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This morning, President Donald trumpigs standing an invitation to the Chinese President Jujinping, the two leaders participating in a state banquet. Following discussing trade and Iran last night, Former Senior White House Trade advisor Kelly and Shaw writes the following, we have a long way to go in terms of navigating the future of US China relations. Many of these conversations will continue well past September when the two leaders meet again on newba Soil. Kelly an joined us now for
more Kelly and welcome to the program. An Marie has alluded to this a few times that this leader in China has taken a more assertive stance on Taiwan at this meeting. With that in mind, how sustainable is this more stable phase of relations between the two countries.
Yeah, good morning.
I think this is the most highly anticipated leader to leader conversation of the year. Now, certainly there have been a number of mentions of Taiwan, predominantly on the Chinese side as part of the readout, and this was some of the fear on the US side going into this meeting that we might see President She lean on President Trump to get some sort of concession when it comes to Taiwan. But what I'll say about She's comments is this is not unusual. And I think back to the
last phone call that the two leaders had. The Chinese readout was almost entirely focused on Taiwan and weapons sales. It again, it is not unusual for the Chinese to emphasize this. The US on the other side is basically not saying anything at all as part of the formal readout. And then you had Secretary Rubio just a few moments ago talking about the fact that the policy on the US side has not changed. So while this will continue to be a pressure point, and it's one that we're
watching very closely. I don't think anything has shifted, at least not yet.
Let's talk about things that might be shifting right now. The Chinese leader talked about China opening more to trade. We've been talking about that for ages. The more intriguing part of this is everyone else shutting the door to them. We heard from the Treasury Secretary speaking to the press earlier on this morning, who talked about Chinese investment and saying this, what we want to do is make sure that some of these investments don't get referred to Syphius Caana.
Things changing on that front.
Yeah, and this is one of the points that I was watching the most carefully in terms of what would come out.
Of this summit.
There have been a lot of talk about the Board of Trade and trying to manage the flow of goods going back and forth between the two economies, but there was really not a lot of clarity about what the investment commitments would look like, and frankly, a lot of concerned by US lawmakers, by stakeholders that the President might
allow more Chinese investment into the United States. And so I found this comment really curious as well, now, to the extent they are talking about investment, to the extent they're talking about the fact that there may be some transactions where there's really no national security nexus. They want to make sure that Siphius is being used and calibrated appropriately.
Maybe that's less concerning, But if what we're talking about is allowing large Chinese investments into strategic sectors in the United States, that's going to be very concerning for the President if he gets back home to that kind of outcome.
We've also heard that there is some sort of early speculation from the likes of Julian Emmanuel earlier on the show, that there could be some sort of trade tech for oil technology investments, both into China in the form of selling chips and possibly China in the US in favor of some sort of help with the Strait of Ramos. Are you expecting anything on that front?
So my expectations overall for the summer were relatively low in terms of outcomes. I think the administration has forecasted for weeks not much to see here. We're enforcing the Busan deal, and the fact that Johnson Wand was not included on the initial delegation list made it seem more likely than not that export controls would not be part of any sort of outcome. But of course it wouldn't be a G two summit, a Trump She summit without a little bit of drama and some surprising deliverables at
the end of this. So we could see some sort of broke or deal around these things, but it wasn't part of the formal negotiating agenda going in. So I'll also be curious to see what comes out of a potential transaction that way.
Right now, how much do you expect China to reciprocate and come to the United States and September twenty fourth, as a president has requested or invited, Yeah.
I think this has been on the calendar for a while. These two leaders will likely meet face to face four times this year, so I have re expectation that President She will come to the United States this fall. The two leaders will meet again later in the year as well. This is a very robust year in terms of potential developments. But what I will say is this is about managing the relationship. It's about keeping an otherwise rocky situation as
stable as possible. These two economies are still going in very different directions, particularly in strategic sectors, and so having that leader to leader touch point keeps the connectivity, keeps the stability without this whole thing falling off a cliff. And I think that's in the interest of both sides, and that's where both leaders are thinking.
Kelly and I go one step further, it's in the interest of the world to make sure there is never a direct conflict militarily between these two superpowers. But we have to face the reality. The reality is this has been an adversary, the supports adversaries of the United States, including Iran. How do we tackle that issue this year?
