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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie 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.
It's time for some calm.
Joining us now the seventy ninth Secretary of the Treasury, Skill Besson. Mister Secretary, welcome to the program sir. Let's pick up on that theme, not you calm in the markets, but on inflation and where rates should be. As Amori pointed out, we've had a string of softer th expected inflation reads in this country. We've had four, we might get five at a thirty Eastern time. Why do you believe that's signal and non noise?
Well, I mean there's some persistence there, Jonathan. And look, I do have access to the number of the night before, but when I'm coming on TV. I don't look at it, so I don't know what the number is going to be at eight thirty, and I wouldn't. I don't know whether it's going to be down, up, or flat, but I wouldn't put too much emphasis on one number. I
think it's the trend. And I think one thing that Wall Street, a lot of economist market in general got wrong early on was that tariffs were going to cause a substantial price level rise, which just hasn't happened.
And there are some people on the FMC the Federal Reserve still worried about the prospect of that happening. Through the summer, We've all sensed the frustration from the White House across the administration with FED Chair J Powell, and a lot of confusion. I think at this point that maybe we can address in this conversation, is firing the Federal Reserve Chair under active consideration in the White in the Treasury in your administration.
President Trump said numerous times he's not going to fire J. Powell. You know, he's working the refs. And I've said before I'm a basketball fan. There are two schools of working the refs. There's the Bobby Knight school, and there's the Dean Smith School. President Trump seems to prefer the Bobby Knight school. And I'll tell you, I went back over the weekend and looked, and Bobby Knight won three NCAA championships.
My hero Dean Smith only won two.
Then Seat Director Kevin Hassett, I'm not sure what you'd call him, but he was asked over the weekend, can the FED chair be fired? He said, that's the thing this being looked into. How should we understand those comments?
Look? And I will point out Kevin was a collegiate basketball player. And I think, as President Trump said, he's not looking to fire Chair Powell. And as I've said, I'm not going to come. I'm not going to comment on future policy or future mistakes the federal make. I'll only comment on past mistakes. And look, they've had some big forecasting errors and this may be one.
Now is there a reason for not firing Kim? And I asked that question because the presidents also said that his term is about to expire in May of next year. Is that the reason to ultimately just wait? Or is it something come? So you convinced by the negative consequences associates it with such a move.
Look, I think an independent central bank is very important for the conduct of monetary policy, and we can see that in terms of both the financial markets, the term premium and longer term debt.
You said previously the interview process would begin later on in the fall. There's been plenty of speculation as to whether that process would be brought forward, Missus Secretary, do you still, as far as you understand, believe that's when the interview process to replace the feed che will begin in the fall, or as a formal process already started.
Well, look, there's a formal process that's already starting. There are a lot of great candidates, and we'll see how rapidly it progresses. It's President Trump's decision and it will move at his speed.
Do you see any merits at all and selecting maybe a candidate that's already on the committee on the FMC versus taking a look at someone outside of the Federal Reserve.
Again, there are a lot of good candidates inside and outside the Federal Reserve.
Jonathan has the chairman himself the Fed shat Jake Paw, given you any indication whatsoever as to what he would do once his term has expired, WILLI f ak as the governor at the Federal Reserve.
Well, traditionally the FED chair also steps down as a governor, and there's been a lot of talk of a shadow FED chair causing confusion in advance of his or her nomination, And I can tell you I think it'd be very confusing for the market for a former FED chair to stay on.
Also, mister Treasury Secretary, I love to talk to you about what's going on in Video. This morning, Jensen Wang, the CEO, out in a blog statement saying that the company has quote provided an update to customers, noting that in Nvidia is finding applications to sell the H twenty GPU again. The US government has assured the company that licenses will be granted, and the video hopes to start deliveries soon.
Can you attest whether that.
That's true or not the United States is willing to let Nvidia sell H twenties once again in China?
Well again, I emrie. I think that'd be a judgment that the Chinese indigenous manufacturers, namely Huawei and some others already have an equivalent chip. So if there's an equivalent chip, then the Nvidia H twenty could be sold because I can tell you the one thing that we do not want is a digital Belton road springing up around the world because other countries or China are substituting for our American chip manufacturers.
