with someone who markets like, 0:12:08.120 --> 0:12:09.040 what's the problem. 0:12:09.400 --> 0:12:13.920 The issue is whether you're setting up the next chair. 0:12:14.000 --> 0:12:17.600 Let's hypothesize that it's Kevin Walsh. Are you setting him 0:12:17.640 --> 0:12:20.400 up for success or are you setting him up for failure. 0:12:20.840 --> 0:12:24.480 If Trump were to appoint Wash or a similarly qualified 0:12:24.559 --> 0:12:30.080 candidate under regular order when Powell's term is up, I 0:12:30.120 --> 0:12:34.719 think Wash, or indeed potentially one of several other potential 0:12:34.800 --> 0:12:39.160 Trump picks, would be well positioned to service fed chair 0:12:39.360 --> 0:12:43.400 and continue to command the confidence and credibility in the marketplace. 0:12:44.080 --> 0:12:48.080 The problem is if you fire Powell and put somebody 0:12:48.120 --> 0:12:52.280 in his place. Now, even if that person is individually credible, 0:12:52.320 --> 0:12:56.360 for instance, like Kevin Walsh, you set them up to 0:12:56.440 --> 0:12:59.280 fail because no one would ever believe that they were 0:12:59.320 --> 0:13:03.920 making decision truly independently of the White House, to quote 0:13:03.960 --> 0:13:07.760 the words of one commentator, Then the chair put in 0:13:07.800 --> 0:13:12.520 that context would be seen as Trump's sock puppet, right, 0:13:12.880 --> 0:13:16.520 and so it would be incredibly difficult for that person 0:13:16.640 --> 0:13:20.520 to command the confidence of markets. And remember, if that 0:13:20.559 --> 0:13:24.640 person did try to behave in an independent way that 0:13:24.760 --> 0:13:29.320 are points crossed the President's preferences, the risk would be 0:13:29.360 --> 0:13:31.000 that that person too could get fired. 0:13:31.440 --> 0:13:32.679 Well, and I guess and the only way that you 0:13:33.080 --> 0:13:36.600 show your independence to the markets is potentially to not 0:13:36.960 --> 0:13:40.240 cut interest rates. If you're Donald Trump, you're not going 0:13:40.280 --> 0:13:42.360 to get what you initially wanted when you replace him 0:13:42.360 --> 0:13:43.000 in the first place. 0:13:43.240 --> 0:13:45.960 Well, this is just an example step of how self 0:13:45.960 --> 0:13:50.920 defeating this whole exercise is, because if you're the president 0:13:50.960 --> 0:13:53.960 and you want the FED to cut rates, the best 0:13:54.000 --> 0:13:57.079 way to maximize the likelihood that the FED cuts rates 0:13:57.360 --> 0:14:01.360 and cuts them soon is not to raise any concerns 0:14:01.720 --> 0:14:05.280 about FED independence. That might also lead to a lot 0:14:05.320 --> 0:14:09.360 of confidence in inflation expectations and so forth, if the 0:14:09.400 --> 0:14:12.000 president is able to take a deep breath and step 0:14:12.040 --> 0:14:15.280 back from this, I actually think Powell is indicating that 0:14:15.320 --> 0:14:18.880 the FED would in principle be prepared to cut rates 0:14:19.200 --> 0:14:22.960 once unemployment moves up materially, even in the face of 0:14:22.960 --> 0:14:27.200 a big one off tariff inflation wave, provided those expectations 0:14:27.200 --> 0:14:29.320 and underlying inflation remained well behaved. 0:14:30.160 --> 0:14:32.680 Kate, are we overdoing this in the sense that over 0:14:32.720 --> 0:14:36.040 the years, maybe not so much recently before Donald Trump, 0:14:36.040 --> 0:14:38.800 but you know, over the years, it's been pretty common 0:14:38.840 --> 0:14:43.120 for presidents to complain about their FED chairs, to complain 0:14:43.160 --> 0:14:45.680 that the FED wasn't cutting rates when they wanted them 0:14:45.720 --> 0:14:48.120 to cut rates. Is there something different here than just 0:14:48.160 --> 0:14:50.720 going back to the kind of old fashioned nineteen sixties 0:14:50.800 --> 0:14:53.040 