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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie Hordern. 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.
The President saying he plans to announce his selection to lead the Federal Reserve early in the new year, possibly this giving rise to berts that the Fed is going to cut rights rates more aggressively, which is fed into this expectation of a bigger deficit and potentially what's going to be happening on both the monetary side of things and the fiscal side of things, which is the reason
why we are looking at the fiscal deficit. President Trump once again suggesting revenue could replace federal income taxes and reduce the national debt. Mayamaguinnis of the Committee for for Responsible Federal Budget writing, despite all of the promises made on deficit reduction in twenty twenty five, we're heading into twenty twenty six with a little to show as far as fiscal improvements. MAYA can join us now, Maya thank
you so much for being with us. I want to start with what you make of the recent discussions of the AEPA case in front of the Supreme Court of potential companies clawing back some of the revenues that they paid to the United States.
Are you taking that seriously.
As a potential hit to revenues that otherwise have been penciled in.
Absolutely, I think everybody should be taking seriously the potential that there's going to be major shifts on what happens with the tariff revenue, both going forward and potentially if some of that money has to be paid back. Listen, I have no legal expertise at all, but having talked to many people, I'm less concerned that people are going to have to pay it back, which would be immensely disruptive to companies and distortive to the sense that you
can make negotiations on foreign policy and economic policy. But I do think it's likely that they will find that those tariffs are illegal. In their present structure, the tariffs are projected to raise about two and a half trillion dollars over the next decade and reduce the debt by as much as three trillion because of interest savings. This would be a huge hit to the fiscal picture, which
is already in deep, deep trouble. So I think one of the big questions is if we do find that that TEARFF revenue doesn't remain in place, and let's be honest, it's unlikely to remain in place in the current structure no matter what, because the President enjoys changing those tariffs around.
But if they are pulled back and unable to go as planned, we should be thinking about a smarter, more efficient, more pro growth revenue approach that would replace them, so we wouldn't lose all of that money and make the deficit even worse.
MAYA when it comes to potentially well can get done by the end of the year. What are you hearing and what do you think it's going to do the fiscal picture? If there is an extension of the AMA Care health credits enhance this This was.
A really interesting part of the discussion about how to open the government. Which was the big ask was that we extend the subsidies for Obama healthcare, and that would have all told to cost three hundred and fifty billion dollars. You'll notice there was not a single discussion of how we might offset those costs. So again, here's another plan that would increase the deficit. We're not going to see them extended permanently, and so the cost will be less
because it will only be for a few years. There is some chance that this will happen for one or two years before the end of this year, but I think it's likely. It seems as though the momentum for getting this done is starting to slow down. But to your point, no matter what happens at the end of this year, we'll either see nothing, which will just keep a very bad fiscal picture in place, or there is a possibility that there'll be a trade and a worsening
of the fiscal picture. Let's extend those subsidies, and it's no comment in the policy. They might be a smart policy, no, but he's talking about how to offset them. But there might be a trade where you extend them unpaid for for other policies that are also unpaid for. Which is often what happens in that Christmas tree fiscal rush at the end of the calendar year.
Well, when it comes to these enhanced subsidies, this was at as you mentioned, the heart of the government shutdown. Have you any seen any impact that is going to be long term of the government shutdown on the fiscal healthy United States?
The government shutdown itself will not have an overall massive fiscal impact. There is a slowing and spending during that period and take a small hit on GDP usually which is made up in.
The following months.
So we usually just see a shift of growth and overall effects fysical effects from the shutdown.
What it does do is causes us to be.
A laughing stock around the world when our government can't keep the lights on. Really, it is a punchline, and it is the huge sign of an inability to govern at the most basic level, and it presents weaknesses and sort of a distraction from the big issues that are
going on around the globe right now. So I think any country that's not aligned with the US looks at us and says they can't get their act together, and our allies are a little bit concerned too, So I would say it has far more of global foreign policy ramifications that it does on the actual bottom line, which is more of a shift of when money is spent. There'll be small savings in the short term, but they'll be pushed out into the subsequent months.