This is the same chip though, that the Trump administration blocked with export controls in April. So why the change in policy now.
Emery, you might say that that was a negotiating chip that we used in Geneva and in London.
So this was part of the trade talks when it comes to Washington and Beijing.
Yes, was it a quid pro quo then.
As you said, it wasn't, But was it potentially to make sure that you can get the licenses when it comes to rare earths.
I think it was all part of a mosaic. They had things we wanted, we have things they wanted, and we're in a very good place. I expect to meet my Chinese counterpart, the vice premiere, in the next few weeks.
So when and where will that meeting take place.
We're still working on that. The Chinese leadership has a big conclave at the beginning of August, so we're trying to work out whether that could be in a third country before or after that conclave.
Well, the administration released the framework of the Geneva and London talks.
Well, we have released some of it, and I'll tell you that now having settled on tariffs on the export controls, we can move on to the next stage of talks. And I think it's very important both for the global economy, for the US economy and for the Chinese economy, for US to move on and talk about China opening its market and the increase domestic and consumer production.
There.
Are you hoping to get to that next phase before August twelfth, when that's currently the day taunt between these two economies.
Yeah, Look, I think we're in a very good place. And I tell market participants not to worry about August twelfth.
Should they worry about what's happening with Europe with respect to thirty percent teriff rate? They don't seem to be worrying. But I'm just curious whether that's the final rate or whether the letter was part of a negotiation that Europe received from President Trump.
Well, Lisa, you know what I would say is President Trump's able to create a lot of leverage here, a lot of leverage because he's indifferent. He's indifferent whether we take in the thirty percent rate or whether the Europeans come to us with a much better deal. As I've been saying for a while that if countries or trading blocks don't come with their best deals, then the rates could boomerang back. So President Trump's leading this, And what I will tell you is that a lot of the deals,
and this is where his leadership has been invaluable. A lot of the deals that I thought were excellent deals keep getting improved upon every time he takes up the maximum pressure strategy.
There is a theory in markets, and you don't even have to calm them.
They're pretty calm.
They're watching all of these rates and they're not freaking out in parlance on Wall Street. They're taking this in stride. We're close to all time highs, if not at all time highs. Do you see this as giving a green light to Trump? To President Trump to keep going, to take hardline approaches and to keep trying to get better and better deals.
Look, I think this narrative of this subsessive focus on the market isn't right. President Trump views this as a generational opportunity to reset trade in a fair and sound manner for the American people. So the idea that some market ups or downs are going to be the deciding factor here. What we are concerned about, and President Trump is laser focused on, is getting the best deals because we were not having fair trade and now we're seeing with these countries coming to the table, the quality of
the deals gets better and better. So we're not going to rush just because of some market deadline. Now. I think what the market's seeing is market's willing to look forward three, six, twelve months and this is going to be good for the US, is going to be good for the global economy.
If you do get some sort of signal from the market though that this isn't going to be good for the US economy, Is there a trigger point? Is there sort of a sense at which it acts as a gut check and sort of pulls back some of them to negotiating tactics.
Look, I think that the market understands what we're doing. Sometimes individual market people don't. Sometimes the television personalities don't. But good thing about President Trump is he always tells you what he wants and what he wants this fair trade here.
I won't take that as a slight on me and my colleagues around the table, mister Treasury Secretary, But you did tell me on April second, on Liberation Day, that this was the ceiling when it comes to those rates. But since then we have actually had some tariff rates the President announced in letters higher than those rates he announced on that big chart on April second. So is there no longer a ceiling when it comes to tariff rates? When you are dealing with trading partners.
I think that I said, if they come and they negotiate in good faith in those are ceilings. And some of the talks got off to very slow starts.
So who's negotiating good faith at this moment? Who's not?
Again? I congratulated the UK the other day, as I told many of our trading partners, and Anne Marie I may have said on that day or a few days after April second, I'd advise countries to move quickly because the President Trump the first deals are usually the best deals, and the UK came in early, they got a great deal, and everybody else is kind of dragging right now.
Well, when it comes to Japan, you're headed there at the end of this week, do you expect to come back with a deal.
