Chapter 1: What is the main topic discussed in this episode?
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I'm joined now by someone who intimately understands the Fed, was there for 10 years, and most recently was the Fed vice chair under Jay Powell, who is still now the chair. And that's, of course, Lael Brainard. Lael, thank you so much for joining us this morning. As we see this standoff between President Trump and Governor Cook, we have yet to hear from the Fed itself.
What kind of response do you think we can expect from the institution? Well, I think the Federal Reserve is in an incredibly difficult position here, but you have to remember this is not about an individual governor. This is really an unprecedented attack on the independence of the Federal Reserve as an institution. There is nobody...
in the Federal Open Markets Committee, the monetary policy setting committee, that can't be thinking, well, what does this mean for me? And so any member of the board, presumably, is going to worry that they too could be subject to this kind of political pressure
And that fundamentally undermines the institutional independence of the Fed, which means higher inflation potentially, less credibility, even higher long-term interest rates. Bad for the economy. Do you think this can actually impact how members are thinking about monetary policy? Well, I just think the...
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Chapter 2: What is the significance of Fed independence in the current political climate?
implication if any member of that board could come under this kind of political pressure from the white house and of course we saw that kind of pressure on the chair earlier this year i think that does really put a higher premium on whether they're going to be willing to speak their minds to dissent on key votes if necessary i think it really does create unprecedented risks
The president's letter talked about this mortgage allegation fraud in the mortgage world for Governor Cook. What if she was charged or convicted? Well, I think what is important here is due process and undertaking a real investigation and having the facts on the table and the ability for court. her to defend herself legally. None of that has taken place here.
The White House has preempted the process. And so that is why it's really unprecedented. It's very, very threatening to the very independence of the Federal Reserve. And it should cause concerns, I think, among investors and more broadly about that fundamental underpinning of our strong economy and our strong financial markets.
Given this is just about one individual, does the Fed come out and say something or do they need to wait until that due process takes place? So the Federal Reserve as an institution is all about due process. And there have been individuals who have had investigations previously. There's a good process for doing that. That's not what's taking place here.
This is really about trying to overturn the majority of the board of governors long before any of these governors' terms are up by threatening them with these kinds of investigations and firing without real due process and cause. And again, the Federal Reserve's independence really is at stake here.
And that means that monetary policy will increasingly be overshadowed by concerns that there's political interference, whether or not That is actually the case. If you think about it, Jay Powell opened the door for an interest rate cut in September very clearly. That's exactly what the president wants. So monetary policy is actually moving his way.
And yet this is a very, very aggressive attack on the Federal Reserve when monetary policy is doing exactly what he's been calling for.
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Chapter 3: How does political pressure affect Federal Reserve members' decision-making?
That speech the Fed chair gave at Jackson Hole just on Friday is very different from how he sounded, Jay Powell, four weeks ago. Do you think the speech was political? Well, I think that the chair was very careful in laying out that the balance of risks had shifted. He pointed specifically to the possibility that the labor market is weakening faster than the members of the
FOMC had believed in their last meeting because of the revisions to three months' worth of hiring data. And so he laid out a very, I think, strong case based on data and the facts why they were now potentially going to be more attentive to that labor market weakening, while acknowledging that inflation is still likely to go up because of the very high tariffs that have been put in place.
Knowing the data and knowing all the personnel that are going to get together at the next Fed meeting, September 17th, do you expect them all to walk through that door that the Fed chair opened up for a cut? Well, I don't know if all members of the FOMC will be in the same place. And, of course, what we should hope for is a really good debate and an airing of differing views.
But I do think that barring something really surprising in the upcoming debate, employment print and CPI print, it's more likely than not that they will vote for a 25 basis point reduction in the federal funds rate. Do you think there's a bias to the labor market in this Federal Reserve?
So up until this point, I think what we've heard is a lot of discussion about the potential risks to inflation. Inflation is still high. It is between 2.5% and 3%. And while this time last year it was going in the right direction, moving down to the 2% target, this year it's actually moving up. So we have heard a lot of attention to inflation, appropriately so.
But the chair acknowledged that they are balancing risks, risks of higher inflation, risks of lower employment. And that is exactly what you expect from tariffs, a stagflationary shock. When he was talking about tariffs, he said that it's not going to come all at once, the impact.
Is the Fed chair basically signaling to the market and to us to just look through any potential hot CPI prints that come out between now and the next 12 months? Yes. So my interpretation of that discussion is simply to acknowledge that when the labor market starts to turn down, unemployment often doesn't gently move up and the Federal Reserve doesn't have a lot of time to react.
Unemployment often jumps higher. Whereas because the tariffs have changed a number of times and still do not seem to be settled, unemployment Because businesses were so good at getting inventories in ahead of time, because consumers did a lot of advanced purchases, those tariffs are working their way into prices more slowly.
So I think it was just an acknowledgment of different potential timing on the two legs of the dual mandate. It felt like Chair Powell was coming around to how Governor Waller thinks or maybe how Governor Bowman thinks. And I want to end on those two individuals, their names potentially to be the next Fed chair.
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