Claudia Sahm, New Century Advisors Chief Economist, Talks Jerome Powell, the Fed, Inflation
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Bloomberg Audio Studios. Podcasts, radio, news. President Trump is ramping up criticism of Fed Chair Jerome Powell. So let's discuss now with Claudia Somm. She is New Century Advisors Chief Economist and former Fed Economist. Claudia, great to have you with us. There was a note from Winthen over at BBH this morning saying that the admission that this is being studied at all...

should be taken very seriously and very negatively. And Claudia, I'm curious, how seriously are you taking the possibility that we do see Trump try to remove Jerome Powell?

I take it very seriously. And this administration has taken steps, whether it's with the tariffs or with downsizing the government, that really were beyond expectations. So the unthinkable is thinkable with this administration. So it is a risk to take seriously. But I do think when the administration sits down and studies the options, they'll come to the right conclusion that this really isn't the path they want to go down.

Now, I also want to talk about the precedent here because people often point to what had happened in the Kennedy era, in the Johnson era, in the Nixon era. People often point to Nixon-Burns. The difference now is the amount of tools in the toolkit, I think, that the Fed has brought out in terms of

quantitative easing, emergency measures during crises. The power of the Fed has grown. So what does this mean to have this kind of political pressure on the Fed in an era where the economy is so fragile?

Right. So the Fed needs to be independent, but the Fed absolutely must be accountable. And it is. Congress created the Fed. It has amended the Federal Reserve Act over time. The Fed has to report to the public, report to Congress. And, you know, there are times where Fed has used tools, such as in the great financial crisis, they did emergency lending. And then after the fact, Congress said they amended the Federal Reserve Act with the Dodd-Frank and said, you know, to do that, you're going to need Treasury's buy-in.

And that happened during COVID. So there are times where we watch the powers of the Fed and Congress put some controls on them. But that operational independence, that ability to set interest rates with monetary policy, not just in the US but around the world, has become to be understood as very important to keeping inflation low.

And this is, we're seeing it. This is the moment why we need Fed independence, where you have strong views kind of clashing between the president and the Fed. It's not personal. It's just the experience is we need the Fed to be able to make the decisions that they think are best. And we can hold them accountable for that after the fact. But like, they need to be able to make those decisions. It's a good reminder, too, that we all

have bosses, including the Fed. In Jerome Powell's case, it's Congress. But I want to go back to what you were saying in your first answer, that you think that they're going to study the options, the administration that is, and that they'll arrive at the conclusion and won't go through with this. And I'm curious, what gives you the confidence? When they look at the options, what do you think that they'll see?

It's in the absolute best interest of the president with his economic agenda that he has set to give the Fed its space to make its policy decisions. One of the things that, you know, the Fed is, they're uncertain about what happens with inflation, particularly it becomes embedded. So they are really trying to, you know, we're the inflation fighter. We're going to be credible on this. We've seen market expectations. They don't, they expect the tariffs maybe to lift inflation this year, but then come back down.

That is exactly, I mean, that is the path that the president would want to see, you know, with the tariffs, not to have it be long-term inflation. So let the Fed do their job. If the president undercuts this Fed, it will not just undercut, you know, remove Jay Powell, it undercuts any future Fed chairs that Trump would put in place. And it really could cause a lot of disruptions.

And if he removes Powell, he's not going to get interest rates down anyways. They're going to go, you know, because the inflation expectations would go berserk. So I absolutely understand why the president is critical of the Fed's stance right now. But this isn't the way to do, interact with the Fed.

Claudia, you touched on something that Shanal and I were discussing earlier, that you think about Kevin Warsh, who has been reported as in consideration. Other outlets have reported that he too has urged the president not to necessarily end Jerome Powell's term early, exactly for that reason, that if he was then made Fed chair, that he would be dealing with a loss of credibility at the institution itself.

Right. And we have to look back. The credibility that the Fed gained in terms of being inflation fighting, much of that was won during the Paul Volcker Fed. And that was a very severe recession, very high interest rates to break the inflation mentality. Like, we do not want to go back. No one wants to go back there.