A lot of people have said, look, this could have been said for a long time. We've had the irresponsible fiscal budget deficit for quite a while. It has gotten worse, but right now markets are not freaking out. In fact, we have a whole host of different projections for twenty twenty six coming out of Wall Street expecting a bias to lower yields by the end of next year, even
on the longer denominations. Why do you think the market hasn't been particularly concerned even with everything that you're laying out.
Yeah, I mean this is a long term challenge, the fiscal situation, because it's not in the US about oh, we might have a fiscal crisis in the immediate short term, because we are the reserve currency, because countries around the world and savors domestically want US treasuries. There are lots of reasons that rates don't pop up immediately. What it is is a slowing kind of erosion of our role in the world and faith in the US, and so that when there is kind of a moment of reckoning,
it will be so much harder to fix. We will have ten trillion twenty trillion more in debt than we would have if we had gotten ahead of the problem. That's one big issue. The second issue I'd say is markets aren't the best predictors of when things turn bad. There's a lot of kind of frothy optimism that comes out of markets momentum that's built in it, and it's almost like a bubble.
Many people understand that.
Most people understand the fiscal fundamentals of the US are nothing short of terrible, but that doesn't mean there isn't money to be made in the short term as long as things kind of continue with the momentum they currently have. And when it comes to time, people don't want to pull money out of the market or make abrupt changes too quickly.
So there's a refusal to acknowledge that the fundamentals are bad and hope that kind of the top line.
Numbers will continue to look good for as long as possible.
Stay with US. Mulpleinpeg Savanna's coming.
Up off to this.
Here's a view from Wall Street. Stocks inching higher as risk sentiment appears to be improving. Dana Dioria of Investment Solutions writing, the current bout of market difficulty doesn't presage a bear market. It's better to see wild buying tamed now than to witness a major bubble. Developed data joins us now from more Dana, thank you so much for
being with us. This to me really is the question, is this a healthy sell off or is this a sign, especially with what we're seeing, for example, coming out of Oracle CDs, a sign that there really are some significant worries that are developing.
Well, I think there've always been significant worries.
I think the market has, you know, kind of plowed ahead throughout the course of the year in spite of what we all know.
One of the main head winds, of course, being just valuations being so high.
Another major head wind being that it's a pretty narrow story that's kind of driving all of this, right, It's this AI story, and narrow and only in the sense that we don't know yet when AI is going to pay off. We don't really know yet other than paying off for the NVIDIAs of the world, and kind of the producers if you will, but when will it actually
pay off for the rest of the economy. And so you know, transformative technologies that of course are good bets in a long term sense, don't necessarily pay off in the short term at all, and it's really hard to
see how that's going to disperse throughout the economy. So all being said, I think the market has kind of gone through all of that and pushed hard ahead throughout the course of the air in spite of some of these existing concerns, and so yes, to see a little bit of a pullback, to see some consideration around Hey,
there's a lot of concentration here. This whole capex AI you know cycle is sort of a little bit circuitous, and you know, maybe we should back off a little I think is normal and you know, kind of to be expected and maybe probably even a little on what it could be.
So Dana, going forward, what's going to get people to reverse that skepticism to actually come in and buy again. Even the valuations, yes, they've come off, still are pretty elevated.
Well, certainly you've got the FED rate cut.
I mean, I think everybody you know what you're seeing, even in the market is now a little bit of you know, TechEd kind of recovery.
A little is based on that, right, It's.
Based on the bad news is good news kind of storyline where we're still going to see some softness and employment. That softness and employment will be enough that the FED will actually cut rates in December as expected.
My view is and has been that.
They will cut, regardless of kind of some of the rhetoric and ups and downs that we've seen in the futures market.
I think a cut is coming.
I think there's enough concern about the soft patch in the economy that.
They will do that.
I think some of what they've said is an assertion of independence and you know, don't get ahead of yourselves kind of thing.
But at the end of the day, they will cut, and.
So I think that will be good, and I think it will be good for areas of the market that we want to see, you know, kind of do better, such as small caps, you know, more straight sensitive areas in the market where if you want breadth in the market, which we do, right, we want to get beyond this large cap tech only type of a trade. We want to see those areas of the market that maybe are
more reliant on capital markets be able to come back more. So, you know, I think a FED rate cut is the right thing, and I think we'll get it, and I think that that is what the market is seeing right now.