nineteen seventies of presidents complaining about the FED. 0:14:53.560 --> 0:14:56.560 Well, I think what is certainly different from the first 0:14:56.600 --> 0:15:00.160 Trump administration is the fact that you have people who 0:15:00.160 --> 0:15:04.280 were otherwise viewed as mainstream quote unquote reasonable people who've 0:15:04.360 --> 0:15:07.720 supported FED independence in the past, kind of you know, 0:15:07.800 --> 0:15:10.800 not really coming to the Fed's defense. For example, you 0:15:10.880 --> 0:15:14.200 had Kevin Hassett the White House, a National Economic Council director, 0:15:14.200 --> 0:15:17.000 saying yes, the President is exploring this. I think this whole, 0:15:17.040 --> 0:15:20.480 the whole legal question that's now been introduced around whether 0:15:20.560 --> 0:15:23.640 the White House has the authority to fire heads of 0:15:23.680 --> 0:15:27.480 independent agencies has introduced a new element here. I think 0:15:27.520 --> 0:15:30.520 that that really raises the stakes. Whereas previously, I think 0:15:30.520 --> 0:15:33.720 that central bankers felt that they had that protection and 0:15:33.760 --> 0:15:36.320 it made it easier, certainly for them to ignore the noise. 0:15:36.720 --> 0:15:38.840 And now, of course j. Powell and the FED is 0:15:38.840 --> 0:15:40.800 going to say, they'll continue to ignore the noise. You know, 0:15:40.840 --> 0:15:43.160 their job number one is to do what's best for 0:15:43.200 --> 0:15:45.080 the economy, and they'll keep doing it. But it just 0:15:45.120 --> 0:15:47.080 becomes that much harder to tune it out, and I 0:15:47.120 --> 0:15:49.200 think it becomes kind of as Krishna was alluding to, 0:15:49.280 --> 0:15:52.040 it's difficult to message around. Okay, maybe they do want 0:15:52.040 --> 0:15:53.640 to cut rates, but how will it look now if 0:15:53.640 --> 0:15:55.760 they've done it after Trump has been rating them and 0:15:55.920 --> 0:15:59.080 insisting that they do it. It adds another element. 0:15:59.720 --> 0:16:01.520 Quite apart from whether or not it was a safe 0:16:01.520 --> 0:16:04.280 haven or the global reserve currency or anything else, or 0:16:04.320 --> 0:16:07.120 the global superpower for that matter, It's had years and 0:16:07.240 --> 0:16:10.280 years of hoovering up the line's share of global investment flows. 0:16:10.640 --> 0:16:12.920 You know, investors have found year after year that the 0:16:13.040 --> 0:16:16.720 US was beating other markets and was finding reluctantly maybe 0:16:16.880 --> 0:16:18.560 that they had to keep putting their money in a 0:16:18.560 --> 0:16:21.840 market which all the normal metrics said was overvalued. So 0:16:22.400 --> 0:16:24.880 is part of this it's just an excuse. We're sort 0:16:24.880 --> 0:16:27.400 of blaming Donald Trump, but actually its excuse for a 0:16:27.520 --> 0:16:32.560 rebalancing in global investment that many people have expected to 0:16:32.600 --> 0:16:33.840 see long before now. 0:16:34.720 --> 0:16:36.760 I think you raised some very important points. I would 0:16:36.760 --> 0:16:39.280 frame it a little differently. The way I think about 0:16:39.320 --> 0:16:43.720 it is that initial conditions were such that the entire 0:16:43.800 --> 0:16:48.480 world was essentially over allocated to the US. After years 0:16:48.560 --> 0:16:50.920 in which the US was the only game in town 0:16:51.360 --> 0:16:56.400 for asset markets, and so in those circumstances, it doesn't 0:16:56.480 --> 0:17:02.200 take a very large shift in global preferences for people 0:17:02.280 --> 0:17:05.439 to want to move capital out of the US and 0:17:05.640 --> 0:17:10.800 into other markets, into other currencies, into other economies. But 0:17:10.880 --> 0:17:13.439 the way I would think about that is that you 0:17:13.520 --> 0:17:16.320 have to be