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We want to bring in Lale Brainerd, former director of the National Economic Council under the Biden administration, for our vice Chair of the Federal Reserve, now distinguished fellow at the Georgetown Center for Financial Markets and Policies. Laiel, thank you so much for joining Bloomberg. I just want to pick up on this conversation. President Trump says he's not going to fire Jerome Powell. So is this just all about trying to see lower rates next week when the FMC meets.
There's probably a few things that are going on.
One. I think it is an effort to pressure the Federal Reserve for lower rates.
It's also a distraction.
You know, that was a picture for the Ages yesterday, the President standing next to the chairman of the Federal Reserve wearing hard hats.
Quite a story, and.
It also serves to find a place to have blame to the extent that the economy is not as strong as the President has said that it would be at this juncture. You heard him say that the Federal Reserve should be lowering rates, and that's the only thing standing in the way. So I think it does serve multiple purposes in terms of the storyline.
But we also know.
That Federal Reserve chairs go down in history for actually following their mandate and not caving to political pressure, and those that do cave to political pressures tend not to be viewed very favorablely in the history books.
Lell it's great to have you with us. I want to ask you about the op ed that you wrote recently in the Washington Post, an opinion piece with the headline the real reason Trump wants to fire the FED Chair? You say it has everything to do with debt management. The President, you're right, one, wants to reduce the debt service on the trillions his megabill will add to the national debt. So now we're connecting the dots to the
President's big, beautiful bill. The fact is, and you say this in your piece, they are saying it out loud.
Lael.
Peter Navarro sat right at this desk a couple of days ago and talked about the need to lower infrastrates in an effort to save a trillion dollars when it comes to our debt. Is this the new Mission Creep? We hear a lot about Mission Creep in the Central Bank. Is this a version of that in your eyes?
Well, certainly this is the kind of diversion of the Federal Reserve from its core inflation fighting mission to supporting the administration's desire to finance this big new increase in the national debt cheaply. That is traditionally the way that central banks in other countries like Brazil or Turkey Aregentina
go awry and lose that credibility on inflation fighting. So I have to say that I was surprised to hear the President say it out loud when he says every percentage point reduction in interest rates translates into three hundred billion dollars. What he's talking about is interest payments on
the national debt. And when he says, you know, if the Fed will cut by three percentage points down to one percentage point, that'll save us a trillion dollars in debt service, that's what he's really referring to, and he said it quite explicitly, And economists have a term for it because it has happened so many times in history.
It's called fiscal dominance. When debt management becomes more important for the central bank than fighting inflation and what happens is you lose control of inflation and ultimately long term interest rates actually go up.
Well, we did actually get a different sort of answer when we posed this question to Jill Lavarni, a senior counselor to the Treasury Secretary Scott Best, and about concerns when it comes to the long end of the yield curve. He joined us on Balance of Power last week. I want to play you with some of his reaction and then get your reaction on the other side.
I don't see how markets are going to be worried about that. In fact, if you look at where yields are, they're lower than where they started the year. And when a lot of the people who are worried about the markets selling off because the credibility and things of that sort, these are many the same folks who back in April said the US was uninvestable, and yet we had Treasury data that came out today that should essentially record inflow into the market with treasury demand virtually at an all
time high. So these arguments I don't think hold up to really scrutiny into the facts.
We should say that A response was last week on July seventeenth. But Leo, I'm wondering what you make of that defense when it comes to this issue.
Well, what we did see when the markets were really reacting to news that this administration would really pressure the Federal Reserve and might fire the chair of the Federal Reserve back in April, that was the first time I think market participants really were digesting that news, and there was a lot of repositioning, as you'll recall, And what we saw is that the long end of the curve did actually go up quite a bit and the dollar weekend.
That is the kind of response that you tend to see in circumstances where central banks lose credibility on the fight against inflation because investors demand more compensation to hold longer term securities, sovereigns securities, treasury securities if they think that the currency is going to be weaker and inflation is going to go up. So that is just the traditional kind of market reaction we have seen it. We
certainly saw it back in April. Now leave markets, I have seen the President back down say that he's not going to fire the Federal Reserve chair. Yesterday he was even somewhat complimentary, and I think that's why you're not seeing those kinds of reactions right now in markets. But I do think the reaction we saw in April was a cautionary tale.
It did seem the President came fixing for a bit of a fight yesterday, Leale. I'm sure you were watching as the two wore hard hats. The President pulled a piece of paper out of his suit jacket to prove to the Fed chair that not only was the renovation at the Echoes Building running over in terms of money, but more than he thought, and he added a whole new building to the list. Let's bring everybody back to the construction site. Watch and listen.
It looks like it's about three point one billion, one up a little bit for a lot.
So the two point seven is now three point one.
Yeah, it just came out. I haven't heard that from anybody that you're including the Martin renovation.
You just added into third buildings.
What that is?
That's a third building.
It's a building that's being built, it's been it was built five years ago.
Well, I'd love him to lower interest, Rachel.
Other than that, what can I tell you?
Complete with a knock on the back there, Lail I'm wondering, as you watched this and had a chance to digest everything that happened yesterday, does this go down as a good day for fed independence.
Well, I think what was interesting is that the Federal Reserve had a chance to explain what was going on with their renovations.
These are very old buildings.
They have two buildings that really haven't been renovated I think since the nineteen thirties and one that just was renovated for the first time since the nineteen seventies. And I thought what was interesting is that the President really came out of those discussions, you know, really showing his
long experience as a real estate developer. You know, he talked about how hard it is to build on a former swamp and the kind of very expensive renovations that are necessary to you know, really be secure in pushing down when there are concerns about the water table. So in a way, it was interesting to see the President
getting into the complexities of the renovation in that sense. Yes, I think it was a good day just for transparency around the Federal Reserve, which is so important because the Federal Reserve has to be accountable to the public.
Well, I do want to go back to this idea of so called mission creep that Joe had mentioned earlier. We've heard this critique from Treasury Secretary Scott Besson, from Kevin Worris, who we know is potentially in the running to be the next FED chair. Do you think that it would be healthy for the FED to conduct a
review of its non monetary policy activities? Is that something that you think would actually be a good thing for the FED to look into, whether or not that's an external review, for example.
So I always think that the Federal Reserve benefits from being accountable and transparent to the.
Public and particularly to Congress.
And it's really Congress who has oversight of the Federal Reserve who wrote the Federal Reserve Act that governs the monetary policy and the Dodd Frank Act that governs their responsibilities in financial stability policy. So I do think those kinds of reviews are very beneficial, and there are many mechanisms that the Federal Reserve could use to undertake such a review.
The thing that.
Would concern me I have heard the Secretary of the Treasury saying that the administration would undertake a review, and that does raise some concerns.
Well, I'm sorry, we're out of time. Sorry, I'd love to have you come back to finish this conversation. It's wonderful to have you back on balance of power. Former director National Economic Council, former vice Chair of the Federal Reserve Laalel Brainerd whether us live from Washington, Only here on Bloomberg TV and radio.