Is it cut in December enough though, for that burdening out you're talking about, or is it that going to have to continue this into twenty twenty six?
You know, I do think you're right.
I think the cutton December, of course will make everyone happy. Perhaps we'll have our Santa Claus rally, but you're absolutely right. I think we will need to continue to see at least some cutting in the new year. I also think though you know, twenty twenty six, I don't have a negative outlook, right. I mean, as we go into the next year, I think we do have a.
Situation where you've got stimulus coming.
You still do have what I think is a good storyline around AI and Capex.
I don't think it's going anywhere.
I mean, look at the bond markets and the interests that these companies have, and you know, getting credit for some of these purchases. There's credit a wash for their needs, and so I think there's a lot still there.
I don't think we're ready to sort of back off.
On where the market can be in twenty twenty six, but I think we just want to see more breadth.
We're going to get ADP report today, We're going to get PCs very stale on Friday. We're not getting jobs data from the US government until after the FED meets. Does it unnerve you that we're going into the end of the year with really a fog out of the data story?
For sure?
And I think it unnerves the FED, And I think that's why you're seeing such pushback we have And really what's going on with the FED that's super interesting, of course, is that you're getting a lot of different types of feedback.
You know that you're not seeing go to this monolith and how they talk about things.
Different FED governors have very different viewpoints, and it tells you something, right, It tells you they're not kidding when they say that very FED or the excuse me, they're very data dependent. The FED is very data dependent, and they look to that data and they really make their decisions, and they try to make the decisions notwithstanding all the politics surrounding it. I really do think they try to make those decisions as dispassionately as they can.
And so when the data is.
Missing, which to your point very much is and has been now for a bit, it makes it harder for them to do their jobs. It makes it harder for them to feel confident, because of course, what happens, right if we do lower rates too quickly and there is a rebound in inflation, I mean nothing would sort of be a worse occurrence.
I think for this FED in particular, given the.
Nine percent inflation that we got to a couple of years ago, for the FED to let inflation rebound in any kind of big way would be a huge fail. And so I think it's real the concerns and consideration. Like I say, Net and Net, I think we will get it. But I do think it's problematic to not have the data to support what you're trying to do.
I mean, you're running an entire economy here, right, You're running interest rates and monetary policy for you just the benefit not only of people in the stock market, but of everybody sort of living with affordability issues.
And everything else that we've been talking about. So not having data is a serious issue.
Stay with us. Mulplinpex Savanas coming up off to this.
I guess the potential FED chair is here too.
I don't know we shall allowed to say.
That potential is a respected person that I can tell you, Thank you Kevin.
The presidential praise only boosting bets that White House a NEC director Kevin Hassett will be the next Federal Reserve chair. Former Kansas City FED President Thomas ohneg joins us. Now for more, Thomas, what do you think of this sort of bachelor style a race for the next FED chair? Do you think that it has framed it correctly in terms of what's at stake?
Well, I think it's been framed well as far as this is a big deal and they better picked well the and the five mandidates they originally had. We're all qualified as it is coming out as the top runner. But I don't know if that's a trial balloon they want to test it or not. That's all has to
be decided. Kevin certainly qualified, and if he were chosen, I can tell you the world will be watching his or whomever has chosen his first speech with great intensity because there's so much at stake going forward, with the FED changing, lots of call for reform. Who's going to lead that it's going to be on everyone's mind, so it's a big deal.
A big question is not just how much influence the FED has over the front end of the yield curve, but really what they can do for the tenure in the thirty year Given the fact that there has been a focus on home affordability and mortgage rates, what are you watching for to understand what tools they could potentially deploy to lower ten year yields, not just the very front end.
Well if they, I mean, they always have the choice of trying to manage the yield curve through their monetary operations by which government securities they buy and the pressure they put on there. However, one of the issues is should they be doing that, should they be pulling away let the market take it. They do monetary policy and focus on the short end treasure yields and let the
market take care of itself. That'll be a big debate I think within the FED, whomever the new chairman is, because it is so important financial conditions overall are easing. The fedest part of that, and that will be as much influence on the tenure as trying to manage that you occur, which I think will create uncertainty as much as it will help help mortgages, so they have some big choices to make ahead.
