The Fed Will Remain the Fed, Bandholz Says

and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, Bloomberg dot Com, and of course on the Bloomberg for the Federal Reserve, then the White House announcing plans to nominate Pimco's Rich Clarada as the vice chair of the Federal Reserve, and filling the final piece in the feeds three most powerful spots Yelling Fisher and Dudley Outs and pal Clarada Williams In After all the concerns and conversations

about the changes the new administration would make to the US Central Bank, the new Fed looks a whole lot like the old Fed. Arm band holds any credit chief US economists Joy and just Now and Harm It was a concern about a year ago about what this Federal Reserve would look like, and you'd have to say, not much change. Yeah, I totally agree. I think it's we have seen pretty pretty good choices. There has been a year ago there was a concern that the whole FET

maybe totally revemped. After after several comments from the administration. UM. Then the next concern was we have a new FET chair who lacks this formal economics degree. But I think these concerns have been addressed by adding two very strong, you know, vice chairs with with John Williams and Rich Clarada. So I think this new inner circle of the FAT um is a pretty solid group. They're fine choices, not quite the heavyweights of Janet Yellen and Stanley Fisher, but

really fine choices. And it's testament to the institution, isn't it that this administration has taken these picks so seriously harm there's already quite good picks. I I totally, I totally agree, yes, and and and the market, I mean, there was not much market reaction yesterday to Rich Clarada's um intended to the intended nomination of Rich Clara, I don't think it has formally happened yet, but um, I mean, first of all, he was he was a front runner

for the position for some time. He was rumored to be the front runner. But but yeah, as I said, also, over the last several months, the market has the notion in the market has settled that that the FAT will remain the fat and will continue to do what it did under the previous leadership. So harm no policy shift, at least not imminently. As the Federal Reserve, the old guard hands it over to the new guard. Has the reaction function of this Federal Reserve with these new names?

Has that shifted in any way, shape or form as far as you're concerned, Um, well, the reaction function has shifted it a little bit over the last several years, I would say, most importantly, because there's a view that the equilibrium exchange rate, the infamous sorry equilibrium interest rate, the the R star is lower, right, that that change

has happened over the last several years. John Williams was one of the main architects, intellectual architects behind that shift, and Rich Clarata he totally agrees with that view, So that very helpful to There's no additional change on top of the change that we've seen over the last several years, So that means more consistently steady as she goes lower long term interest rates. Are you prepared for the central

bank independence to be tested? That was another remainting question coming into this new administration, and bear in mind it wasn't so long ago we were really talking about radical changes to the Federal Reserve, and so far these are really quite consensual kind of replacements for the for the spots that were available on the Federal Reserve. But do you see at some point the independence of this institution

being tested? No? I well, you should never say never, but but I think it was a big lip mus test how this reshuffling off the Federal with all these

empty seats will play out. And I think we should, everybody should be encouraged by by these picks, and I think it's a testament to the independence, to the strong institution that the fad is we will determine the certitude of three or four rateex whether it becomes three, becomes four, they become five, which very few people are talking about, or they cut back from four to three, etcetera, etcetera. What what's the thing the distinction that will make that

decision happen. Well, I think it's a usual suspect. Big drops in the stock market on the negative side, would you know, would mean tighter financial conditions, and the FAT has in the past reacted and I think the new leadership will do the same, so that would mean less rate hikes. Um much slower growth than anticipated, meaning even an even smaller multiplier from all the fiscal stimulus. May also mean that we're ending up with two or three

rather than three or four. And on the upside um maybe and overshoot on the inflation side may bring us to four or five. That's said, I think the threshold to change the outlook for three or four hikes on both sides, on the upside and on the downside is

pretty high. And and and frankly, I mean, while I have four rate hikes in our forecast for this year, eyes have a very hard time to see the FED going to five almost Okay, it's it's it's very hard to imagine this scenario where the FED would go five types. I just brought that up for conversation on Tuesday. But the basic the basic idea here as does that marginal second, then third, then fourth rate hike did they begin to really impinge on business process? Or is it all overwhelmed

