Lighthizer Signals Progress On USMCA, But Not On China

economics and policy correspondent for Bloomberg News. He joins us in our Bloomberg Interactive Broker studio uh here in New York. Michael, thanks for joining us. What do you expect to hear from Mr Leitheiser today in front of the Senate Finance Committee. Well, we we've seen some headlines out from his text, and he's going to of course tout the president's trade accomplishments,

because that's his job. The most interesting aspect of the text so far is that he suggests that the new NAFTA treaty, the U s m c A should be approved. They expected to be approved because it was written with democratic opposition in mind. Now we know that the Democrats are are holding up some discussion of it because they want changes to be made. Lightheiser seems optimistic about the prospects for it, and he does a little bit of

a sales job for it. What will be most interesting is in the questions and whether the Democrats lay out specific terms they want. Also joining us is Sean Don and senior trade reporter joining us from d C. So the backdrop though, of course, is the tweet from President Trump and he and g just talked on the phone and they're going to have a meeting of the G twenty and then G through CCTV also reaffirming that they're going to have a meeting. Um, do we believe now

this is actually moving forward on? Yeah? Well that's I mean, it's really interesting developments that we've just had in the last hour. I think the most interesting thing about Bob Leightheiser's prepared testimony is what's missing, and that is any mention of China, really uh, in there any any addressing it as one of the big issues, and it's the elephant in the room, really uh in terms of US trade policy. But he's really gonna be asked about the

President's tweet this morning. Uh, and uh like as you say that the Chinese announcement as well, that there's phone call has taken place, that's a big development. Um. There were a lot of people questioning whether or not whether such a meeting might even take place. At at the G twenty, there were some people who thought that the

things were just two tents right now. Uh. So it's a good sign that there that they're going to meet, but we should remember, uh that there's a big gap between the two sides uh in these talks right now. And uh, it's unclear how much President Trump and j and Pink can close that gap in just one meeting. So, Michael, it seems like we've in terms of trade, things are on a little bit better track with Mexico. It now seems like a China may be on a similar track.

How do you think the markets are kind of pricing right now global trade because it's been such a driver of uncertainty the market's really since the fourth quarter of last year. It's very hard to price because you don't know with President Trump what he's going to do from day to day. They've put into earnings and expectations about as much as they can in terms of what a trade war would mean, but there has been this reluctance to fully price it in because they don't think it's

really going to happen. The President has sort of pushed back against that, but then you know, with China, but then with Mexico he raised the prospect and then he dashed it again. So you know, how far will he really go? That's a question. If I were on the Senate committee, I suppose I would ask that question. But I don't know if you get a straight answer from Bob Leheizer, because I don't know if he knows the answer.

And uh, you know, the standard answer is, of course the President is going to follow through, but it's not in his interest in uh terms, to have an economy that is going down, to have a stock market that's rolling over. So there's definitely an incentive for him to try to move forward with Shi Jinping, and that maybe just enough to carry the market for a while. It may not reach a deal, as Shaun says, but they may at least say we're going to keep talking and

that will get priced in as good news. But if the economy is holding up in Lukawa has a great piece on the Bloomberg right now talks about how US equities are a performing the rest of the world. Yet again, our GDPs better than other countries. Yet again, inflation expectations rolling over still higher than like you're a Germany, for example, in Japan. I mean, if it's the best house and a bad block thing, is that enough to sustain well

for a short time. I mean, the problem is we don't know exactly what is causing the weakness that we see in the United States. We know that in Germany, for example, in Europe, the trade is weighing heavily on them, and that's an issue. And so you you would figure if they can reach some sort of trade accommodation that things might get better. I was saying earlier that I think the President may have just tweeted j Powell out of having to do a really stole that dangerous radio

because because uh, you know, you got gotta wait. You gotta wait and see what happens before you make any monetary policy decision exactly, or put a trade on for that matter. Just think about a trade one to put something on this morning, and how's that trade has been whipsald um Sean I want to bring you back. And just as it relates to China, just give us a sense of where you think the Chinese negotiators are in terms of their position right now. How confident did they

feel as they potentially sit down with the US. Well, I think the real danger in these negotiations right now is that both sides feel like they're in a in a strong position. You've heard the UH the argument that everything is hunky dorry in the United States and it's the you know, or it's the best house on a

bad block, if you will. I think the Chinese kind of feel similarly that they're not in a bad position and that, if anything, they have more power to pull the levers they need to and respond to any slow

down in the economy. We heard that from Ye Gang, the governor of the People's Bank of China, in a Bloomberg interview a couple of weeks ago, where he said they had lots of room UH to respond to to any slow down and whereas the US may have less room, and as Donald Trump keeps complaining, UH, he doesn't have the ability to to pull the levers directly UH to to boost the economy when he needs to. I think

why I'm just look, I was in China for ten days. Uh. Uh, just back a week or so ago, and and one of the common themes you hear on the ground in China is that people are just bracing themselves and getting ready for a more protracted trade conflict, and they're ready

to adapt. Sean Donna, thank you so much. Shawnas, senior trade reporter for Bloomberg News, joining us in a Bloomberg studio in Washington, d C. Michael McKee, international economics and Policy correspondent for Bloomberg News, joining us live here in Bloomberg Interactive Broker studio. We're gonna move on to a story here that's just crossing the tape the White House uh explored the legality of the mooting FED Chairman pal Uh. To help us explore this new topic, we welcome Celia Motion.