Yeah, I mean, Ron, I'm not really expecting any sort of jointnouncement by President Trump and President Hian Iran other than the fact that they are both seeking some sort of de escalation and opening up the strait of removes and something to try to address the energy costs as well as the ongoing conflict and to prevent it from spreading. Now that said, both sides do have an interest in de escalation, and so I think that behind the scenes and in non public ways, we are going to see
some cooperation come on the back of this. I completely agree with you that it is in the interests of the world to not have any of this breakout into broader direct conflict. And I think that's what both sides are trying to do in their own way while continuing to compete on economic and national security areas where it matters as well.
Stay with us. Multiple IMPAG surveillance coming up.
Off to this.
NAT the Richardson of ABPA joins is now from more NATA goodmarnicline. What avoid that conversation. We'll talk about the dates that we just call retail sales and jembless claims. Is this thy to do an all?
Right?
Is this economy okay?
The headline numbers are all okay. You look at those retail sales impervious in some ways to recent shocks, in previous to downbeat sentiment. You have a jobs market that's still functional, still producing jobs, and you have wage growth that's still holding its own. The interesting parts is underneath the surface always so going a level deeper, you know
just how much did energy prices impact retail sales? That iPhone is now a durable good, not something we switch out every two years, so there is some change in consumer spending. And then you got some data from the BLS saying that real wages actually edged down, they declined, And so you put all that together, Yeah, it's a pretty good economy. But that doesn't mean there's not tensions underneath you.
Now the one tension is real. Why just disguace if you worried about that.
Yeah, and here's why I'm worried. So when we look at our data at ADP and we are able to match individuals over time, we're seeing a couple things. The first thing we're seeing is very robust wage growth. Even when we put divided into the bottom quartile and the top quartile of income earners, wage growth is robusts. But here's the rub. There is this widening inequality gap. We're tracking it in real time. Last year, the wealthiest twenty five percent made about five hundred times with the lowest
bottom twenty five percent. I know, you raise your eye a lot. This year, it's more like six hundred and forty percent more. So we're seeing this widening gap. And that's an issue because the wealthier, the higher income you are, you start saving, you start investing. Good for you, not so great for the economy. Consumers at that bottom end, they spend more, and when you don't have that savings lever and things prices go up, you start can stop
consuming as much. And that is the concern when it comes to wages.
This has been the conundrum when we talk about this all the time. It really is an increasing issue and you're seeing it politically, but you're not seeing it in the overall averages from economic data. At what point does it become more of a concern on the averages not just a political problem but a market problem.
Yeah, wage in equality is really just it's a long term drag on economic potential. For the reasons, we are not as savings and investment economy. We are a consumption driven economy. And if you have a significant proportion of the new jobs, remember a lot of jobs that are coming on under those low paid hourly working jobs. So our labor market is being fueled by low paid.
Jobs right now.
And then you have those very sane people who traditionally spend more out of their income not consuming as much because of higher energy prices. So if I could bottle this up and then like a tagline, monetary policy is really concerned with core Consumers are concerned with headline, and this wage in equality hits right at that headline difference and higher income and lower income when it comes to spending.
What would help the lower income consumer more? A rate hike or a rate cut, that's.
A great question if you're in the bottom coure tile. Unfortunately, buying a house is probably not on your horizon. It's just too expensive now. So borrowing money it would help with credit card fees, if you're putting more and more of your consumption and debt or that would be helpful. But that's not the way to increase growth. The way
to increase wages is through productivity enhancement. So if you can get an economy that invests in a way that creates more jobs and increases wages and standards of living, that's wonderful. But will you know a couple basis points downward or a couple of rate cuts actually lead to those changes. It would be hard to see that.
In real time we see the standard of living climb for everyone. This whole conversation, and forgive me for sort of digressing a bit, reminds me of an address from Margaret Thatcher to Parliament, and she went at the left wing of Parliament at the time, and she talked about the gap between the rich and the poor, and her accusation to people on the left in Parliament at the time was that the only thing you care about is making the gap smaller, and you don't care if the
poor get poorer. Do you remember that line from Margaret Thatcher. Now, for me, the gap alone is not concerning so long as everyone's living standards are improving. So if you see the upper income cohorts get a lot richer than lower income but living standards for everyone climbs, you've got an argument to make that maybe we're moving in the right direction. Is that happening?
Now?
Has that been happening?
Actually, you uncovered attention that I have because you are seeing really robust wage growth even at the bottom quartile. So it's not that lower income people are not seeing their wages increase faster than higher income people.
It's quite the opposite.
The problem is it's still not enough, and.
You still continue to see this gap widening. If the gap stayed the same or narrowed, there's an argument right in line with Thatcher, but the fact that is widening is problematic in terms of economic growth long term.