I'm going to Japan to represent the United States government and the American people at the International Expo, which we used to know as the World's Fairs. So this coming Saturday is going to be America's Day and I'll be taking a delegation includes the Labor Secretary, Deputy Secretary of State will be representing the US. So this is a celebration of the US more than trade.
Talks, MISSUS Secretary.
Before you go, just to final question, I'm embarrassed to say that my knowledge of college basketball is nothing like yours, but I can tell you back in the nineties in English football, there used to be a concept of player managers. There used to be certain managers of football teams that also put themselves on the field, and they play too effectively.
They had two jobs.
And I'm wondering, from your perspective, whether that's something you'd be interested in.
We've seen that throughout the administration.
Is that something you think that you could pursue both the Treasury Secretary and the Fed chap.
Look, I think I have the best job in town. I will do what President Trump wants. We got a lot of great fed candidates, and I'm confident it's going to be a robot process.
Jonathan has he asked you, what's that? Has he asked you? Are you part of the process.
I am part of the decision making process, but again it's the final decision is going to be President Trump's.
Mister Secretary. I appreciate time. Thank you, the Treasury Secretary. There scale beston on a range of issues, including trade and the future of this Federal Reserve. Inflation data too at eight thirty Eastern time, about an hour away joining us now as Sarah Hunt of Alpine Saxon words, Sarah and Mornic.
Good morning.
Is inflation dead?
I think it's quiet at the moment, but I wouldn't completely rule it out. I think that there's some possibilities that it could pick its head up. But I think that it's hard for people to anticipate data when we spend a whole lot of time anticipating a bunch of stuff that didn't happen. So I think there's a little bit of fatigue there. So it's hard to say right now.
It's difficult to forecast. There's still some debate over the data. We've already had, what's underpinning the softer than expected reads and why won't it last?
So if we think about whether or not companies did pull a huge full of inventory forward and or people started changing their behavior because they knew what was coming, you can argue why that's soft now and why it should rise if the rates are going higher. But you still see these moving of the goalposts in terms of timing, which allows companies to bring inventories back in again and refresh that. So I could see a lot of bumpiness in the data. And I also think that companies have
had a lot of time to prepare for this. And if I'm sitting there, I want my margins to stay where they are, so I'm going to try to do whatever substituting i can. So I also think that there's probably a lack of understanding how much of that substitution has gone on, and I think that that is why it could be bumpier and less dramatically higher than people are expecting because they're expecting a really fast move.
I just wonder, can we expect immaculate disinflation ongoing immaculate disinflation where there is no pain in the overall economy at the same time that inflation is dead. Does that seem consistent with you or is there kind of a tension right now between employment data that's pretty okay, albeit with very slow activity, and inflation that seems to be maybe, if not dead in hospice.
It is one of those periods of time wherein figuring out what that data means is going to be tricky. It remains tricky. The earnings are going to matter for the stock market. Inflation's going to matter to some degree, but only if it's really surprising or gets much higher than people are looking for, and then people start to investors really start to worry. The question is what are those trends look like. I mean, to Treasury Secretary Vessin's point,
it's not just about one number. It's about where the trend is going. If it looks like the trend is reversing, investors are going to like that a whole lot less.
Do you just not pay attention to the data at all? And by ai Biden video and just you know, call it a day.
It would have been the good trade for this year, right. I mean, that's sort of what happened, is that you had alldes concern about II going into the beginning of the year. Then you had the trade situation. Everybody started looking at every single earnings call from Microsoft or every hyperscaler to parse exactly what they're spending was going to be.
There was this little bit of.
Freak out and then everybody got over it really quickly. So that would have been that reversal, and that goes back to the idea that the companies that have growth and the companies that generate a ton of cash and have good margins are the places that they end up performing better than the rest of the market.
Anyway, it would have been good to get in on Nvidia just last night, given the fact that they have a blog post out saying that those eight twenty chips at this administration and blocked are now going to be able to go to China.
How do you.
Deal with this basically flip flop almost within weeks or months of this administration when you're trying to direct what to do in a portfolio.