She is of a Bloomberg News Selah, thanks so much for joining us. Give us a sense of what you're

reporting right now. Yeah, so, survices have told us that back in February, just about two months after the President discussed whether he could fire Jerome Powell, UH, the White House General Counsel's Office, the team of lawyers explored the legalities around UM stripping Jerome Powell of his chairmanship and leaving him just as a governor, which would allow the President then to either nominate another existing governor he has swore to choose from too that he himself placed on

the board UM to become chairman, because they said chairman always has two jobs. They are the chair and they are a governor one of seven governors. The other options that the President would have UM if he was able to demote essentially h Jerome Powell in that manner is to nominate UH someone to fill one of the two open governor seats and then make that new governor or a chairman. So how unprecedented would a move like this being.

So this has never been tested. We don't actually even know if it's possible, and I imagine that is what the White House was exploring. UM it is legal experts are telling us that this would most likely go to the courts if chair Powell decided that he wants to challenge Trump and say that he is not allowed to demote me this way. The courts would then have to look at the Federal Reserve Act and try to interpret it.

But this has never actually happened before. So is there any evidence that this review of this type of motion, the legality of it, was in fact directed by President Trump? Is there any evidence of that? No, there's no evidence of that. And there's also no evidence that the President is at this very moment considering taking any action against Powell like this? Do we do? We know how far

along this process got. Is there any sense of how widespread it was and maybe how deep the the consideration was. What I can tell you and what we reported in the story that's on the terminal today, is that a ruling was made by the White House lawyers on on what this kind of strategy would look like and whether this is a viable option, And that ruling has not

been revealed, even on background by sources. We do know that. UM. The Wall Street Journal in at the beginning of April reported that Trump told Powell and a phone call in March that he said, you know, I guess I'm stuck with you, which you know, take that from you know, take from that what you want any sense now, I mean, you know, the White House they've not not commenting presumably UM, but just kind of what next next steps might be

UM for this issue. Absolutely not. They're not commenting at all, and it looks like, you know, we're not expecting any next steps. The legal um study has been done and it's there just in case the White House needs that. Are it's it's a FED chooses to edge their own research. We don't know. Interesting, So Silely, I just you know, finally here its just the obviously, as you mentioned and as you re ported in this story, the relationship between

Chairman Pound and pre President Trump remains difficult. What is the sense of how the the UM the Commission itself is actually functioning right now? Is it feel like despite the tensions, the Commission is still uh or that you have still kind of getting work done? Yeah, you know, so far the Powell has said, the chair has said that there is no political influence. He's not going to be influenced by the President or his comments or any

phone calls that they have behind closed doors. UM. The We can also see that the Fed didn't about face of monetary policy in January. Markets were so royaled after the rate cut and the hawkish outlook for rates that was given in December, and in January we started to see the Fed pull you turn on that policy and now we're you know, markets are expecting a lot of economists are expecting not a rate cut tomorrow, but something to be signaled and a possible rate cut in July

or later this year. So it doesn't make you think that maybe the Trump is getting his way. We can't really know, um whether that is because of what Trump said, or whether that's just the Fed independently making those decisions. Soliah, thank you so much for this reporting of this important story. Celia moson Bloomberg News on the phone with us. The Federal Reserves Open Market Committee meets today and tomorrow. The market is eagerly awaiting comments tomorrow Fed Chairman Pal to

get a little preview of what we might hear. We welcome Ira Jersey. Ira is chief US interest rate strategist for Bloomberg Intelligence. He joins us from the b I headquarters in Princeton, New Jersey. Ira, thanks so much for being with us. What do you expect to hear from Chairman Pal tomorrow? Given what we saw out of the e c B this morning and even a follow up tweet by President Trump about the euro what do you expect to hear tomorrow? Yeah, good, good morning. So I

think a couple of things. I think firstly, the FED is going to have to be more dubblish and just in general. Um, so you look at things like inflation expectations, both survey measures and from the Treasury inflation protected securities market, and uh, they are going to have to acknowledge that inflation expectations are well anchored, um and uh and even moving lower. So so so that that's one thing that