Stay with us more Bloomberg Surveillance coming up after this. We begin this hour with stocks adding to record highs at a pivotal moment for the Federal Reserve, rising inflation complicating the rate outlookers. A new regime takes hold at the top of the Central Bank tomorrow, joining us now in his final broadcast interview as a member of the Federal Reserve Board of Governors, Stephen Myron, Governor Maron, good to see you, sir.
Good to see you. Thanks for having me back.
We've got a moment to step back and sort of reflect on your experience at this institution. We've talked lots about how you've been received externally. Can we just start with how you've been received internally over the last few months.
Sure, this has actually.
Been one of the biggest surprises, you know, given what all the drama at the beginning. I've been perceived internally, I think very very politely, very cordially, and very kindly. And I think folks have largely enjoyed some of the some of the intellectual conversations, some of the challenges that I've leveled against, some of the ways that they had
been thinking beforehand. And I think that the overall response has been, you know, very welcoming and very kind, and that's one of the things that I'm most grateful for.
One of the kind of ideas that have been received well, that are shaping debates right now that will linger and continue beyond your departure.
Yeah, sure, so one, you know.
So an example of one of those things is the importance of regulations for determining the supply side of the economy. I mean, we spend a lot of time, you know, out in the financial world at in policy discussing the effects of a thirty three versus thirty five percent marginal tax rate.
But the truth is that regulations.
Are often infinite taxes, and being told you're not allowed to do something versus you are allowed to do something is a very very strong difference. And this had played a very small role in a lot of the modeling discussions happening at the FED, in a lot of the outlooks that that I heard people present, and I came in and really hammered that idea, and I think sort of moved it forward. And now a lot of people talk about it very often internally and externally, and you know.
Sort of talk a lot about supply shocks.
This is a positive supply shock that is unfolding and continues to unfold, and will I hope mitigate some of the negative supply shocks we also get hit by.
Well, let's talk about another supply shock. And I think it's been central to some of the arguments you've made on the committee, and that's population growth, the negative population growth that we've seen, which is lower the break even rate for the labor market, and contribute it to arguments in some places for hotter, stickier inflation. You've taken the other side of that. Can you just explain that for us?
Yeah, So, I think this is a really subtle issue with a lot of moving parts. Now at a very high level, what I would say historically is that we've seen a lot of countries in different places have declines in population growth rates and stagnant populations or shrinking populations. And I think the cross country and historical evidence is that it's unambiguously disinflationary or even eventually deflationary. Now, there's a few ways that that works. One is by reducing sorry,
there's a few consequence of lower population growth. One is it does reduce the break even in payroll growth. Rate, so the number of jobs you need to create every month to hold the uneplomary constant that does come down. That's a mildly hawkish implication because it means you shouldn't
get so concerned about very very low job creation rates. However, there's also there's also duffish implications as well, which are that it lowers the neutral rate, it brings interest rates down over time, and we've sort of seen that across countries and historically and historically to be the case. And it's also disinflationary through long lived capital and consumer goods.
And if you think about something like housing, right, the supply of houses is relatively fixed in the short run, and if you throw millions of new people into an economy, you're going to drive up the price of rents because they need places to live, right, You're going to create inflation. And that inflation is very very persistent because of the way that housing inflation is calculated.
It's very very sticky.
If you have declining population growth, you don't need as much, you don't need as much home price growth, and that very inflationary tailwind gets taken away and ceases to be a major driver inflation. I think you've been seeing that start to play out in the data market. Rents in this country have been growing at a one percent rate
for the last few years. This is one of the biggest components of the inflation in disease, and I think you're going to continue seeing measured measured PCE and CPI rents and measured pc and CPI shelter inflation continue to
converge down to those very low levels. So I think there's one hawkish implication, which is the lower break even peril rate, But there's also some very dublish implications because that it reduces the neutral rate and it brings down inflation through some of these long lived capital and investment goods.
This is a longer term structure for how to think about inflation and the benchmark rate of the Federal Reserve and how it sort of it works with the sort of long term inflation rate. Near term though, one thing that you've been known for a hallmark of your time on the FED was that you voted to cut rates
at least once at every single meeting. Do you think that that still holds even though in the short term it does seem like the inflationary shock is overwhelming potential structural changes that could lead inflation.
I do, and I think I think this is maybe one of the biggest differences between me and a lot of other folks is that I take very seriously the idea of Montera policy lacks, very very seriously.
Mantera policy doesn't hit the economy right now.