Well, I mean, flip flop is an interesting term. I think it's more about I mean, again to Treasury point, it's changing those dynamics may have been part of that discussion all along. So you have to assume that some of the things that are coming out as X or Y maybe x or Y under certain circumstances. But if
I change my mind, they're going to be different. So that's got to be And I don't think that that's entirely different from things that the way the world works anyway, but I think that certainly in the near term, this administration has been much different about market changes than other administrations.
It's not just in Nvidia, it's AMD, just Crossing resuming ship chip shipments to China, wants their license clears that stock is off in the free market as well.
Look, China's a big business for all of these chip providers, and the key question is can they understand the rules of the game enough to create chips that are compliant with some of the constraints that have been put on them from the US government.
Sarah, it's good to see you, Sarah Hunt, Vampoint, Snacks and Woods. I want to bring a NILT data of Renaissance Macro Neil. Welcome to the program, sir. That's not four, it's five. Why is that signal and not noise?
Well, I mean I think look, we're obviously tariff revenues are going up, right, and the effective tariff rate is rising. That was the case in June. And despite that, inflation missed expectations. So that means that I mean tariff's increased costs. We all know that who ends up bearing the cost is where the debate is. And you know, I think at the margin, this probably reflects more of a margin squeeze than anything else. It's not like prices for core
goods aren't going up. They are, but you have you know, I mean, I was just looking at the data. You see big increases in appliances, you see big increases in all sorts of household furnishing and supplies. But it's also important to remember that service sector inflation. Service sector prices represents the lion's share of what people spend their money on,
and prices in those areas continue to go down. You know, ultimately it's going to come down to nominal dollars spent, right, So to the extent that people shift more of their household budgets towards goods because the prices of those things are going up, they'll have less leftover to spend elsewhere, and that means that services are at risk and that's why they'll ultimately see the prices for those things coming down. So that to me seems to be what's going on.
The nominal anchor isn't changing to tariffs are resulting in a relative price shift that's pushing up the prices for consumer goods. That is clear if you look at the data. That's obvious. Look at just look at household furnishings in the latest report. But services are providing an important offset.
No is that a good enough reason for two FED governors on the FMC later on this month to shake their hand up and say, I think we should count rights.
I mean, I don't think they'll be as noisy about it in July, only because you know, the last employment report gave them some colm, right, because the unemployment rate went down. But you know, ultimately, you know, for me, it's about you know, what is nominal income doing. When you take like the sum product of jobs, hours and earnings and you look at it over the last several months,
it doesn't look particularly encouraging. At the same time, you've seen the work week decline, particularly in the areas that are seeing the most robust jobs growth, like education and health. Right, So if you start to see jobs in those areas slow down what's left, So you know, I still continue to have like concerns about the job market over the summer, but that just reinforces this weakness and nomenal income that
we've seen. So ultimately, you know, it all comes down to like the household budget constraint and to the extent that prices arising in one area, that means that quantity is going to go down in other areas.
So Neil, just to sort of sum up what you've been talking about, I think it's really interesting that you see these numbers as not representing strength in the economy, but a sign of weakness in places like services that is bringing down the overall inflation rate that otherwise is getting inflated by certain goods prices going up like home appliances. At what point is that weakness necessary to keep inflation low?
In other words, not necessarily a reason for the FED to cut, but to hold where they are so that you can have that offset in a way that doesn't allow inflation to really kick back up.
I mean, I don't think one rate cuts really going to change that in any in any material way. I mean, the FED policy is still restrictive. That means they can they can start and they'd still be restrictive. It doesn't they don't have to promise like a broad sloth of raid cuts. In fact, they're not doing that. So you know, I don't think a rate cut in July or even one in September is going to materially, you know, change that dynamic.
If you are just joining us, welcome to the program. Equity is high here the open in about about fifty four minutes away MONMTHENTS ago inflation data in the United States month of a month headline CPI are from zero point one percent the previous month to zero point three, in line with expectations. But for cour CPI it's another downside surprise, zero point two percent against an expectation of zero point three. It's five consecutive months of softer than expected core CPI.
MI mckey's back with us for more. Mike, you've had a second look. What jumps out to you?
Well, I think Neil pointed out the major tariff implications here. We do see a four ten percent rise in apparel overall and a significant rise in foot where up seven tenths of a percent. Mail footwear in particular. Now those things come from China. Other things coming from China that go up or from other Asian countries. Furniture, as he mentioned, was up four tenths of eight percent, household furnishings up one percent, and appliance is up one point nine percent.
