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I have no intention of firing him.
I would like to see him be a little more active in terms of his idea to lower interest rates.
I'm Stephanie Flanders, head of Government and Economics at Bloomberg. Welcome to Trumperonomics, the podcast that looks at the economic world of Donald Trump, how he's already shaped the global economy, and what on earth is going to happen next. This week, we're looking at what's at stake in the tussle between President Donald Trump and the Federal Reserve Chair J Powell. At the start of this week, stocks took a dip,
and this time they weren't reacting to tariff policies. It was the president's comments about the Federal Reserve, the US Central Bank, and its chair, Jerome or Powell. On Monday, the President had posted on social media, there is virtually no inflation, pointing to lower energy and egg prices, but there can be a slowing of the economy unless mister too late, a major loser. Lower's interest rates now in capitals. And that followed another post saying Powell's termination quotes could
not come soon enough. Well late in the day Tuesday, after we recorded our discussion this week, President walked back some of those remarks, saying he had no intention of firing FED Chair Jay Powell, but he couldn't resist adding his own take on FED policy.
It is a perfect time to lower interest rates.
So the argument between the world's most powerful politician and its most powerful central banker isn't over. And we know from experience that once Donald Trump has someone in his sights, he's likely to keep taking shots, especially if the target is someone he can blame for a weakening economy. We discussed in detail whether the President can actually fire j Powell a few weeks ago, didn't go into that in
this week's conversation. My focus was on how investors are reacting to those comments, those complaints about the FED, and more broadly, what is at stake not just for the US economy but also the world. And we have the perfect people to engage on this, especially from a market perspective. We have Krishna Guha, vice chair of Evercore ISI and head of the Global Policy and Central Bank Strategy Team there.
Before being at Evercore, Crucially, Krishna was an executive vice president and member of the management committee, head of Communications Group at the New York Federal Reserve, and before that he was a senior writer on global economics and Economic policy at the FT. I think we overlapped briefly. Welcome Krishna. Very good to have you on.
Wonderful to be Awathy is there.
And our own Kate Davidson back to talk to us, managing Edis, who covers US economic policy for Bloomberg News in Washington. Kate, I think you were actually on the debut episode of Trumpnomics back in January, so I'm surprised it's taking us this long to have you back.
Thanks for having me.
Thank so, Kate. Let me just ask you right at the start, just to catch us up briefly on how Donald Trump's view of J. Powell has changed, Because, of course, you know, as we keep reminding ourselves, he appointed Jay Powell to succeed Janet Yellen back in I think twenty seventeen, in his first term. How quickly did he sour on him? How did we get this far?
Yeah? I did go back. Actually I was curious about this myself. I went back and watched that announcement in the Rose Garden when he said he had chosen J. Powell to succeed Janet Yellen. The question was whether she would be nominated for another term. Of course, she wasn't, and at the time he said he was confident, based on Powell's record, that he had the wisdom and the leadership to guide the economy through any challenge.
He's strong, he's committed, He's smart. Jay has earned the respect and admiration of his colleagues for his hard work, expertise, and judgment. He has proven to be a consensus builder for the sound monetary and financial policy that he so strongly believes in.
He had a lot of praise for j. Powell at the time. It soured pretty quickly. If you recall in twenty eighteen, shortly after Powell was confirmed, the FED had been slowly raising interest rates. Right, We're coming off a period of very low rates for a number of years, and there was a thinking that among Fed officials they wanted to try to get back to something resembling normal. They were very slowly turning up the dial, and Trump
pretty quickly decided he didn't like that. He thought that the FED should be helping the US, and the complaints turned kind of personal. Right, I can't remember this specific choice words, but I once sticks out when he said that J. Powell was like a golfer with no touch. You know, he couldn't put I mean, they got fairly colorful.
He was really clearly very angry, and it got to the point where Bloomberg reported in December of twenty eighteen, so just about a year after that Rose Garden announcement, reported that Trump was actually considering firing Powell. So similar headlines in the news. Again, he's feeling like this guy that he originally put in there is not helping him.
That really feels like the tone of it is that the economy could really be doing so much better if only the FED would get on board and help out by lowering rates.
We also saw during COVID and after when Trump was no longer in office, the complaint, insofar as we heard it, tended to be the other way, that the FED had not raised interest rate enough in the Biden administration. In his post over the weekend, when he talks about too late Pale, part of the criticism he has is that
the FED was too slow to raise interest rates. So of course he's not the only one, but you have to observe he wants lower interest rates when he's in the administration, when he's in the White House, and tends to want higher ones when someone else's Krishna. This isn't primarily a market show, but we've become one when what's going on in the markets potentially affects the US and
global economy significantly. Going slightly back to basis, talk us through how these latest attacks on the FED and potential question marks about its independence are being perceived by markets, and how we're seeing that in asset prices.
I think we got a pretty good foretaste in market trading on Monday as to what kind of a train wreck we would have if the President actually tried to fire the FED chairman. So, as you know, we saw a general sell America trade, stocks lower, bonds, lower, dollar lower. That reflects the reduced attractiveness of US assets in a
world where the central bank might lose independence. The fact that the currencies weakening at a time when the yield the return supposedly risk free a US government securities is going up is also a sign, of course, of investors reallocating capital, at least of the margin, out of the US and into other market places. We saw a steepening of the yield curve. That's the difference between the shorter dated government securities and the return on the longer dated
government securities. Again quite standard fare for this kind of shock. I think if we were to see President Trump actually try to make a move on chair power, which is different from musing about this and threatening it, I think you would see all those trades in multiples of what
we saw on Monday, but with one additional twist. Up to this point, one of the really striking features of this whole tariff's market saga is that you I've seen clear evidence of a loss of confidence in the economic policy of the US administration, but no loss of confidence in the credibility of the FED. And we can actually observe that because while the real rates and real risk premiere on US government debts gone up, market inflation compensation has not changed.
This is allowing for inflation. Yeah.
Now, so up to this point you might have thought this is going to be stagflation trades. It has not been up to this point. But if you actually tried to move on FED independence, you would risk shifting towards a stagflation environment and a stagflation trade in markets. Has people lost faith in the central bank.
It's worth lingering on that. In effect, you're saying, as far as the market's concerned, there is something worse than unleashing a really damaging global trade war, and that's also prevent your central bank from responding appropriately to the impact of that trade wark.
That's exactly right, yes.
And that becomes a stagflation trade because you would be looking at the kind of worse combination of a slowing economy but also a FED that's not trying to reduce the long term impact on inflation.
Yes. I mean, what we see in markets right up to this point is that the market has confidence that the FED will do whatever turns out to be necessary to prevent this initial very big wave of one time tariff inflation becoming embedded in the ongoing inflation rate, or if you like, the technical version of this is also in inflation expectations. But that's premised on the idea the FED is free to do what it judges is needed.
If you lost confidence that the FED was able to make those judgments independently on the merits, then people would start to expect a higher inflation in the future, more inflation risk and as you know, death, when people start to expect more inflation, it's can very often become a self fulfilling prophecy.
Kate just to you. I mean Scott Besson, the Treasury Secretary. You know, up until this point his support for the tariffs that the President is unleashed have sort of led some people to question whether he does still have full confidence of the financial markets. But Scott Besant was considered to be someone who was a markets guy. He has certainly said that he continues to have his weekly meetings with Jay Powell and it's very cordial and everything's fine.
Do you have a sense of that that Scott Besant is trying to prevent this going beyond just a criticism of j Powell.
Yes, I mean I think he is certainly in the camp that has and is continuing to make the argument
that it's not worth it, right. I mean, it's worth remembering that the Jay Powell's term as chairman is up in May of next year, so the Trump administration is within a few months is going to starting to explore who would they replace Powell with, regardless of whether he's fired or not, just simply because his term is up, you have to go through the vetting process, the Senate confirmation process, that's going to take some time if you got rid of Powell, if there's not a lengthy, drawn
out court battle, which we can assume there would be. This is not like, you know, the next day, put your person in there and they flip the interest rates, which it just doesn't work this way. And so I think that the argument from Besson and perhaps some others that are close to the president is it's not worth setting off the market chaos that Krishna just laid out when you'll have the opportunity to do this in a matter of months.
Anyway, school present, i think, has publicly made references to the independence of the FED being a jewel box, and you sort of think, well, maybe that's the sort of veiled way of saying this isn't something you should mess with, Krishna. We do have someone potentially in the wings who is a perfectly credible replacement for j Powell. Kevin Walsh, someone who was also in the running last time, is perceived to be positioning himself as a tr Trump pick to
replace j Powell. If Trump were to say, look as long as I replace Jay Powell with someone who markets like, what's the problem.
The issue is whether you're setting up the next chair. Let's hypothesize that it's Kevin Walsh. Are you setting him up for success or are you setting him up for failure. If Trump were to appoint Wash or a similarly qualified candidate under regular order when Powell's term is up, I think Wash, or indeed potentially one of several other potential Trump picks, would be well positioned to service fed chair and continue to command the confidence and credibility in the marketplace.
The problem is if you fire Powell and put somebody in his place. Now, even if that person is individually credible, for instance, like Kevin Walsh, you set them up to fail because no one would ever believe that they were making decision truly independently of the White House, to quote the words of one commentator, Then the chair put in that context would be seen as Trump's sock puppet, right, and so it would be incredibly difficult for that person
to command the confidence of markets. And remember, if that person did try to behave in an independent way that are points crossed the President's preferences, the risk would be that that person too could get fired.
Well, and I guess and the only way that you show your independence to the markets is potentially to not cut interest rates. If you're Donald Trump, you're not going to get what you initially wanted when you replace him in the first place.
Well, this is just an example step of how self defeating this whole exercise is, because if you're the president and you want the FED to cut rates, the best way to maximize the likelihood that the FED cuts rates and cuts them soon is not to raise any concerns
about FED independence. That might also lead to a lot of confidence in inflation expectations and so forth, if the president is able to take a deep breath and step back from this, I actually think Powell is indicating that the FED would in principle be prepared to cut rates once unemployment moves up materially, even in the face of a big one off tariff inflation wave, provided those expectations and underlying inflation remained well behaved.
Kate, are we overdoing this in the sense that over the years, maybe not so much recently before Donald Trump, but you know, over the years, it's been pretty common for presidents to complain about their FED chairs, to complain that the FED wasn't cutting rates when they wanted them to cut rates. Is there something different here than just going back to the kind of old fashioned nineteen sixties nineteen seventies of presidents complaining about the FED.
Well, I think what is certainly different from the first Trump administration is the fact that you have people who were otherwise viewed as mainstream quote unquote reasonable people who've supported FED independence in the past, kind of you know, not really coming to the Fed's defense. For example, you had Kevin Hassett the White House, a National Economic Council director,
saying yes, the President is exploring this. I think this whole, the whole legal question that's now been introduced around whether the White House has the authority to fire heads of independent agencies has introduced a new element here. I think that that really raises the stakes. Whereas previously, I think that central bankers felt that they had that protection and it made it easier, certainly for them to ignore the noise. And now, of course j. Powell and the FED is
going to say, they'll continue to ignore the noise. You know, their job number one is to do what's best for the economy, and they'll keep doing it. But it just becomes that much harder to tune it out, and I think it becomes kind of as Krishna was alluding to, it's difficult to message around. Okay, maybe they do want to cut rates, but how will it look now if they've done it after Trump has been rating them and insisting that they do it. It adds another element.
Quite apart from whether or not it was a safe haven or the global reserve currency or anything else, or the global superpower for that matter, It's had years and years of hoovering up the line's share of global investment flows. You know, investors have found year after year that the US was beating other markets and was finding reluctantly maybe that they had to keep putting their money in a market which all the normal metrics said was overvalued. So
is part of this it's just an excuse. We're sort of blaming Donald Trump, but actually its excuse for a rebalancing in global investment that many people have expected to see long before now.
I think you raised some very important points. I would frame it a little differently. The way I think about it is that initial conditions were such that the entire world was essentially over allocated to the US. After years in which the US was the only game in town for asset markets, and so in those circumstances, it doesn't take a very large shift in global preferences for people to want to move capital out of the US and
into other markets, into other currencies, into other economies. But the way I would think about that is that you have to be additionally careful then if you are the US administration, because you are starting from a position where a lot of people don't really have a lot of reason to add to their positions in the US. And of course if you're running a fiscal deficit in particular, you do need to continue to attract global capital into
the US to help fund the government deficit. More broadly, it's the avowed intention of the Trump administration to attract capital to come in to invest in the private sector in the US as well. So I think the starting point of the overallocation to the US is part of
the story here. But it's very clear that what's driving this reallocation is a collapse of confidence in US growth exceptionalism on the one hand, and some meaningful at the margin erosion of confidence in US assets from a safe haven perspective, and.
Just following on from that, because you also mentioned it in a note that you've put out on that if there was an actual attempt to fire J Powell, even if it ended up going through the courts, and we've established on this show before that there would be big question marks about whether it would succeed if he actively attempted to and we saw that kind of what you
call the stagflation trade playing out in US markets. You have said that would also increase the chance of the tariff crisis morphing into a more Liz Trust style fiscal crisis. So just talk us through that. How does it take us a bit closer to that even to have more questioning of FED independence.
So I think the starting point for all of this is to understand as I know everyone on this podcast does, but members of the administration appear not to understand, which is that the trades more strictly current account deficit is the capital surplus. They are one and the same thing. They're just two ways of describing the same thing.
If you're buying more from other countries than other countries are buying from you, you need to borrow the money to pay for those goods from someone.
But the point, though truly I think that I'm trying to make here is that you can't conceptually think of the external account, the trade balance, completely independent from the capital account and the flows that are coming into the US, including to finance the US government deficits. That's the sort
of conceptual point that we start from. The risk in the current conjecture, the serious risk, that sort of more than tail risk that's certainly not highly probable at this point, is that the tariff crisis ultimately morphs into more of
a Liz Trust style fiscal crisis. And the path by which that would happen is a global buyer's strike in the treasury market at a time when the already very large US structural deficit blew out further on an economic downturn, a lack of serious fiscal consolidation in the legislation before Congress, and the possibility that the administration might try to add more unfunded tax cuts to try to buy its way out of a recession. Now, to be very clear, the
US is not the UK. The US is the most core market in the world, the most core economy in the world, the most core bond market, the most core currency market. The investments in the US are far stickier than in any discretionary market like the UK. So we must be very careful not to jump quickly to the idea that the US will behave like the UK. But even now without an actual assault on FED independence, merely
it threats to this. Given what's happening in terms of the US withdrawal from international economic engagement, from trade, a large trade integration, and so forth, there is a non trivial risk that this could morph from a tariff crisis to a fiscal crisis. If you also layer it on top of that an effort to fire the central bank chief and to bring the central bank under government control.
I think the risk of that global bias strike that would take you from a tariff crisis to a sovereign debt crisis would go up a lot kate.
The US is not the UK for sure. Even if we were halfway, there is a question mark about how the administration would respond. I mean, the classic way to respond to that kind of bias strike, or even a hint of a bias strike, would be to reassure markets that the authorities are willing to raise interest rates to support US assets, to support the currency. Combined with potentially fiscal tightening. How likely do you think that would be in this administration?
Well, I might have said this last time, staff, I sound like a broken record in the newsroom anyway.
But we quite rightly started talking about the bomb market at the beginning of the series. I suspect we will keep getting back to it. But yeah, that's right.
No, But I think beyond doge, if you want to consider that a serious effort to tighten belt, so to speak, I don't think that there's really much of a real effort by the administration to make the deep kinds of cuts to spending that you would actually need to do to restore fiscal sustainability. Right at the end of the day, what Congress has typically done is they've come together to
make deals. Whether that's to enact spending, you know, and continue funding the government, or to raise the debt ceiling. They come together and they agree to spend more money. And I think even right now that package that's under consideration, there are some conversations about some Republicans saying that they want to pay for all of that tax cut, they want to offset it, they don't want to add to deficits.
But I think I think just looking at the record, it's really hard to believe that there'd be any serious effort to do that. So it's not a good situation for sure, if that were to happen.
To put it mildly, kay, if the US seems an unreliable place to park your money. There is a cost to the world potentially of just not having a global reserve currency that's kind of as attractive as what we had before. It's not that it's going to be replaced, it's just sort of we've lost that as a sort of global public good, having a single reserve asset. I guess the equivalent for US voters and US households is that they're just their interest rates will just be that
much higher. I mean, they're not going to move into some other currency, they're not going to change what they invest in, but there could be just a sort of significant premium on, for example, mortgage rates that will stick around for a long time.
I think that's right. I think that if you think about it from the Fed's perspective and what some of them have said, they prefer that the American people don't really know that much about what they do and who they are, right if they're kind of below the radar. That's a good thing, and as we saw in the last few years, with inflation getting as high as it was,
the FED has become very unpopular again. I think if interest rates were to be just in some higher place because of this effort to undermine the Central Bank's credibility, that would obviously have a huge impact on American households. And it's hard to see how that is quickly reversed right by perhaps the President interest installing someone new, even if that person is credible and highly regarded. I think that it's not just a financial market issue that we're
talking about. It's a real problem that will affect everyday Americans for quite some time.
We'll give the last word to Krishna. You've obviously been on different sides of this as a journalist, as an official, and now as a very expert earn list for investors. You're thinking about how to rate the probability of the kind of exp dream scenario that you've laid out as you try and advise investors. How are you thinking about
that in your gut? Is this something that will be within the range of possible impacts on bouts of selling of US assets that we've had in some previous eras around two thousand and eight, for example, or do you think you're seeing something more fundamental.
At this point in time. I'd sort of take the middle position, which is, this is absolutely not business as usual. Right to see upward pressure on US government yields real yields when the economy outlook is somewhere between near recession or recession, it's extremely abnormal. To see the yields go up and the dollar go down on the same day, which has happened repeatedly in the last few weeks, is extremely abnormal. This is more like emerging market type behavior.
On the other side, I think it is way too premature to declare the end of the dollar based global regime and to proclaim a shift to some new global international economic order. Maybe we end up there, but we're certainly not there today and it's certainly not the dominant probability going forward. So at the moment, I think we're in the sort of an intermediate position where we are seeing things that are extremely unusual and the very significant
in terms of reallocation away from the US. The imposition of some risk premium on US assets, at least relative to the truly riskless state that US assets previously exhibited, and I think that is partly associated with some erosion at the margin of the unique attractiveness of holding US assets in a dollar based world, which is itself in part related to the current policy choices of the administration and partly to the possibility that some bigger regime ship
could lie ahead. So this is serious business cities not normal. We are not yet at the point of a regime shift.
Christa Gurha, Kate Davidson, thank you so much, Thanks Steph, Thank you, step Thanks for listening to Trumpnomics from Bloomberg. It was hosted by me, Stephanie Flanders, and I was joined by evercore A Size, Krishna Guha and Bloomberg's Kate Davidson. Trumponomics is produced by Summersadi and Moses and with help from Chris Martlu and Amy Keen, with special thanks this week to Rachel Lewis Chrisky. Sound design is by Blake
Maples and Brendan Francis. Newden is our executive producer. To help others find this show and appreciate it, please rate and review it wherever you listen to podcasts.