If we changed interest rates today, it wouldn't flow through into the economy until twelve to eighteen months from now. Right now, there's some disagreement of exactly how long those lags are, but I think twelve to eighteen is the consensus view. And therefore, for any shock that's hitting the economy today, you can't think about what the effect in the next few months is. You need to think about what the effect in the next twelve to eighteen months is,
and sorry, the effect twelve to eighteen months out. So if oil goes higher, it's a supply shock. Straits of hore moves are closed, right, that's going to boost the oil price today. And with a bunch of other stuff that's very tightly tied to energy prices like airfares, right, that's going to go higher very quickly within the course of a few months. And we've been living through that, and that is very real, right, there's no way that is very real inflation. But it is not inflation that
montera policy can affect. Montera policy can affect twelve to eighteen months from now. So there's got to be a reason that you think airfares and oil prices are going to be moving higher in the summer of twenty twenty seven, in the fall of twenty twenty seven, not the summer and fall of twenty twenty six.
And so it's those lags that really should.
Be driving where you think about forward looking monetary policy should be.
And that's a lot of what I've tried.
To hone into when thinking about population growth and deregulation and saying that the traditional view that we should look through in oil shock should prevail. This is very you know, vanilla basic traditional mondary policy.
Part of the.
Problem is that the market doesn't agree, at least not in terms of where longer dated bonds are trading and where yields are shifting. Where you see them shifting higher even as the front end stays where it is. Do you think that in this type of environment it's imperative to have some sort of Fed Treasury accord akin to what people have been talking about, where the Treasury steps into sort of influence the long end while the FED cuts rates on the short end.
So let me address those separately.
So the market not agreeing is in part a hall of mirrors issue, because if you have if the FED says we're very backward looking and inflation over the last twelve months is going to determine policy that affects twelve to eighteen months from now, meaning the economy in twenty twenty seven is affected by data in twenty twenty five in that world, right, So very very backward looking. If that's how the FED communicates that it's setting policy, then
the market is going to start to reflect that. And so the market reflecting a lack of interest rate cuts, right, is in part because the FED is telling them we're backward looking, right, And so that that's going to create
a self reinforcement problem. Now on the Fed Treasury accord, you know, so first of all, you know, I won't be involved in that if it happens, but you know, I have done some work on the balance sheet, and I do think it is important that one of the problems with having a very large balance sheet and lots of securities, lots of treasure securities on the Federal Reserve's balance sheet. Is it does start to get the FED
involved in questions that have some fiscal implications. Right, if we own a huge chunk of debt, then that means that we're impinging on decisions that traditionally are the realm of the fiscal authority. What is the distribution of public death public death that it issues that that's held by the public. And so I do think it is important that if you have a large balance sheet, there needs to be there needs to be, you know, some clear
delineation about who's doing what. And to me, these questions are really murky and they you know, they implicate independence to an extent, and therefore it's one of the reasons among many that I would favor having a smaller balance sheet.
How close do you think the FED should work with the Treasury to achieve that? How closely should the FED work with the administration?
Yeah?
So, so my view is that the FED having a big balance sheet starts to implicate a lot of those lines and becomes and becomes problematic. So the FED should strive to have as small a balance sheet as it can right to achieve its goals and implementation framework, and if we can sort of improve that implementation framework and make it smarter to reduce the minimum size the balance
sheet that we need, then that's a great thing. And that was a major thrust of the paper that I wrote in the spring with Alessandra Barbarino and Anthony Dirks and.
And UH and uh and uh.
Alyssa Anderson and and so that was a that was a major thrust of of of that work. That was that was really important now in terms of coordinating, Right, the Fed should do what it should do for monetary policy, and the Treasury should do what it should do in terms of fiscal policy. And the level of coordination should I think should I think be you know, sort of separate. Right, they should be doing what they what they want to
do for each of their own priorities. However, there are times when there is going to be half when there is going to have to be that type of coordination. So for example, you know, right now we're doing the reserve these reserve management purchases where we're we're expanding our balance sheet to sort of provide a minimum level of reserves into the economy to meet reserve demand. We're you know,
we're we're buying treasury bills. We're letting mortgages continue to mature off of our balance sheet in place them.
With treasury bills.
Right Like in theory, if we did enough, uh, you know, sort of conversion of our balance sheet, of our existing balance sheet and the treasury bills, we may be absorbing all of the supply, right and then some. So this is an example of a time where there would have to be very tight coordination.
We've got an administration right now very interested in financial markets. The president often looks at where the index level is in the equity market. We've got a Treasury secretary that used to trade this stuff. Did you speak to them in your time at the Federal Reserve. Did the President ever pick up the phone and say, hey, Steve, what's happening, Tell me what you're saying in the market, in the economy.
