Bloomberg Audio Studios, Podcasts, radio News.
This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hortern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business App.
I'm joined now by someone who intimately understands the FED was there for ten years and most recently was the FED Vice chair under J.
Powell, who is still.
Now the chair, and that's of course Lale Brainerd. Lale, thank you so much for joining us this morning. As we see this standoff between President Trump and Governor Cook, we have yet to hear from the FED itself.
What kind of response do you think we can expect from the institution?
Well, I think the Federal Reserve is an incredibly difficult position here. But you have to remember this is not about an individual governor. This is really an unprecedented attack on the independence of the Federal Reserve as an institution. There is nobody in the Federal Open Markets Committee, the Monetary Policy Setting Committee that can't be thinking well, what
does this mean for me? And so any member of the board presumably is going to worry that they too could be subject to this kind of political pressure, and that fundamentally undermines the institutional independence of the Fed, which means higher inflation, potentially less credibility, even higher long term interest rates bad for the economy.
Do you think this can actually impact how members are thinking about monetary policy?
Well, I just think the implication if any member of that board could come under this kind of political pressure from the White House, and of course we saw that kind of pressure on the chair earlier this year. I think that does really put a higher premium on whether they're going to be willing to speak their minds to to sent on key votes if necessary. I think it really does create unprecedented risks.
The President's letter talked about this mortgage allegation fraud in the mortgage world for Governor Cook, what if she was charged or convicted?
Well, I think what is important here is due process and undertaking a real investigation and having the facts on the table, and the ability for her to defend herself legally. None of that has taken place here. The White House has preempted the process, and so that is why it's
really unprecedented. It's very, very threatening to the very independence of the Federal Reserve, and it should cause concerns, I think, among investors and more broadly about that fundamental underpinning of our strong economy and our strong financial markets.
Given this is just about one individual, does the Fed come out and say something or do they need to wait until that due process takes place.
So the Federal Reserve as an institution is all about due process, and there have been individuals who have had investigations previously. There's a good process for doing that. That's not what's taking place here. This is really about trying to overturn the majority of the Board of Governors, long before any of these governor's terms are up, by threatening them with these kinds of investigations and firing without real
due process and cause. And again, the Federal reserves independence really is at stake here, and that means that monetary policy will increasingly be overshadowed by concerns that there's political interference, whether or not that is actually the case if you think about it. J Powell opened the door for an interest rate cut in September very clearly. That's exactly what the president wants, so monetary policy is actually moving his way.
And yet this is a very very aggressive attack on the Federal Reserve when monetary policy is doing exactly what he's been calling for.
That speech the Fed Chair gave a Jackson holl just on Fridays, very different from how he sounded J Powell four weeks ago. Do you think the speech was political?
Well, I think that the Chair was very careful in
laying out that the balance of risks had shifted. He pointed specific to the possibility that the labor market is weakening faster than the members of the FLMC had believed in their last meeting because of the revisions to three months worth of hiring data, and so he laid out a very I think strong case based on data and the facts, why they were now potentially going to be more attentive to that labor market weakening, while acknowledging that inflation is still likely to go up because of the
very high tariffs that have been put in place.
Knowing the data and knowing all the personnel that are going to get together at the next FED meeting September seventeenth, do you expect them all to walk through that door that the FED chair opened up for a cut.
Well, I don't know if all members of the FMC will be in the same place, and of course what we should hope for is a really good debate and an airing of differing views. But I do think that barring something really surprising in the upcoming employment print and CPI print, it's more likely than not that they will vote for a twenty five basis point reduction in the federal funds rate.
Do you think there's a bias to the labor market in this federal reserve?
So up until this point, I think what we've heard is a lot of discussion about the potential risks to inflation. Inflation is still high. It is between two and a half and three percent, and while this time last year it was going in the right direction moving down to the two percent target, this year is actually moving up.
So we have heard a lot of attention to inflation, appropriately so, but the Chair acknowledged that they are balancing risks, risks of higher inflation risks of lower employment, and that is exactly what you expect from tariffs, a stagflationary shock.
When he was talking about tariff's he said that it's not going to come all at once. The impact is the fedcher basically signaling to the market and to us to just look through any potential hot CPI prints that come out between now in the next twelve months.
So my interpretation of that discussion is simply to acknowledge that when the labor market starts to turn down, unemployment often doesn't gently move up, and the Federal Reserve doesn't have a lot of time to react. Unemployment often jumps higher. Whereas because the tariffs have changed a number of times and still do not seem to be settled, because businesses were so good at getting inventories in ahead of time, because consumers did a lot of advanced purchases, those tariffs
are working their way into prices more slowly. So I think it was just an acknowledgement of different potential timing on the two legs of the dual mandate.