additionally careful then if you are the 0:17:16.400 --> 0:17:20.919 US administration, because you are starting from a position where 0:17:21.280 --> 0:17:23.479 a lot of people don't really have a lot of 0:17:23.800 --> 0:17:27.040 reason to add to their positions in the US. And 0:17:27.160 --> 0:17:29.840 of course if you're running a fiscal deficit in particular, 0:17:30.280 --> 0:17:34.359 you do need to continue to attract global capital into 0:17:34.480 --> 0:17:38.320 the US to help fund the government deficit. More broadly, 0:17:38.680 --> 0:17:43.400 it's the avowed intention of the Trump administration to attract 0:17:43.480 --> 0:17:46.199 capital to come in to invest in the private sector 0:17:46.760 --> 0:17:51.200 in the US as well. So I think the starting 0:17:51.240 --> 0:17:54.359 point of the overallocation to the US is part of 0:17:54.400 --> 0:17:57.480 the story here. But it's very clear that what's driving 0:17:57.480 --> 0:18:03.520 this reallocation is a collapse of confidence in US growth 0:18:03.560 --> 0:18:09.280 exceptionalism on the one hand, and some meaningful at the 0:18:09.320 --> 0:18:13.080 margin erosion of confidence in US assets from a safe 0:18:13.080 --> 0:18:14.760 haven perspective, and. 0:18:14.800 --> 0:18:16.879 Just following on from that, because you also mentioned it 0:18:16.920 --> 0:18:19.400 in a note that you've put out on that if 0:18:19.400 --> 0:18:21.800 there was an actual attempt to fire J Powell, even 0:18:21.840 --> 0:18:23.640 if it ended up going through the courts, and we've 0:18:23.720 --> 0:18:25.679 established on this show before that there would be big 0:18:25.760 --> 0:18:29.360 question marks about whether it would succeed if he actively 0:18:29.400 --> 0:18:33.040 attempted to and we saw that kind of what you 0:18:33.160 --> 0:18:39.159 call the stagflation trade playing out in US markets. You 0:18:39.200 --> 0:18:43.000 have said that would also increase the chance of the 0:18:43.040 --> 0:18:48.159 tariff crisis morphing into a more Liz Trust style fiscal crisis. 0:18:48.240 --> 0:18:50.640 So just talk us through that. How does it take 0:18:50.720 --> 0:18:53.040 us a bit closer to that even to have more 0:18:53.520 --> 0:18:55.080 questioning of FED independence. 0:18:55.680 --> 0:18:58.000 So I think the starting point for all of this 0:18:58.480 --> 0:19:01.720 is to understand as I know everyone on this podcast does, 0:19:01.840 --> 0:19:05.920 but members of the administration appear not to understand, which 0:19:05.960 --> 0:19:10.080 is that the trades more strictly current account deficit is 0:19:10.640 --> 0:19:12.880 the capital surplus. They are one and the same thing. 0:19:12.920 --> 0:19:15.560 They're just two ways of describing the same thing. 0:19:15.880 --> 0:19:18.240 If you're buying more from other countries than other countries 0:19:18.280 --> 0:19:20.320 are buying from you, you need to borrow the money 0:19:20.520 --> 0:19:22.359 to pay for those goods from someone. 0:19:23.160 --> 0:19:25.320 But the point, though truly I think that I'm trying 0:19:25.359 --> 0:19:29.879 to make here is that you can't conceptually think of 0:19:29.960 --> 0:19:34.439 the external account, the trade balance, completely independent from the 0:19:34.480 --> 0:19:37.480 capital account and the flows that are coming into the US, 0:19:37.480 --> 0:19:41.440 including to finance the US government deficits. That's the sort 0:19:41.480 --> 0:19:45.479 of conceptual point that we start from. The risk in 0:19:45.520 --> 0:19:49.160 the current conjecture, the serious risk, that sort of more 0:19:49.200 --> 0:19:53.000 than tail risk that's certainly not highly probable at this point, 0:19:53.359 --> 0:19:56.560 is that the tariff crisis ultimately morphs into more of 0:19:56.600 --> 0:20:01.120 a Liz Trust style fiscal crisis. And