by Make America Great again? G d P. Well, certainly the there has been talking about the libel rate right which which which has gone up. My people say this is the equivalent of another rate hike. But overall, I

think that what the FAT is looking at. How the FAT sees things is they raise rates and then they look at how financial conditions change, because that is how short term monetary policy affect the real economy, right, and that is through credit spreaders, longer term interest rates, maybe the exchange rate, maybe stalks, and that is all relatively easy. What did you make it this weight from yesterday from the President on foreign exchange restaurant China playing the characters

as the us ks rising interest rates not acceptable? What did you make of that harm? Who was the aimed at? Who's the audience? Um? Um? Serious question. I'm wondering whether it's aimed at the Federal reserve, the effects market, or putting the effects market unnoticed A dollar? No, I think I think the audience is always the same, right, it's the people he's addressing with the president's addressing with most

of his tweets. I mean, on a serious note, we know that China is not manipulating its currency I don't want to say at all anymore, but much less than it did and the latest PBOC actions over the last year, so it was actually to prevent a weakening of its own currency, you know. So that and if you look at the Chinese overall current account balance, Yeah they have a surplus, but it's not huge. So bottom line is the Chinese currency is not that much um out of

think um with with where it should be. So I think it's totally misplaced. And I think it also it doesn't disservice to him to the Fisher line of argumentation from the administration, because the focus should not be on exchange rates or anything monetary, if you want, it should be on this non terrible barriers to trade, including intellectual property. Right, I think that should be the focus. I think it's

a legitimate concern um. But now bringing back to exchange rate or something, I think it's a totally wrong direction. Ar Binals, thank you so much, greatly appreciate it this morning. You've heard me say it before, I'll say it again. It is a price of to Martinis for an annual prescription subscription. And it is Foreign Affairs Magazine. The font is large for those site impaired like myself, but far more importantly, it is smart, smart, smart, well timed. Here

is democracy dying? A global report. We are advantage by having Get and Rose with us of Foreign Affairs Magazine. Why that cover why is democracy dying? Because right now there clearly is a resurgence of authoritarianism in lots of parts of the world China, Uh, Saudi Arabia, elsewhere. And there are also lots of problems in the major advanced industrial democracies in Europe, in America. And so we did a survey essentially of just how bad things are, and

the answer is pretty darn bad. There's no question this is the worst period for democracy in decades. UH. And people disagree, Legitimate serious scholars and analysts of all stripes disagree about whether this is sort of a permanent shift against democracy down the road, or whether it's something that's just a temporary lull before things can right themselves and

get back on track. It's a global report, Elizabeth, Economy in China, You've got a wonderful chapter on the Crown Princess charm offensive with Saudi Arabian such which chapter sticks

out to Gideon rose Um. You know, there's a Uh, I'm really worried about out what's happening in Eastern Europe because I don't understand and hungary, and and and and not just hungry, basically countries that should be embracing their new European identity and the virtues of being part of the eu UH and the opportunity they've been given, like Poland have sort of and even the ones like Poland that have made their best foot forward in the new

situation are rejecting the transplant to the modernity in the West, taking things they want and leaving the rest behind and and not moving forward in the way that we thought liberal democracy and international cooperation should work, and so that scares me. But but basically, you know, the optimistic side of things, we have a whole package on Crisper and gene editing with Bill Gates and Jennifer DOWDNA who might win a Nobel Prize for this down the road, and others.