Has monetary policy ever been as confusing during your tenure in terms of both the dual mandate of FED in terms of inflation as well as the labor market and also the transmission mechanism. Are financial conditions easy or are they tight?
Well? Things are confusing, and you can see that within the debate within the FMC itself. Doves hawks seeming to be really at odds right now. So now, I haven't seen it like that before. I've seen it similar to that before, and it is tough, and they've got this new mandate and they're going to argue about it. But I know inflation is three percent, that's way above their target. But they're worried about employment, and I've heard and you they will say it. I'm just as sure as I'm sitting here.
You know.
Should we make this cut as an insurance policy to make sure the economy moves forward. That's all going to be in next week's meeting. I'm confident of that.
When it comes to potentially a Kevin Hassett chair, do you think it would harden the views of the Hawks and the committee because he is so close to the president.
Not well, maybe give given the diversity on that committee right now, they could harden, but I think I think basically they want to get the right the right balance in the in the policy academ so they'll be willing to discuss it and I think come to conclusions. I think it will really depend on how whoever leads, if Kevin, how careful they are in terms of making their points, how they lead the system words consensus. That is an art, and if he's good at it, they'll come to consensus.
If not, you'll see this split continuing because I think the difference between inflationary goals and the employment goals will continue to haunt them going forward.
Do you think it's peculiar that current Fed chair J. Powell hasn't announced whether or not he's going to give up his governorship when he leads the leaves the chair post.
I think, yeah, I would be surprised if he stayed on. It's possible, but it would be surprised. But it wouldn't be his advantage to announce one way or the other. So he's just keeping his mouth quiet because it would do nothing. But I think confusings even further. So he's playing out his term as chairman. That's what matters to him, and he'll make that decision whether to stay on much later. But I would be very surprised if he stayed on.
We've been talking all morning about potential cost of living concerns and fiscal stimulus that could be coming from the White House earlier next year, and I just wonder how that factors into any potential to decision by the Federal Reserve. Would that be something that could be inflationary or would that be so small as to be negligible to those discussions.
Well, I think the Fed should be looking ahead to that issue because it's small in some ways, but the national spending of over seven trallion versus the revenues coming in just over five trade and that's a huge deficit.
That's a huge new issuance of debt to fund that, and you know that's going to affect the economy, and it's going to affect how monetary policy, how effective it is going forward, and they're going to be under a lot of pressures to make sure that the interest rates don't rise if the debt continues amount and there's not the demand for it that they would otherwise want. So
that's going to be facing the FED. I'm a little disappointed that at least the FED itself isn't publicly recognizing that as a challenge that they have to be ready for, because it will be a big challenge going forward.
Do you think that the reason why they're not is because there has been this political pressure, sure, and this would only reignite some of that pressure and potential accusations of being politically motivated.
I think political pressure is part of it. You know, why engage in a fight if you can avoid it. But at the same time, they're going to have to face it at some point because the data is continuing to grow. It is a challenge that the FED will have to have to deal with. And remember they're in the middle of the past, the middle now of changing policy frameworks to this ample reserve system and they try
and figure out what is the right number for ample reserves? Uh, they got that going on, there will be pressure to bring that ample reserve number up. So there confusing times, but difficult times for sure for the FORMC.
Do you think there has been a weakness in terms of FED independence, You know, like if they're not willing to come out and say something that you think is so obvious because of political pressure, does that show that on the margins at minimum there has been some weakness.
Weakness is sensitivity is the right word, because look at the FED has been under political pressure almost since the start. But in modern times we all know the history of the FEDS. UH, Nixon years, Johnson efforts and so forth. That's that hasn't changed. And so they're trying to be careful. They don't want to get into a fight before they need to uh. And I think that's part of it. Although political pressure is part of their thinking, there's no
question about that. It has to be. They are They are in the middle of a political series here and there. They have to play in that in that arena.
This is the Bloomberg Surveandmons podcast, bringing you the best in markets, economics, antient politics. 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.