It felt like Chair Powell was coming around to how Governor Waller thinks, or maybe how Governor Bowman thinks. And I want to end on those two individuals their names potentially to be the next FED chair.
Their scenario. People are talking about that.
All the presidents' terms need to be renewed in February. Would you see a situation or risk at the FED Board when next multiple presidents at the bidding of the President of the United States.
Well, I think that is exactly the risk that we are seeing play out right now. So by moving preemptively to remove a governor from the Federal Reserve without going through the process, without there being any clear evidence, the President essentially is moving to shift the majority of the Board of Governors well before what was contemplated in terms
of the institutional structure in their terms. And that opens the door when renewals of all of the Reserve Bank presents come up in February, to again take very unprecedented actions and potentially not renew some of them in order to shift the overall voting majority on the FMC. That is an unprecedented attack on the independence of the Federal Reserve and it should really concern us about their ability to continue to be credible in fighting inflation and keeping our economy on a strong course.
Which is quickly.
You know, Governor Bowman and Waller, do you think they would be up for that kind of level of revamping.
So this is really not about individual members of the board or the FMC. This is really about whether political pressure will continue to be exerted on all members of the FLMC in a way that puts them in jeopardy and potentially makes them less willing to share their views about the economy and appropriate monetary policy with the public and also to vote their mind on monetary policy decisions. That is what is at stake here, and I think it's very concerning.
Stay with us. More Bloomberg surveillance coming up after this. Joining us now to extend the conversation, the former New York Fed President Bill Dudley. Bill, welcome to the program. Extensive experience the Federal Reserve inside that institution. How do you think they'll be responding to this this morning?
They're going to be very unhappy because this is a real assault on the Federal reserves independence. And as we know, central banks independence is really important for good economic outcomes. There's been a reason why we've been moving in the direction of greater central bank independence over the least four decades.
Across the world because central banks that have independence in terms of how they conduct monetary policy to achieve the objectives set for them by Congress and the administration do a better job in controlling inflation and keeping the economy on a stable path.
So this is assault on that.
And I'm sorry of surprised that the markets are so relaxed about this.
Now.
Maybe that's because we don't know where this is going to go. We don't know whether Lisa Cook is going to be able to stay in office. It certainly looks like the barf to getting her out is quite high, because it doesn't seem that the for cause would extend to the allegations against her. But she certainly a very minimum deserves her day in court.
Well, Bill, it seems like that is the system that is emerging, that we're understanding the contours of FED independence from the courts. Be it the most recent ruling that said other independent agencies could have their heads fired by Trump, but not necessarily the FED without cause. This maybe defining
having the courts define what causes. If you have a system where it's not encoded in law but instead is being interpreted by the courts, what does that say about the fragility or the stability of FED independence.
Well, it sort of has to be interpreted by the course because this is there's no precedence for this. We don't really know what the law is until the courts actually rule on it. So the courts have to decide what's the law intended to do. I think most people think that, you know, what Lisa Cook did does not represent four clause dismissal from her governorship. But it's up for the courts to adjudicate that.
So, Bill, if we're in a scenario where it seems like we might be that this is a FED that wants to start to ease policy that it wants to cut, but because of all these proceedings in the background, you get some real tension on the long end of the curve. What would the FED do in that case that it wants to cut, it wants to ease, but the markets do something different.
Well, I think the Federal do what it thinks is appropriate to achieve its subjectives on employment and inflation and policy certainly signals that his jackson will remarks that he's worried about the downside risk to the labor market more than he's worried about the upside risk to inflation, and so his view that Manterrey policy is currently restrictive. He basically set a signal that is highly likely the Fed is going to cut rais and September. And I don't
think this changes any of that. What it does change is down the road when the Federal Reserve acts. When the Federal Reserve, if they cut rates at subsequent times, is that because they think that's the appropriate thing to do for the economy, or because it's because they're under
pressure from the Trump administration. Putting a lot of pressure on a central bank is in my mind, somewhat counterproductive because it basically causes people to start to wander is a central bank doing what is appropriate to achieve its objectives or is it caving into pressure from the administration.
Well, you've got great contacts. Do you sense that shift is already underway?