And although there are dangers and worries about regulation, they're also upsides of the wonderful advances in medical technolog gy and agricultural technology they're gonna happen. And so while all this political turbulence is swirling around us um, there's also this world of science and technology and development that's going on as well. And so the challenge right now is how to keep your intellectual and practical and financial grounding

in what the Chinese called interesting times. So giddon, let me just be clear about something. Do you think democracy is dying or you were just unhappy with the outcomes of democracy? No, the the it's not just a question of the outcomes. What you're seeing in places like the United States right now are classic signs of what we call democratic regression. Centralization of power in the executive, politicization

of the judiciary, using it to go after your political opponents. Um. Attacks on an independent media, not because of what they the factual truth what they say, but because of the political valence of it. UM. Things like that use of public office for private games. These are very common in a lot of places around the world. For Zakaria has called them illiberal democracies. Um. We just didn't think that was gonna be true in places like the United States.

And what you see right now is a Latin American friend put it to me. UM. The sad thing about this is we've seen this movie before, just never in English. UM. And so the real question now is is this a temporary regression or is it going to go back to uh two normal? Are Are things going to get better when people realize just how low they've gotten well. Getting there all valiant, valid concerns, but they are outcomes of democracy.

And I assume that the next time is an election, that the electorate gets the chance to put it right if they want to. We hope, hope. Isn't that democracy? Yes? And that is in fact exactly right. And the real

question now is will we get through? Then? For three United States, there's an absolutely no question in my mind that the major question is will you get through the next seven months in which the legal and political processes of democratic institutions are allowed to take their natural course? And I think they will, and I think in the long one will sort of like, uh, basically say ha

ha ha ha, who are you about that? But but we'll know that in seven months, because there's a real chance you could have a domestic constitutional crisis or an international security crisis specifically designed simply to derail the otherwise legitimate playing out of those institutional processes. And that's what scares me the most. You start with the optimism of Walter Russell Meade, how American democracy fails its way to success. It's a wonderful issue. I really can't say enough about

foreign affairs. Is democracy dying Gideon Rose with this today with a wonderful set of essays, including on China. The must rad on China Neil Shearing. These are the capital economics, looking at the economics of um and their interdependencies, the interdependencies of a Chinese US tip for tat, what's it mean to Indonesia, What's it mean for the Czech Republic.

That's a that's a key question that we need to think about, because what happened in the global economy over the past twenty years has been that China has become this manufacturing hub with spokes spreading out all over East

Asia and all the way into Europe. Even so, if there's a straight spat between the U S and China, that's going to trickle down through supply chains and hit other em so particularly Taiwan, also Korea, mainly in East Asia, but as you say, it goes but beyond that as well, looking at the the story within China at the moment, Neil, the economy seems to be this tug of war between the old economy and the new economy. And you see that in the data this morning, retail sales versus say,

industrial production. How are they managing that transition from the old engines of growth to the new engines of growth. Neil, it's a difficult transition, and it's one that's going to take place over a matter of years, in decades, rather than months and quarters. I think what we see in the data today, I mean, you take the official data at face value, the economy is remarkably stable. Actually, in

our view, the economy is already slowing. We have our own activity proxy that puts growth at about four point eight percent, not six point eight percent. Four point eight percent, so substantially lower than than the official data, and it's on a declining trend. And a part of that is industrial weakness, the effect of pollution controls that were put

in place over the winter. But as also, as you say, there's more fundamental weakness in fixed investment that reflects that the deeper transition that needs to happen over the next decade or so. And Neil on the on the triple R rate at the Chinese Central Bank, the reserve requirement ratio a full one percentage point one hundred basis point cut to that this morning, Nol. What are they trying to address with that kind of action, and how are they easy in that transition by doing it, I think

there's several things that are trying to do here. They're paying a very for called balancing game, balancing out the Chinese People's Bank. On the one hand, they've put one eye on the currency defens tightening. They're they're raising that one of the policy rates will be at one that

doesn't necessarily have any impact on on monetary conditions. On the other hand, they have a kind of one eye on the fact that credit conditions in the real economy of tightening, and that's what this reserve ratio cut this morning is aimed at trying to ease back on some of the um ease credit conditions in the real economy, trying and get some of those engines of growth going again. So this is it's percolating, uh, certainly in the last oh five six eight weeks, which is about slow down.