They were up eight tenths of a percent last month. A lot of this probably has to do with the tariffs on steel. We saw that when we had the steel tariffs in the first Trump administration that appliance prices went up. Food three tenths of eight percent. Still in line. President added extra tariffs on tomatoes yesterday, but in June they were down one and a half percent, and I know a Marie is anxious to know that eggs were
down seven point four percent. One other thing that comes in for the China aspect of it is toy prices up one point eight percent. So we are seeing some tariff pass through here. But again I would look at what Neil was saying about service prices. They were relatively restrained, up three tenths of eight percent. We saw medical care
and auto insurance prices very tame this month. So some of the things that we had seen pushing up inflation in the services categories have backed off for a while, at least.
By McKay, Thank you, sir.
Equity high in response to some of this, we'ren by four tenths of one percent on the SMP yields a little bit lower. Across the bond market, the yield curve looks like this tenure yields this morning, down by two basis points, similar move on a thirty. So you don't see the tariff inflation on a headline, but you start to see it just a little bit beneath the surface, and.
You start to see what the response function is of households that they might be cutting back maybe on eating out to compensate for the increased costs elsewhere, which you wonder on a compositional level, whether this tamps down overall inflation even as you see pockets of higher prices in select areas. Is that the path of travel or is that just the current state of affairs as people take stock of exactly what do scenariois.
We can have that discussion right now with David Kelly of JP Morgan Assa Management. David, Welcome to the program, sir. How much comfort can you take from this morning's inflation data.
And not a lot.
It's a very interesting report because you can see sort of the fading of issues that were causing inflation over the last few years, but you can also see the beginnings of the inflation problem related to tariffs. So if you look at owner's equivalent BREND to auto insurance, those are the things that really held inflation up and they're going away. And the other thing that really helped this report is we had a further decline airline fares, a
further decline in lodging prices. There's a lot of weakness in the tourism industry right now and that's in this report. But when you look at core goods outside of new autos, we're seeing those goods prices go up, and that's where you're going to see this tariff inflation. And we have
only seen the thin end of the wedge here. It takes a while for the tariffs to get it to be implemented, takes a while for the revenue to be collected, takes a while for the inventory to make it to people's shelves, takes a while for the retailers to say, look, I'm going to have to mark it up.
But it is coming.
So I fully agree with the Fed's forecast that inflation is going to go up between now and the end of the year, and they've got to stay on their guard.
And yet, David, they also believe it starts to come back down again. In fact, for that reason, some officials, including Governor Waller, believes you can look through it.
Do you think you can just look through it?
Not yet, because we also have a lot of fiscal sugar in the first half of next year. What's going to happen is that we had a lot of temporary tax breaks put in for four years, but they start at the start of this year. They're not going to adjust in contact with holding schedules quickly enough. That means a bumper season for refunds early next year. And you know, we know from twenty twenty two that you've got supply chain issues and then you give consumers a lot of
extra cash. What happens you end up with inflation. I mean, eventually, I think it will fade a long run. I am not an inflation hawk in America. I think inflation will fade, but I think it's going to be sustained by some of the provisions of the OBBBA.
And because of that, I think the Fed needs to hold off here.
If we got clarity on tariffs, if we could say this is what the terror are and they will go no higher, then I think that makes it easier for the Fed. So, you know, I think the administration really needs to think about, Look, could we please whatever the tariff policy is, let's make it and be done with it. Because this uncertainty is the very thing that's making it impossible for the Federal Reserve to say that that we're out of the woods or will be out of the woods.
And inflation, David, is there a sort of a necessary weakness that we need to see in consumer spending and services at this point to make sure that inflation doesn't take off? In other words, that pain that you know was talking about, you can start seeing in the data on the margins.