Yeah.
So I spoke to the president when I got when I went to go resign from the Council of Economic Advisors, I went to bring my bring my my recom sorry, my resignation letter. But you know, he doesn't tell me anything. He doesn't tell the whole world, right, this this President is very forthright with his views, and he tells journalists all the time, including Bloomber journalists, exactly, you know, exactly what's on his mind about about policy and where and where it should be.
So, no, I didn't.
I'm not in receipt of any information that's not that's not public.
Because we've to start this conversation by talking about how you were received internally externally, I thought unfairly at times, basically everything you said about interest rates and on the economy was always described as just doing the president's bidding at the institution, at the Federal Reserve. Did people see it that way internally when you put your hand up and said, I want to write twenty five basis points, I'm dissenting, sort of roll of the eyes. Here we go.
This is the president's guy during the president's bidding.
Well, thank you for those words.
I do think it's I do think it's clear that I've disagreed with with lots of people on policy and on lots of times. There have been times when there have been signals out of the White House that they wanted policy rates lower than I had my dots. And there have been times when there's been signals out of the White House where they thought that I was two dubs.
Right.
So, for example, the NEC director after my first vote said that he would have preferred a twenty five basis point god right.
So I clearly do my.
Own thing and have my views, and they're all I think, grounded in very traditional economics. And we were talking about population growth before, like this is not new, right, Like six years ago we all have been talking about it is everybody becoming Japan? You know, that would have come up several times a week, right, Like, none of this is new, None of this is heterodox economics. None of this sort of says we need to discard with the
entire framework. It's all within the traditional framework. And this is part of why I think the reception internally has been has been generally pretty good, is because I'm engaging with folks on their ground, right, Like I'm within the world of normal economics, and we're talking about what drives the interest rate and the neutral interest rate, and does population growth drive it? And is it inflationary or disinflationary. This is all well within.
Sort of normal.
We're trying to figure out what kind of an institution Kevin Walsh is walking into how he will be treated, how difficult will be to get people on his side as he starts to think about changing this institution, particularly when the form of FED share. We'll be sitting there as a governor on the Board of Governors. Can you help us understand that from a man inside the building, what that might look like in the next few months.
Yeah.
So I think one thing that's important to understand is that people have have FED are responsive to arguments and as I said before, you know, I've been hammering deregulation among other things since the day I got there, and you know, they start to respond, but it takes time, right, you know, it's it's it's a it's a it's a bit of a slow moving, slow moving process.
Helping them make it harder.
Well, you know, I don't I don't know about I don't know about that. You know, certainly, chairm Powell built a lot of the institutions and processes that exist that exist there and so you know, so that dynamic may you know, sort of may may play into it. I don't know, but that'll be an issue for for for Chairman. Doesn't it wash to to deal with twenty guests.
And when you heard the chairman in the news conference present to the press and to the world that he was staying gone as a governor. Was that the first time you heard of it? Or did he tell the border governors ahead of time that that was his plan?
No, he didn't.
He didn't tell me ahead of time that that was his plan. But he he'd always said that, you know, publicly and privately there's something that it's something he might do. And so it wasn't It wasn't entirely a surprise. What was your reaction to it?
Uh?
You know.
Look, my to that is that when I was the incoming chairman of the Council of Economic Advisors last year, I was very grateful to the previous chairman, Jared Bernstein, for spending time with me on the phone, being very generous with his time several hours over over over days and weeks, giving me advice for how to be a good cea chairman. And I really appreciated that and sort of how does the place run and what you know, what are your responsibilities and how do you do a
good job? And I thought that that was really generous of him, and I was really appreciative of that. And then I went out of my way to make sure that they very quickly put his portrait on the wall of former CEA chairmen in the offices and the Eyes and Hower building. You know, it's to make sure that happened, that happened quickly, without delay, and I was really grateful. So, look, transitions are important, and I think that you know, it is maybe helpful to have someone there to give advice.
Here's how to be an effective chairman, Here's how to lead the committee, here's you know, here's how the building works. It maybe a little bit different than it was twenty years ago, right, I think that can be helpful. But I still think it's important that it be a transition because you want to have people's loyalties undivided. You want to have there be very clearly one chairman. You want to have a place where there's no question about no question about who's in charge, and there's no talk of
rival factions and things being split. I think you want to have you want to have a sense of unanimity and clarity, and so transitions are important, and I think it can be helpful to have to have help in transition. But I still think it's important that it is a transition.
This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, angient 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