I mean, I guess we had nascent boom and a pretty good, you know, better than good global economy. Is the is the shock of the world economic outlookout today by the IMF going to be a little bit of that recession or gloom or depression, but just slow down in the too good to be true global economy. I

think that's right. I mean, I've been in this game for long enough now that when you get almost unanimity amongst economists at the turn of the year that we were in the synchronized global upswing, you knew it was too good to be true. And to my mind that

signaled that the peak of growth in this cycle. Um now, I think that's un even at this stage, as I say, growth in the e M world at least the extent that's been a slow down that's been led by China, and growth elsewhere in lastin America still seems to be picking up, for example. The real shock in all of this is that the European economy seems to have lost some steam over the last couple of months or so. And that was the part of the world that was

much earlier in the growth recovery. Wouldn't be that much for shocks here. The U s loan right now, but

Europe slowing right now, I think is a surprise. And and Jian Ferrell, Ambrose, Evans Pritchard and the Telegraph for the very cogent essay were the our word and Germany recession not predicting it now predicting it is, Neil says, Uh, some of the precursors are there real slowdown in Europe and the backdrop to all of this, Neil at the moment is trade concerns, tension between China and the United States, and the President injecting some concern around the effects market

as well. Not the first time he's done it, referring to China and Russia is playing the devaluation game. The Treasury Secretary Steve Manuch in an interview with CNBC earlier this morning, saying that the president's currency comment was a

warning shot to Russia and China. What's your read on that, Neil, And how difficult is it to read what the ornament policy of this White House is When just a couple of days ago the Treasury said that China was not a currency manipulator, then a couple of days later the President says they are, well, exactly, It's extremely difficult and it's extremely difficult for market practitioners to to get their

head around what's going on. I think there's a particular irony in the case of singling out Russia because, of course the reason the ruble has weakened um the devaluation that the President talks about that is because the US has plays sanctions on the country to Actually, this is not about the Moscow intervening in the phone exchange market. This is about the effect of sanctions and then the

impact that's something the currency. But look at the Treasury report that came out earlier at the back end of last week. I think actually it was a bit more timid than than certainly I had expected, and some people in the market had expected. They could have made a plausible case for singling out countries like for Thailand, Taiwan, and they stepped back a bit from doing that. What do you say about a headline from Mr Manuian's interview, Trump only considers re entering t p P on better terms.

Why should any Asian e m that you look at Neil go to the United States quote unquote and better terms. I find it illogical. It's the short point is it won't and that won't happen. Now, there might be some cosmetic changes that can be um that can be made to coax the US back in as it were, But I think what's happened in the U S at least for the US part at least, is that this realization actually the TPP, the bedrock of the TPP, that's kind

of ideals. The idea of the TPV was to kind of almost form a ball walk against China in trade terms, you know, get get allied countries like Japan career and the Pacific nations on board put pressed back against China. I think only now has there been a gradual realization that that that was the aim, and hence that perhaps

the reappraisal in Washington. So is this a stick for the Chinese, that the threat of joining TPP, if it is a threat, Neil, could it be and could it be a stick to say to the Chinese, look, playball, give us a better deal, or we're going to revisit t p P and put a strong foot foothold in that region economically speaking, It could be. I mean, I think that the US has other ways in which it can push back and will continue to push back the use of Section three or one, the US Section two

to three that your national defense arguments. I think that there's as a wide range despite the fact that Congress has at least call into the constitution um responsibility for regulating commerce with foreign partners, there's a wide range of powers the president control upon So I don't think it necessarily needs to Washington needs to fall back on the threat of t p P. But it's certainly everything's going

into the mix now. And I think at the moment that the big question is is just a photo war that we're seeing At the moment, all we've seen as a list of tarists potential tarists, nothing is actually really changed or will both sides follow through? And if they do, then game. But but the news just very quickly, or the news out of their Chinese technology company, that's not a phony war. A US company can't deal with this tech savvy telecom company out of China anywhere in the world.