Well, that's a tough way to do it, I mean, the way you want to if you're worried about a long term inflation problem, it's only going to become because wage growth sort of compensate for price increases. Now, we still have a relatively weak labor force in terms of their ability to demand wage increases. You know, I think again, we have to think a little bit about it, how immigration is affecting labor supply, and again there's huge question marks there. As long as we don't see an acceleration
in wage growth, the inflation will fade. It's not just a matter of consumer spending being weak. So long as wage growth is controlled, inflation will fade again. But I think it's way too early to say that. You know, inflation's coming down to two percent. We've still got to get past tariffs. We've got to get past the steamers of effects of this fiscal bill, and that's really what's causing the delay in any further FED easing.
No doubts have run MAAX still with us.
No, today's about prices, Thursdays about spending. Let's talk about retail cells. How do you expect some of our understanding of prices this morning to show up in spending in retail cells light to this week?
Well, I mean, if goods prices are rising and the consensus expects nominal retail sales to rise three tenths, that basically tells you that real spending on goods is declining. That's not exactly an encouraging situation. So you know, I mean the fact that price increases are showing up, and you know, it's more or less matching what you see in the retail sales data. That base simply tells you that the volume of good souls is going down. Look,
it comes back to P times Q whatever. You know, whatever goes into price is going to come out of quantity because the nominal anchor hasn't really changed. So you know, look, I mean, I think consumers are actually quite resistant to
higher prices. With the exception of the University of Michigan data, if you look at you know, other estimates for inflation expectations, whether that's the New York FED Survey of Consumer Expectations, Atlanta FED Business Inflation expectations, professional forecasters inflation expectations, it suggests that, you know, people are resistant to higher prices and they're acting as if you know, if you look at the areas where people have been cutting back their consumption,
those are the areas where the prices have been going up the most. So it's not particularly surprising. And the labor markets remain still in a tricky spot. You know, while the unemployment rate remains low, you still have you know, a rising increase in you know, discourage workers, you know, people that are out of the workforce but want a job. Now, you know, companies are telling you, like the small businesses are saying that there's uh, you know, poor sales are
bigger concerns. So you know, I think that that probably reinforces ongoing weakness in wage growth. And you know that means that households don't really have the capacity to absorb higher prices, and that means that to cut back no, And.
It's a good point.
And David, I guess said, if you take what Neil is saying, the idea that you do see world price resistance by consumers, and if you do see this sort of compensating for the extra expense and goods by pulling back on services, what would the harm be for the FED to cut rates by just twenty five basis points or fifty basis points.
Well, any you know, any problems the economy is facing is not really about interest rates being too high.
And I think that I think, you know, I think we have to think carefully.
About long term policies, about helping the labor force grow, about helping free enterprise and reduce regulation and reduce barriers to business. And I think we need to focus on that. I don't think the interest rates are too high right now. I think the Fed's the steward of the dollar and of our inflation outlook in the long run, and they've said their commisioned to two percent inflation.
I think they should stick to their guns.
And you know, if the call them gets into trouble, it's not because they kept rates too high.
No, I just want to give the final word just on housing, which is something you've been following now for months and months and months and flanking the weakness here. Why is that so important to you, Neil.
Well, because it undercuts the argument that was just made, which is that you know that interest rates are fine, right, I mean obviously housing isn't weakening because of tariffs or anything else. Housing is weakening because rates are too high. And you're seeing, you know, a rising pile of completed new unsold inventory. I mean that hasn't been as high.
That's that's been rising, you know, over the last year or so, and that's starting to weigh on home prices, which we see, so you know, I think think that the housing market does provide some evidence that interest rates are restraining economic activity.
Is that the FETs fault, or is that the fault of Congress Nail.
The reason we're seeing that?
Sorry, sorry, The reason the reason I've got trouble in the housing market is not because rates are too high now, because rates were way too low for way too long after the Great Financial Crisis, causing prices to jack up to a level that cannot be supported at normal mortgage ing. It's nothing wrong with mortgage it's the problem is home prices, which are too high because rates were too low for too long.
Well, mortgage rates are running six and a half to seven percent and wage growth is rising just three percent, so I think the math is actually getting quite challenging for most people. That's why housing is not working.
Well.
It's challenging, but only because home prices are the anomaly here. They're just too high because rates were too low for too long.
I'm sitting back that, gents, I thought you'd continue no doubts of Rammack, David Kelly, a JP Morgan, So the two of you appreciate it.
Thank you.
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