you could look for in the first sentence. The second is I think that the market that he's not going to be quite as doublish maybe as the market is anticipating at the moment. I do think that there's going to be a doublish hilt. He's going to say that the balance of risks maybe is to the downside at the moment, But that doesn't mean that they're going to cut three times this year, which is largely priced into

the market. So turning, so the stage is really set by Mario Draggy or as President Trump refers to Mario d which is just too cool for words. Um, do you feel like the pressure that we're seeing the bond market over in Europe? You know, negative thirty plus basis points on the German tenure is going to inform the FED at all, Like what do they do when they look at something like that. Yeah, So, you know, Europe in the US when it comes to the economy has

di verge a little bit. But the but kind of the slowing trend in the economies is um has continued in both jurisdictions. Although in the US we might avoid a more prolonged slowdown. I think in Europe they're really worried about about a more prolonged slowdown. They are worried that inflation continues to be um, you know, not be able to pick up at all. I think the problem with all of these things is that there's forces at

work that monetary policy can't help with. So the fact that you have low inflation and slow growth in Europe in particular and places like Japan is largely a demographic issue. It's aging populations and as well as low birth rates. So it's not something you know, the monetary policy that has to be easy, uh, kind of just to keep things afloat. But how much easier can you get? So one of the things that Mario drag You said overnight was if the economic outlook doesn't prove we're likely to

cut interest rates. And you know, so what's happened is you've had this rally in um in Europe and and basically you're now pricing for an additional rate cut by the ECB by the end of the year, and that's

pulled all of these interest rates flowers. So don't look at don't look at European ten uere yields at negative thirty two basis points as the as the measure, because you can still buy a tenure bond in Germany funded overnight in Germany and and still make money, right, So that's that's the thing that we have to realize, is that is that the carry from trades UH is not necessarily as bad as it looks on the surface, just seeing that it's negative thirty basis one is there an

argument to be made that the US FED should hold out on rake cuts as long as possible, perhaps even till the end of the year. They perhaps and I think that if the data rebounds as the as the Bloomberg Economics teams thinks, so Carl Rickadana and his team, if the data amounts and there's not a reason for them to do that, which is one reason I think they will wait at least until July to see another set of data before they actually consider cutting interest rates. Um.

That being said, there's other things they can do. So, for example, one thing that would not surprise me um is they could taper the quantitative tightening faster, so they could actually maybe end balance sheet reduction by the end of July potentially, And something like that would be a debbish measure that they could take without actually without actually

cutting interest rates. So, because the problem is that they don't have that many bullets, they you know, the feed in particular doesn't want to cut interest rates less than zero. I think J. Powell was pretty clear about that a few weeks ago. So the thing is, if you can only cut interest rates eight times, you don't want to have to do that as your first step if you can avoid it. So do you think so if they did that, so they opted for balance sheet normalization now

versus later, like, does the market like it? Is it devilish enough for them? Well? I think that that risk asset markets would probably be more or less and change.

I think I think the bond market has already priced for a lot of bad news and and certainly for the FED to cut so I think if they did something like that and said we're going to end quantitative tightening, but don't look for but hint that there's not going to be an interest rate cut in July, I think the bond market, probably the two year notes and the

front end of the of the market. Short term maturities they probably go up and yield, but long end maturities probably stay where they are, just on the idea that the Fed's not cutting enough with this negative sentiment hanging around. And then a lot of this negative sentiment, of course, could go away very quickly, as you saw today. I mean we were we we were up a lot more in the bond market. But then you know, Donald Trump makes a tweet. The next thing, you know, five basis

points of that rally, today's rally goes away. And I read just the she agrees President, she agrees is coming on the redhead headline, come across the tape. She agrees us China should keep talking. So just confirming the tweet from President Trump. So is there something here that maybe the market's missing? What be you know, just we've had so much volatility just to pass well, let's just go today for for that matter, Where could the FED or how could the Fed really surprise the market, maybe even

on the downside tomorrow. Yeah, well, I I mean certainly if the if the Fed cut tomorrow, that would be a huge surprise. Um. I think that would be you know, really good at least temporarily for risk assets, and um,

the market is not price for that. But I think if they were to cut tomorrow, then we would probably price out to cut in July, so you wouldn't you'd see the very very short term market, so one month, three months he bills for example, would move, but not necessarily two year notes very much because we're already pricing for two and a half more than two and a half interest rate cuts by the by the end of this year. Um, could they could they suggest that they're

going to Could they cut fifty basis points? They could? I think that that would be highly highly unusual. Ira Jersey, Thank you so much, Irish chief US interest rate strategist for Bloomberg Intelligence, joining us on the phone from the headquarters in Prince to New Jersey. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at

pim Fox. I'm on Twitter at Lisa abramoits one before the podcast, you can always catch us worldwide on Bloomberg Radio