the path by 0:20:01.160 --> 0:20:05.679 which that would happen is a global buyer's strike in 0:20:05.720 --> 0:20:08.640 the treasury market at a time when the already very 0:20:08.720 --> 0:20:12.600 large US structural deficit blew out further on an economic downturn, 0:20:13.080 --> 0:20:16.879 a lack of serious fiscal consolidation in the legislation before Congress, 0:20:17.119 --> 0:20:19.919 and the possibility that the administration might try to add 0:20:20.119 --> 0:20:23.600 more unfunded tax cuts to try to buy its way 0:20:23.680 --> 0:20:27.040 out of a recession. Now, to be very clear, the 0:20:27.160 --> 0:20:30.520 US is not the UK. The US is the most 0:20:30.560 --> 0:20:33.240 core market in the world, the most core economy in 0:20:33.240 --> 0:20:36.120 the world, the most core bond market, the most core 0:20:36.200 --> 0:20:40.680 currency market. The investments in the US are far stickier 0:20:41.280 --> 0:20:45.640 than in any discretionary market like the UK. So we 0:20:45.720 --> 0:20:48.439 must be very careful not to jump quickly to the 0:20:48.480 --> 0:20:51.800 idea that the US will behave like the UK. But 0:20:52.640 --> 0:20:57.600 even now without an actual assault on FED independence, merely 0:20:57.600 --> 0:21:01.399 it threats to this. Given what's happening in terms of 0:21:01.480 --> 0:21:05.280 the US withdrawal from international economic engagement, from trade, a 0:21:05.359 --> 0:21:08.720 large trade integration, and so forth, there is a non 0:21:08.760 --> 0:21:13.120 trivial risk that this could morph from a tariff crisis 0:21:13.119 --> 0:21:17.040 to a fiscal crisis. If you also layer it on 0:21:17.119 --> 0:21:20.280 top of that an effort to fire the central bank 0:21:20.680 --> 0:21:24.000 chief and to bring the central bank under government control. 0:21:24.480 --> 0:21:27.159 I think the risk of that global bias strike that 0:21:27.200 --> 0:21:29.520 would take you from a tariff crisis to a sovereign 0:21:29.600 --> 0:21:32.920 debt crisis would go up a lot kate. 0:21:33.320 --> 0:21:36.640 The US is not the UK for sure. Even if 0:21:36.680 --> 0:21:39.760 we were halfway, there is a question mark about how 0:21:39.760 --> 0:21:42.399 the administration would respond. I mean, the classic way to 0:21:42.480 --> 0:21:45.119 respond to that kind of bias strike, or even a 0:21:45.200 --> 0:21:49.400 hint of a bias strike, would be to reassure markets 0:21:49.560 --> 0:21:53.480 that the authorities are willing to raise interest rates to 0:21:53.600 --> 0:21:58.760 support US assets, to support the currency. Combined with potentially 0:21:58.800 --> 0:22:02.600 fiscal tightening. How likely do you think that would be 0:22:02.640 --> 0:22:03.680 in this administration? 0:22:04.800 --> 0:22:07.159 Well, I might have said this last time, staff, I 0:22:07.160 --> 0:22:09.639 sound like a broken record in the newsroom anyway. 0:22:09.320 --> 0:22:12.080 But we quite rightly started talking about the bomb market 0:22:12.080 --> 0:22:13.600 at the beginning of the series. I suspect we will 0:22:13.640 --> 0:22:15.480 keep getting back to it. But yeah, that's right. 0:22:15.960 --> 0:22:18.879 No, But I think beyond doge, if you want to 0:22:18.920 --> 0:22:22.760 consider that a serious effort to tighten belt, so to speak, 0:22:23.000 --> 0:22:25.840 I don't think that there's really much of a real 0:22:25.920 --> 0:22:29.280 effort by the administration to make the deep kinds of 0:22:29.359 --> 0:22:32.000 cuts to spending that you would actually need to do 0:22:32.560 --> 0:22:36.240 to restore fiscal sustainability. Right at the end of the day, 0:22:36.320 --> 0:22:39.679 what Congress has typically done is they've come together to 0:22:39.840 --> 0:22:43.199 make deals. Whether that's to enact spending, you know, and 0:22:43.200 --> 0:22:45.600