No, I don't think so. I think there is a case to cut rates in September. I'm not sure I would be in that camp. I'm not as convinced that monetary policy actually is restrictive today, and I am more worried that the rise in inflation caused by the path through of the tariffs. Will you could be end up being more persistent than Paul does. But that's a reasonable point of disagreement. I think that if the Fed cuts rates in September is not a big event. The market
certainly anticipates rate cuts over the next year. They expect the Fed eventually to cut race back down to what they view as sort of a neutral a federal fund rate of around three to three and a half percent.
Go out of interest. Why are you more concerned about inflation? In very simple terms, the Fed share has basically come out and said he's not worried about upside risk to inflation because of the downside risk to employment.
What makes you more concerned, Well.
Four years of being above your inflation to objective, and every year you're above your inflation objective, that increases the risk that people start to view this is the steady state, and then that starts to flow into wage settlements, and then it becomes very difficult to get rid of the inflation that's been embedded in the system at that point.
Stay with us. More Bloomberg surveillance coming up after.
This significant escalation.
When it comes to the President and this standoff with Governor Lisa Cook. This really stems from FHAFA director Bill Poulti talking about the fact that they think she committed mortgage fraud.
These are allegations.
The President down has letter last night Jonathan saying the American people must be able to have full confidence in the honesty of the members entrusted in setting policy and overseeing the Federal Reserve.
We're now joined by.
Scott Linscombe of the Cato Institute. He works on general economics and trade. Scott, thank you so much for joining us this morning. Just your reaction to this headline overnight.
I'm can't say I'm surprised given the run up and some of the statements from the Trump administration already. But look, that doesn't mean that this isn't a significant move. You know, the independence of the FED is extremely important for US monetary policy in the US economy. We you, Cato and elsewhere, have always been concerned about isization of the FED. But
this is now going in the wrong direction, right. It is pushing us more towards politicized monetary policy, and quite frankly, you know, it's not something that appears justified by the numbers in terms of absolutely necessitating some.
Sort of rape cup.
When you look at core CPI still above three flash pm I last week showing significant price pressures. The idea that you know, this is just a Racalca Trent FED fighting the president's whims our needs is not really held up in the data.
Does the market actually believe it yet?
How do you see this playing out, this fight between Governor Cook and the President of the United States.
Yeah, I mean, I think some of the calmness in the market probably stems from the fact that it's not one hundred percent clear that they can do this Cook and her legal team saying they're going to fight it. In that, you know, it appears to be I think giving some people some thoughts that, you know, maybe the independence of the FED still intact. But that being said, look, this Trump is a persistent guy. We know this, and I don't think we should be too confident that this
is this is going away anytime soon. Regardless of how this particular spat turns out.
Whether it's the FED, whether it's trade.
We like to see the President United States put his thumb on the scale.
He takes an interventionist approach. You wrote about that this.
Week in the Washington Post when it comes to Intel. What kind of president do you see Trumps setting for future administrations.
It's a lot of troubling precedent. I mean, beyond the pressuring the Fed. Now, you know, you have the state taking big stakes in private companies like Intel, not during a great recession or wartime, but in peacetime and doing it clear under a pretty clear pressure and coercion from the overall office. Of course, you have all the import substitution in tariffs and uncertainty and trade deals, which is
also all executive power as well. You know, it makes you wonder where the heck Congress is all in this, But it also makes you think what the next president's going to.
Be able to do.
You know, Bernie Sanders was cheering Trump's Intel move, and you could very well have a Democratic president that picks up these very same precedents and pushes even further into an interventionist executive branch acting unilaterally, and that's of course going to raise serious issues, serious problems for the health of the US economy.
Well, the President also said he would be interested in maybe striking more deals like this. Are there companies that you're looking at that potentially we can see a similar approach from this White House.
Yeah, you know, as I wrote in the post, if any company that's taken subsidies from the US government and happens to be located in a strategic industry by the executive branches, definition should be a little bit concerned. The fact is that we now have national security investigations in the trade space on a whole lot of products, not just chips and steel and aluminum.
In others.
We've already seen a golden share for US steel. We've already seen investments in MP materials, which is in the rare earth space. So I think there's no question that companies that have some sort of dealings with the US government in these strategic industries may be the nets to get a call from the Oval Office.
Trump has talked about building the US Sovereign Wealth Fund. Is that what all of this is leading towards?
Well?
Any C Director Kevin Hassett basically said as much yesterday that they're using a lot of the industrial policy that was implemented during the Biden years through the Inflation Reduction Act, the Chips Act, the Infrastructure Bill, and some other exiscuative authorities to basically reverse engineer a Sovereign Wealth Fund, which Trump is long wanted. And this, again, I think is a concern for companies that have taken some of these, you know, ups of trillions of dollars in government subsidies.