So that, yeah, the Fed is an institution. It plays an important role. It doesn't always get it right. I mean, the president could be right. And there is a case for preemptive interest rate cuts. It's just, that's not a case that he should be making. And he's certainly removing or even threatening to remove the Fed chair. That's just, that's creating more uncertainty in a world right now that frankly is dealing with a lot of uncertainty in terms of the economy and financial markets. So this would be a great time to deescalate this. Well,

Well, Claudia, I want to bring up something that was brought up from Neil Dutta of Renaissance Macro this morning. This is exactly what he wrote.

forget the legal obstacles to fire Powell. Getting rid of him in such a dramatic fashion would upset the bond market. Risk premiums would rise sharply as investors question the central bank's independence and longer run interest rates would surge. That was from Ren Mac this morning. But then you also have this morning, we were talking about a little bit, Katie and I were talking about it. You have

the president this morning not saying he wanted to fire a Fed chair. He said that he wanted him to lower interest rates. You saw on the heels of that just the 10-year lose some of its sell-off. Do you think this is turning into a negotiation tactic more than a reality?

It's really hard. It's hard to judge, right? Like, I don't know where the president is going from this. It's great to see this morning's message on True Social did not include a threat of termination. It is also problematic to be having this, if you call it a negotiation, in public, right? Because now it does. So suppose the Fed meets and they cut interest rates. Did they do it because the president told them to?

Right. Like this is just not this is not a healthy discussion to be having. I mean, I understand. And again, the president and many presidents, Trump is nowhere near unique in this, don't like what the Fed does. Right. That's again, that's part of why we need the independence of the Fed is just having this debate in public and putting this pressure on. It's one of those. Be careful what you wish for.

Right? Like if the Fed caves, it would be really bad. I don't expect the Fed to cave on this, but it would be really bad. And it makes a very complicated policy decisions for the Fed this year even harder if they have it with all of this political tension and these conversations going on. To that end also, how do you see the reaction from the bond market, not just in the short term, but in longer term rates? You think about the 10-year yield flirting with 4.4% this morning, now closer to 4.34%.

Is there a risk that a deep recession would drive down those longer-term bond yields significantly or that fiscal pressures of the United States will supersede all of that and you actually see those longer-term rates go higher?

So everything is on the table. That's part of the problem right now. And there really is a lot of uncertainty. We're doing major policy changes from trade to fiscal to immigration. And then if you want to put Fed independence on the table, too, it's just a lot for anybody who's trying to look out in the future, which is exactly what financial markets are trying to do. They're trying to look out into the future and price it.

And honestly, I think the one thing that we should be very comfortable with is we're going to see a lot of volatility. We're going to see a lot of shifting narratives until that uncertainty is pulled out. And the president, again, has a very unique position in that he can pull some of that uncertainty out right now. Yeah, definitely. I mean, a lot of this uncertainty came from his desk itself. And obviously, like you say, he has the levers to pull to remove that uncertainty. But I want to talk

about the numbers that the Fed has in front of them. Politics aside, when Jerome Powell and his colleagues are sitting down to make policy, they have, of course, inflation, they have what the labor market is doing, and they have, of course, what we're seeing in terms of break-even inflation expectations.

and the like. President Trump in his Truth Social post this morning said that you have energy costs way down, you have food costs way down. You also have most other things trending down and as such he concludes there's virtually no inflation. What are you seeing though, Claudia? What is the actual read on inflation right now when you take a look at this data?

Well, our broad-based measures of inflation, so not just picking out particular series like energy, they show that inflation continues to be elevated relative to the Fed's 2% target. And it's been that way

for you know since 2021 it we've been making progress and and honestly the conversation we would be having right now is about the upcoming fed rate cut because a progress on inflation and the good economy if it were not for some very big changes that have been made in economic policy going forward

above all else the tariffs which just aren't in the data yet. Right? And the Fed has to think about it. I mean, the markets are thinking about it. Everybody's thinking about what's coming ahead. So yes, it is good that we've made progress on inflation. That is amazing. The labor market is great. But that does not tell us necessarily where we are going over the coming months. And the Fed, with all this uncertainty about the policy, their wait-and-see approach to this I think makes a lot of sense.

a lot of sense. And so we're going to, they're going to want, they need to see the data and above all else, they need to see that the inflation stays under control. Claudia, we got to leave it there. We thank you so much for your time this morning. Claudia Sam of New Century Advisors. How can you grow your business from idea to industry leader? Bring your vision to life with smart business buying tools and technology from Amazon Business.

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