I believe that's what I read. It's not obviously that that has ramifications for that that that company and in any company that deals with it. But in a macroeconomic sense, when you're dealing with the two large the enemies in the world, commerce between trades between those countries totaling hundreds of billions of dollars each year, that is a drop in the ocean. So it's to my mind, it's do we see you if we start to see taris on a hundred fifty billion dollars worth of Chinese exports to

the US. They're not so much bigger deal, no sharing capfull economics, chief Emerging markets economists. What a joy this is. You have Tim O'Brien with us doing all of our good work at Bloomberg View, Bloomber Gadfly, with a lot of good announcements coming up as they move forward. Uh at Bloomberg, Tim O'Brien, now for a lengthy discussion and many themes, and yes, we'll do all this stuff going

on with Washington, Timm. It is tax day. President Trump short tweets today employment is up, taxes down, Enjoy, talks about Mr Abe, talks about Mr Brown and the border. Governor Brown and the border. So many people are seeing the benefits of the tax cut bill. Everyone is talking. Really nice to see. Do we know yet, Tim O'Brien, how many Americans have their taxes go up do a year from now? I I think there's still a long

lag time in a lot of this, you know. I think one of the tricky things now with assessing any of this macro stuff is, to a certain extent, President Trump is laying claim to a job market that that preceded him, that was already healing before he came into office, So I think he needs a couple more years in office before he can lay full claim uh to to a rebound or to order a Trump effect on the job market. But certainly, at least what we're seeing already in the data on tax cuts is a big portion

of it right now is accruing to stock buybacks. It's not going into I think two key things that are a publicans need to sell at the mid terms, which is long term wage growth from middle income workers and real investments and plant equipment like corporations. When when we look at this and you know, I give credit, I'll say to the New York Times and the graphics of the number of people that would benefit from a tax cut,

everybody's taking a collective victory lap on it. It seems like right now, do you in in the study, particularly Bloomer get Flight in in the think tanks in Washington, do we know when those benefits end the text cut? Obviously, there's gonna be a good feeling for a bunch of hitters full disclosure, including myself, for twelve months, But when when does it? When's the benefit? When's the free lunch? There is no free lunch. So there it is. There is never a free lunch where the math ultimately on

this isn't complicated. At the end of the day, it says the government collect enough revenue to balance its books and just pay its bills. And I think, you know, we've recently had a big Sea Do study out that the deficits gonna hit one trillion dollars. What do we do when that? When that rolls around, what happens to the bond market when that rolls around? What's going to

happen to inflation rates? When that rolls around? There's a certain amount of I think concern here that this tax cut is gonna have a nice effervescent champagne like now term pop and and everybody's gonna have a hangover later. And the CBO report buried you last week, and all the news that you follow so much with with your classic book, Trump Nation, and all that you went through

off of that book. How is that book aged in the last year when you go back and look at the citizen Trump versus what we've seen, how is the book aged? I you know, I think the book. One of the magical things about President Trump is that he is uh predictable in his unpredictable nous. And he really hasn't changed much since he was about twenty. You know, he really is who he is. He is who you

see the thing. He's a survivor. You can really understand him to two lenses, either self preservation or self aggrandizement. That really hasn't changed for a very long time. My book came out in two thousand and five. Um, I think the portrait of him that that is in that

book is pretty accurate. Within that is the phrase it's in the zeitgeist right now that you know, person A, person B, person C is going to have their day at quarter Justice is going to be had, and all the focus now again is on kimber Wood, who's one of our federal judges. Ald Motto is the one that recommended her uh to President Reagan, to the bench, and

kimber Wood, for me, will forever be younger. And she's, you know, a senior judge now out of Connecticut College, out of Harvard Law, with some notorious cases along the way. She really took charge yesterday in that room. I think people, the sophisticates seemed to be surprised by that as well, right she had two things she had to look at,