But it's also I think, you know, a cautionary tale about US industrial policy generally. Now, this stuff maybe starts targeted, but tends to have a way to spiral out of control.
Scott, I just want to end on another truth last night from the President, not getting as much attention what's going on at the Federal Reserve, he said he's going to stand up to countries that attack US tech because of things like digital services.
What does this mean for the European Union.
Given the fact that the President has already struck a trade deal.
With them, Well, I think it should tell the European Union, Japan and anybody else that these trade deals that they signed over the last couple of months are never really finished. You know, digital services taxes were supposed to be an issue you in the EU negotiations. The Europeans resisted any changes. They signed this big deal, which most people saw as a pretty huge cave by the Europeans. And here we are just a couple of weeks later and Trump's asking
for more. So, you know, for those who think, especially in the market, who think these trade deals have settled down the tariff space, well think again.
Stay with us multil impax surveillance coming up after this, John Guess around a table, Tolston smock of Apollo Toaston, good monic, Morning morning. Your reaction to this one.
Well, obviously the market reaction here is a little bit surprising in the sense that the stock market is basically now want changed, at least before we opened. By what you're seeing in the long end is certainly somewhat worries on the Yulcovist evening telling you that the market is expecting that ray cuts are coming, because this seems to be at least more likely given recent discussions including j. Powell on Friday, but also that the long end has
moved higher. It's obviously equivalent to beginning to think about that maybe there is a risk that inflation is going to be a problem for a longer period than what
people thought just a few days ago. The conclusion from a broader perspective is obviously a discussion around well, maybe we should just begin to think about when we say rates are higher for longer, then maybe it's long rates that will be higher for longer, not only for fiscal reasons, but also now because of this emerging debate, not only because of what Powell said last Friday in Jackson Hole about the framework, but also about this issue now about well,
what would the composition of THEBC look like? Are they going to allow essentially the inflation target to be higher than what it has been just for the last several years.
Trsten really zeroing in on the shape of the yield curve though, and talking about duration getting hit.
It is the thirty year yield.
It's a ten year yield which hasn't moved as much, and you'd expect if the issue is is more persistent inflation, the ten year yield also would be moving on higher tens thirties curve is the steepest since twenty twenty one. Why is the thirty yearield specifically acting as the release valve.
Well, there's just more sensitivity in the form of duration and the very long end. So ten year rates of course are not down as much as two year rates are. So really it is the whole yeel curve that is just steeper, And you're right the tenure rate basically being only down a little bit here as we speak, is certainly also telling us that it really is the very
long duration exposure. Those with very long duration exposure relative to matching their long duration liabilities, they are the ones that are reacting to this, mainly worrying about that thirty year is where most of the action has been. But you're right, it is a little bit peculiar. We look at it here and say, well, why thirty is moving so much more than tens But I think it is just the reflection of the whole yell curve s deepening here that is going to take some time now to digest.
And as Mike also was just saying, well, what exactly will be this scenario we have now ahead of us. Is this going to change the composition of their FIRMC or what will their FIRMCEE then look like, especially when we come to the other side of.
February next year.
So is it your assumption, if we get more doves appointed to the FOMC, more people who are maybe willing to listen to the arguments of the White House, that it's the inflation target that changes that.
That's the main mechanism I absolutely think that we should all think of this as essentially a change in the inflation target. We have now for thirty forty years, been
used to the inflation target is two percent. If I own treasuries, my fixed income PORTFOLI will be eroded by two percent every year, and inflation now is allowed to be higher for longer, and if Jpower now last Friday is said that the change and framework away from flexible average inflation targeting also will allow inflation to be higher for longer. That means that bond investors should begin to
think about that. It is simply the same as saying that the inflation target will also be higher, not necessarily significantly higher than two, but even if we grow up to two and a half and three over time, that's a fairly significant erosion for fixed income investors, especially in public markets.
Houston, They's some really important, critical, serious points. But this has happened independent of the pressure on central bank independence. The whole points of central bank independence is to make the tough decisions divorced from political cycle, to make sure that you hit your two percent target. So what is the excuse for Shair and Pound and the Federal Reserve to miss this target for so many years.
Well, the issue, of course at the moment is that normally the dual mandate, meaning inflation and unemployment, normally points in the same direction. If you have a strong economy, an employment rate goes down, inflation goes up, and you should hike rates. If you have a weak economy, the opposite happens. Of course, inflation goes down and growth goes down. Of course you should be cutting rates. Now there is this tension in the dual mandate, and that is what
brings this discussion to the table. Maybe that now the dual mandate is pulling in different directions. Inflation is saying the feed should be hiking. And if we have upward momentum, if I look at ECFC go on my Bloomberg screen, the CONTENTSUS expecs inflation for the next twelve months to be three percent for the next four quarters. That's a very high level of inflation when the target is two. That says that the Fed should even consider hiking rates.
But at the same time, Pial very clearly last Friday said no, no, we're not going to put much more weight on the slowdown on the label market, and with the anchoring in the long term inflation expectations. That could be the use and the reason the small door out of saying well, maybe we don't need to worry so much about inflation, maybe we can focus more on the
label market. So the answer to your question is it's because of the tension in the dual mandate that one part of the dual mandate it says that should be hiking and the other part says it should be cutting. And that's what brings this discussion to the table at the moment about what exactly is the best decision.
As you know the weather.
Addressing that at the moment is to say, essentially, and this is coming from the FED share governor want of shares, this view, the labor market's not sufficiently tight enough to worry about second round effects that this inflation story will ultimately be. They won't say it, but they're basically spanning it out transit tree, which you push back against that.
Well, the risk is that we don't know if that's the case. But Hammock at the Cleveland Fed has been pointing out that companies and her district are beginning to raise prices, even those that are not impacted by teriffs. So the risk is also in services inflation. Services makes up two thirds of GDP, and the ism prices paid in services has really started going up, and that suggests that even and Austin Goldby was also pointing to this, that even the service part of the CPI index could
begin to show some up pressure. So we just don't quite know if we're out of the woods on the inflation front. So that's also why inflation swaps in twelve month's time uprising that inflation will be in one year's time three point four percent. That is dramatically higher than
the fifth two percent target. And that is the fear, of course that some people in the market have, nameing that maybe inflation is going to be not only translitorially higher, but maybe there is a risk that it could be more permanently higher, in the sense that we will have inflation higher for longer. And that's of course the risk that we could have a policy mistake here by focusing too much on the leave of market.
Well, let's talk about how policy might evolve. There's three time frames that think about here. Danny told about two of them a little bit earlier, the September than everything else. But the September everything else, and then there's life after power from May onwards. And I just wonder whether you think perhaps we're getting ahead of ourselves here that beyond September there's still a lot to apply for.
I do think that it's a good idea to take a deep breath and go for a long walk in a green park and say, you know what, touch grass.
There's a lot of.
Things going on at the moment, which of course are somewhat unusual, including of course the topic of the But let's see what the data is telling us. We have a lot of data points before we get even to the December meeting, so the market is currently only prising a content in September and December, but getting into next year,
the economy could be in a very different place. We could either have a scenario where infleation is a lot higher and we have a whole different discussion, But it could also be a scenario where we have growth slow down, that's a lot weaker and therefore the fit we'll be cutting a lot more. So let's take the data as it comes in and watch exactly how it plays our relative.
To the dual main day for the fed who don't be talked about the same thing. If you're in the threes gone into twenty twenty six, this guits harder and harder to count.
It does get a lot harder, But I think it's going to be really instructive.
On Thursday, Governor Waller is.
Going to be giving a full fledged monetary policy and economy speech. Considering Powell's come around to his camp and he's up for the FED chair. I think that's really also going to determine maybe that medium term plus longer term trajectory of the.
FAT and empower can take notes and basically use the same notes in the news conference. This is basically what the speech was on Friday. Anyway, less of my snark, I want to finish on with you where you think this is ultimately heading. Care you believe we do end up in this situation where we are facing stagflation and this federal reserve is ultimately paralyzed and that dubbish bias is constrained, because at the moment what we hear is
the dubbish bias isn't constrained. Do you think that's the ultimate destination though.
I absolutely thank the ultimate destination exactly because the issue is normally fit policy is very straightforward because both parts of the dual made it are actually designed to point in the same direction, with the business siding. When the economy is good, you should be hiking. When the economy
is bad, you should be cutting. But now because of this tacflationary impulse coming not only from tariffs but also coming from immigration restrictions and deportations, lowering labor supply and putting up by pressure on wages in the sectors where unauthorized immigrants are working, namely agricultural construction, hotels, and restaurants.
That's taclationary impulse is creating this very complex situation for the FED where it becomes a matter of do you like atmosphere like oranges as the fit chair or as the FMC, do it like inflation or do it like the slow down and growth?
And where do you put your weight?
And that does indeed depend a lot on what is the composition of the committee.
This is the Bloomberg Surveillance podcast, bringing you the best in markets, economics, and geopolitics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always, on the Bloomberg terminal and the Bloomberg Business app.