April 23, 2025 • 27 mins
What are the long-term implications of Donald Trump's attacks on Federal Reserve Chair Jerome Powell? Host Stephanie Flanders is joined by Krishna Guha, vice chairman of Evercore ISI and head of its Global Policy and Central Bank Strategy Team, and Bloomberg managing editor Kate Davidson.
“Up to this point, 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,” Guha says. “But that’s premised on the idea the Fed is free to do what it judges as needed.” As bad as Trump’s trade war has been for markets, Guha warns that if Wall Street begins to doubt Fed independence, things could get much worse.
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Speaker 1 (00:00):
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:08):
I have no intention of firing him.
Speaker 1 (00:10):
I would like to see him be a little more
active in terms of his idea to lower interest rates.
Speaker 3 (00:26):
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.
(00:48):
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
(01:09):
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
(01:30):
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.
Speaker 1 (01:39):
It is a perfect time to lower interest rates.
Speaker 3 (01:42):
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
(02:02):
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.
(02:25):
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
(02:46):
policy at the FT. I think we overlapped briefly. Welcome Krishna.
Very good to have you on.
Speaker 2 (02:52):
Wonderful to be Awathy is there.
Speaker 3 (02:55):
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.
Speaker 4 (03:10):
Thanks for having me.
Speaker 3 (03:12):
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,
(03:33):
in his first term. How quickly did he sour on him?
How did we get this far?
Speaker 4 (03:38):
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.
Speaker 1 (04:01):
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
(04:23):
strongly believes in.
Speaker 4 (04:25):
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.
(04:46):
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.
(05:07):
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
(05:28):
only the FED would get on board and help out
by lowering rates.
Speaker 3 (05:32):
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
(05:52):
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
(06:14):
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.
Speaker 2 (06:29):
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.
(06:53):
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
(07:13):
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.
(07:34):
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
(07:56):
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
(08:16):
premiere on US government debts gone up, market inflation compensation
has not changed.
Speaker 3 (08:23):
This is allowing for inflation. Yeah.
Speaker 2 (08:26):
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.
Speaker 3 (08:49):
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.
Speaker 2 (09:04):
That's exactly right, yes.
Speaker 3 (09:06):
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.
Speaker 2 (09:18):
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
(09:42):
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
(10:04):
self fulfilling prophecy.
Speaker 3 (10:06):
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
(10:26):
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.
Speaker 4 (10:42):
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
(11:04):
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
(11:25):
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.
Speaker 3 (11:36):
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
(11:57):
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.
Speaker 2 (12:09):
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
(12:30):
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,
(12:52):
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,
(13:12):
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.
Speaker 3 (13:31):
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.
Speaker 2 (13:43):
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
(14:05):
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
(14:27):
and underlying inflation remained well behaved.
Speaker 3 (14:30):
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
(14:50):
nineteen seventies of presidents complaining about the FED.
Speaker 4 (14:53):
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,
(15:14):
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.
(15:36):
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.
Speaker 3 (15:59):
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
(16:22):
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.
Speaker 2 (16:34):
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
(16:56):
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
(17:21):
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
(17:43):
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
(18:03):
exceptionalism on the one hand, and some meaningful at the
margin erosion of confidence in US assets from a safe
haven perspective, and.
Speaker 3 (18:14):
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
(18:39):
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.
Speaker 2 (18:55):
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.
Speaker 3 (19:15):
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.
Speaker 2 (19:23):
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
(19:45):
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
(20:05):
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
(20:27):
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
(20:48):
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
(21:08):
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
(21:29):
debt crisis would go up a lot kate.
Speaker 3 (21:33):
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
(21:53):
support US assets, to support the currency. Combined with potentially
fiscal tightening. How likely do you think that would be
in this administration?
Speaker 4 (22:04):
Well, I might have said this last time, staff, I
sound like a broken record in the newsroom anyway.
Speaker 3 (22:09):
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.
Speaker 4 (22:15):
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,
(22:36):
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
(22:57):
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.
Speaker 3 (23:10):
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
(23:33):
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.
Speaker 4 (23:54):
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
(24:16):
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
(24:38):
talking about. It's a real problem that will affect everyday
Americans for quite some time.
Speaker 3 (24:43):
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
(25:05):
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.
Speaker 2 (25:20):
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
(25:40):
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
(26:05):
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
(26:28):
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
(26:52):
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.
Speaker 3 (27:09):
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
(27:31):
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.
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:08):
I have no intention of firing him.
Speaker 1 (00:10):
I would like to see him be a little more
active in terms of his idea to lower interest rates.
Speaker 3 (00:26):
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.
(00:48):
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
(01:09):
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
(01:30):
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.
Speaker 1 (01:39):
It is a perfect time to lower interest rates.
Speaker 3 (01:42):
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
(02:02):
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.
(02:25):
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
(02:46):
policy at the FT. I think we overlapped briefly. Welcome Krishna.
Very good to have you on.
Speaker 2 (02:52):
Wonderful to be Awathy is there.
Speaker 3 (02:55):
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.
Speaker 4 (03:10):
Thanks for having me.
Speaker 3 (03:12):
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,
(03:33):
in his first term. How quickly did he sour on him?
How did we get this far?
Speaker 4 (03:38):
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.
Speaker 1 (04:01):
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
(04:23):
strongly believes in.
Speaker 4 (04:25):
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.
(04:46):
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.
(05:07):
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
(05:28):
only the FED would get on board and help out
by lowering rates.
Speaker 3 (05:32):
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
(05:52):
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
(06:14):
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.
Speaker 2 (06:29):
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.
(06:53):
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
(07:13):
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.
(07:34):
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
(07:56):
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
(08:16):
premiere on US government debts gone up, market inflation compensation
has not changed.
Speaker 3 (08:23):
This is allowing for inflation. Yeah.
Speaker 2 (08:26):
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.
Speaker 3 (08:49):
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.
Speaker 2 (09:04):
That's exactly right, yes.
Speaker 3 (09:06):
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.
Speaker 2 (09:18):
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
(09:42):
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
(10:04):
self fulfilling prophecy.
Speaker 3 (10:06):
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
(10:26):
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.
Speaker 4 (10:42):
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
(11:04):
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
(11:25):
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.
Speaker 3 (11:36):
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
(11:57):
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.
Speaker 2 (12:09):
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
(12:30):
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,
(12:52):
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,
(13:12):
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.
Speaker 3 (13:31):
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.
Speaker 2 (13:43):
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
(14:05):
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
(14:27):
and underlying inflation remained well behaved.
Speaker 3 (14:30):
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
(14:50):
nineteen seventies of presidents complaining about the FED.
Speaker 4 (14:53):
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,
(15:14):
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.
(15:36):
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.
Speaker 3 (15:59):
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
(16:22):
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.
Speaker 2 (16:34):
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
(16:56):
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
(17:21):
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
(17:43):
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
(18:03):
exceptionalism on the one hand, and some meaningful at the
margin erosion of confidence in US assets from a safe
haven perspective, and.
Speaker 3 (18:14):
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
(18:39):
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.
Speaker 2 (18:55):
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.
Speaker 3 (19:15):
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.
Speaker 2 (19:23):
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
(19:45):
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
(20:05):
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
(20:27):
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
(20:48):
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
(21:08):
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
(21:29):
debt crisis would go up a lot kate.
Speaker 3 (21:33):
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
(21:53):
support US assets, to support the currency. Combined with potentially
fiscal tightening. How likely do you think that would be
in this administration?
Speaker 4 (22:04):
Well, I might have said this last time, staff, I
sound like a broken record in the newsroom anyway.
Speaker 3 (22:09):
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.
Speaker 4 (22:15):
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,
(22:36):
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
(22:57):
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.
Speaker 3 (23:10):
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
(23:33):
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.
Speaker 4 (23:54):
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
(24:16):
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
(24:38):
talking about. It's a real problem that will affect everyday
Americans for quite some time.
Speaker 3 (24:43):
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
(25:05):
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.
Speaker 2 (25:20):
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
(25:40):
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
(26:05):
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
(26:28):
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
(26:52):
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.
Speaker 3 (27:09):
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
(27:31):
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.
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