which was both the White House and UH. Michael Cohen's lawyers said that the documents that the FBA got FBI got when they rated Mr Cohn's office he's Trump's personal attorney, should be subject to a review before prosecutors could do anything with them. Uh. That's an interesting issue, because prosecutors didn't go into Cohn's office Uh through a subpoena. They issued a search warrant and went in there and took the documents they wanted because they believed they may not

get them otherwise. Uh. And they asked a court for the right to do that, which meant the court believed they had good reason to go in there. Kimball Wood had to say, okay, ex post facto, are does the court need to look at this again and intercede? And what she said was prosecutors can go ahead and take a look at these, but she's considering putting a special master in who will review the documents on behalf of

both sides to make sure the processes fair. The second and I think seminal thing that happened, of course, is that Um, she said that the White House couldn't intervene. You're thrust in all this is the media is focused on the sensationalism. We saw that with the camera horde yesterday at the court. If that's not the case, what is Tim O'Brien focused on, Well, I think, you know, on our best days, we should say focused on the

fact pattern. I think there's a lot of wish fulfillment um on both sides, a partisan wish fulfillment around how Trump has looked at and covered and I think particularly when it pertains that the Mueller investigation, Trump's critics, I think are prone to see every break in the case as the the final moments, right and and and Trump supporters will see every moment of the Muller investigation as prosecutorial overreach. I think all we need to do on a day to day basis is hugh to the facts.

I think, you know, I wrote recently around some of the writing about Michael Cohen certainly had this notion that he was the man in the Trump organization making most of the legal decisions and with knowledge of every single deal Trump has done, that could get him in trouble with Mueller. And that's just not the case. You know, mccoon was a hanger on. He certainly is presents a vulnerability to Trump, and he knows about a lot of deals. But there were other people in the Trump organization where

they're much longer who no more. Would we have had the events yesterday in front of Judge Wood if we didn't have a president tweeting so much, that's a great question, Tom. I think it's independent of the tweets. I think we would have had this in front of in front of Wood because the president's personal attorney appears who have engaged in a number of frauds, that prosecutors are interesting in probing, interested in probing. I think that stands apart from the meats.

But there's no question also that going back to the to the election, the president incentive the judiciary. I think to look closely at his actions because he took on judges and and he routinely criticized the courts. Tell us about the prosecutors. I read about Mr Kazami. I believe it is with an SEC background, and do you remember him from from the O eight crisis. Yeah? Yeah, And these guys are are grizzled, grizzled. I mean, it's it's

in the FBI book the threat matrix as well. The Southern District is a really serious set of prosecutors using that word very narrowly, aren't they And and they're highly independent and they meaning that they don't see themselves as having to take guidance from the Justice Department in Washington. How do they get away with it because they're in the financial capital of the world. They believe they bring an extra layer of financialists and they're allowed to and

they're allowed to. It's you know, we know this immediate.

There's always these Washington bureaus that are very independent from the mother ships for the same you didn't know about that the other thing in the Southern District cause I had a little bit of personal experience in here because Kazami and some of the other people they're worked for Mary Joe White when she ran the U. S. Attorney's Office for the Southern District, and Mary Joe White represented me in my litigation with with Trump and um Mark

Casswitz represented Trump at the time, and Mary Joe and her team completely stripped the bark off these folks. And I think it's in part because they come out of that strong Southern District tradition. Are we going into a stripping of the bark Yes stage here Yes discussed that seconds Trump has not appointed a new head of his own legal team, so he's at sea legally, and he is surrounded by the most well healed and talented group of federal prosecutors under Bob Muller that's ever taken a

look at the White House. And he's now got another foot in New York which he can't control in any way, with the Southern district he's got. It's a princer. This is gonna be wonderful. Tim O'Brien able to be with us today for a generous amount of time. When you come back, pim Fox and really dive into this and also not look forward maybe to Tim O'Brien's thoughts on the new media as well as he is part of that with Bloomberg View, to Bloomberg cad Fly and Bloomberg Opinion.

Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio