Trump May Not Be Done With Powell Yet
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Bloomberg Audio Studios. Podcasts, radio, news. 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 Trumponomics, 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, Jay 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 Jay, 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 Mr Too Late, a major loser, lowers interest rates now in capitals. And that followed another post saying Powell's termination, quote, could not come soon enough.

Well, late in the day Tuesday, after we recorded our discussion this week, the 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's just 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 Jay 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 with you, Steph. And our own Kate Davidson, back to talk to us, managing editor who covers US economic policy for Bloomberg News in Washington. Kate, I think you were actually on the debut episode of Trumponomics back in January. So I'm surprised it's taken us this long to have you back. Thanks for having me. ♪

So, Kate, let me just ask you right at the start, just to catch us up briefly on how Donald Trump's view of Jay 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, 2017 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 Jay 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.

They had a lot of praise for Jay Powell at the time. It soured pretty quickly. If you recall, in 2018, shortly after Powell was confirmed, the Fed had been slowly raising interest rates, right? We were coming off a period of very low rates for a number of years. And there was this 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 U.S. And the complaints turned kind of personal, right? I can't remember the specific choice words, but one sticks out when he said that Jay Powell was like a golfer with no touch. You know, he couldn't putt. I mean, they got fairly colorful. He was really clearly very angry.

And it got to the point where Bloomberg reported in December of 2018, 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 rates enough in the Biden administration.

in his post over the weekend when he talks about too late, pal. Part of the criticism he has is that the Fed was too slow to raise interest rates. 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 is. 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 basics, talk us through how these latest attacks on the Fed and potential question marks about its independence have

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 currency is weakening at a time when the yield, the return, supposedly risk-free US government securities is going up is also a sign, of course, of investors reallocating capital, at least at the margin, out of the US and into other marketplaces.

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 on 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 tariffs market saga

is that you'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 premium on US government debt has gone up, market inflation compensation

has not changed. So it's 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 as people lost faith in the central bank. It's worth lingering on that.

In effect, you're saying, you know, as far as the market's concerned, there is something worse than unleashing a really damaging global trade war. And that's also preventing your central bank from responding appropriately to the impact of that trade war. That's exactly right. Yes. And that becomes a stagflation trade because you will be looking at the kind of worst combination of a slowing economy, but also a Fed that's not trying to reduce the long term impact on inflation. Yes.

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, Steph, when people start to expect more inflation, it's going to 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 has 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 J-PAL and it's very cordial, everything's fine. Do you have a sense of that, that Scott Besant is...

trying to prevent this going beyond just a criticism of Jay 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 is

as chairman is up in May of next year. So the Trump administration is within a few months is going to be 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 rate switch. 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.

Scott Persons, 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 a 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 Jay Powell. Kevin Walsh, someone who was also in the running last time, is perceived to be positioning himself as a Trump pick to

to replace Jay 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 hypothesise 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 Walsh or a similarly qualified candidate under regular order when Powell's term is up,

I think Walsh, or indeed potentially one of several other potential Trump picks, would be well positioned to serve as 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 decisions truly independently of the White House. To quote the words of one commentator, the Fed chair put in that context would be seen as Trump's sock puppet.

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 appoints crossed the president's preferences, the risk would be that that person, too, could get fired.

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Well, and I guess 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 replaced him in the first place. Well, this is just an example, Steph, 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 loss 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 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 1960s, 1970s 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 have 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 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, Jay 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, OK, maybe they do want to cut rates, but how will it look now if they've done it after Trump has been berating them and insisting that they do it? It adds another element.

Krishna, 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 lion'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

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 it's an excuse for a rebalancing in global investment that many people have expected to see long before now?

I think you've 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 investor preferences for people to want to move capital out of the U.S. 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 U.S. 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 U.S.,

And of course, if you're running a fiscal deficit in particular, you do need to continue to attract global capital into the U.S. 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 U.S. as well. So I think the

The starting point of the over-allocation 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 Jay 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 Truss 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

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 trade, 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, 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 accounts and the flows that are coming into the U.S., including to finance the U.S. government deficits. That's the sort of conceptual point that we start from.

The risk in the current conjecture, the serious risk, the 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 Truss-style fiscal crisis. And the path by which that would happen is a global buyer's strike in the Treasury market at a

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 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 layered 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 it a question mark about how the administration would respond? I mean, the classic way to respond to that kind of buyer strike or even a hint of a buyer 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 measures.

How likely do you think that would be in this administration? Well, I might have said this last time, Steph. I sound like a broken record in the newsroom anyway. Well, we quite rightly started talking about the bond market at the beginning of the series. I suspect we will keep going back to it. That's right. No, but I think beyond Doge, if you want to consider that a serious effort to tighten the 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 compensated

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, the package that's under consideration, there are some conversations about it.

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 just looking at the record, it's really hard to believe that there would 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. Kate, if the U.S. 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 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 is 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 resolved.

reversed, right, by perhaps the president just 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. Well, I'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 analyst for investors.

You're thinking about how to rate the probability of the kind of extreme 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 2008, 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 U.S. government yields, real yields, when the economy outlook is somewhere between near recession or recession is 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 globalization.

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 an intermediate position where we are seeing things that are extremely unusual and 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 shift could lie ahead.

So this is serious business. It is not normal. We are not yet at the point of a regime shift. Krista Goert, Kate Davidson, thank you so much. Thanks, Steph. Thank you, Steph.

Thanks for listening to Trumponomics from Bloomberg. It was hosted by me, Stephanie Flanders, and I was joined by Evercore ISI's Krishna Guha and Bloomberg's Kate Davidson. Trumponomics is produced by Samar Sadi and Moses Andam with help from Chris Martlew and Amy Keene, with special thanks this week to Rachel Lewis-Kriske.

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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