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It's a weird time to be Fed Chair J -PAL.
Markets are roiling.
Inflation may or may not be cooling.
And you have a very angry president truth socialing at you about rate cuts.
What's a Fed chair to do?
This is Swamp Notes, the weekly podcast from the FT News Briefing where we talk about all the things happening in U .S. politics.
I'm Mark Filippino and this week we're asking, what does a week in the trade wars tell us about Powell's next move?
Here with me to discuss is the FT's incoming U .S. Economics Editor Claire Jones.
Hi Claire. Welcome to the U .S. Thank you, Mark.
Great to be here. And we've also got our economics commentator, Chris Giles, who writes our Central Bank newsletter.
Hey, Chris. Hey, Mark.
Good to be here too.
So I don't want to presume anything, but I'm assuming that you guys aren't, you know, psyched to take up the role of Fed cheer anytime soon, given the, the, the tumult.
No, indeed not. I mean, you've got to feel for Powell.
It was all going so well for him last year.
We were seeing a perfect soft landing.
The Fed was beginning to cut interest rates after inflation fell quite sharply.
Now the situation looks very different and his job looks an awful lot harder.
Yeah, it's super hard. I do not envy that guy.
Chris, let's start with the state of play.
That was great background Claire.
A new inflation report came out just the other day in the U .S. The consumer price index is now down to 2 .4%, which is actually better than expected and closer to the Fed's 2 % target rate.
Now, that's helpful for US President in Donald Trump because he wants to lower interest rates.
Central banks, as you know, generally wait for inflation to get to this 2 % target that I'm talking about before they start making rate cuts.
If interest rates stayed too high for too long, it could tip an economy into a recession.
So they lower these interest rate cuts to get the economy back going again.
But Powell's hesitant because in broad terms, inflation is kind of sticky.
what are the arguments each side is making?
The ironic thing is that without Trump and without tariffs, we'd be looking at this CPI inflation report.
2 .4 % in March, down from 2 .8 % in February, underlying inflation also down sharply, and we'd be saying, wow, the Fed really has triumphed over inflation.
It's now time we could be cutting interest rates.
And that would all be true if it wasn't that we're suddenly going to get a big cost shock hitting America with higher import prices.
So some of it might get absorbed in supply chains, but the idea that it all will be is for the birds.
So we know that inflation is going to rise from here.
And so it puts J Powell in a really difficult position because it's everything the Fed doesn't want to have. it's got the tariffs are stagflationary, so they lower growth and increase prices, at least at one point, so the Fed's mandate is price stability, maximum employment, and it means they have to choose which one of those they prioritize.
And almost certainly, it means they'll do nothing until they know which one is moving more in a more difficult direction.
But, you know, the Donald Trump is on truth social and other platforms pressuring the Federal Reserve to cut rates.
What's his argument there?
His argument is is quite simple.
He he likes lower rates, he sees the better inflation figures and therefore he thinks the Fed should cut rates.
He always thinks the Fed should cut rates.
I mean this, he's an old real estate man, so always low interest rates are better than higher interest rates.
But the Fed has to worry that what happens in a tariff shock is that prices rise, imported prices rise.
And then you get a situation where people try and defend their real incomes and workers try and raise wages, and you get the second -round effect.
And that's the thing that the Federal Reserve has to be particularly mindful about, what the knock -on consequences are, not what the initial price shock is, and for that, it has to wait and see.
Chris is totally right here.
And the Fed's message has been everything that Trump's tariff policies have not been.
It's been very clear and very consistent, the message that Fed officials have been given over recent days, and it's that you're not going to get any interest rate cuts until we see, as a necessary precondition for those cuts, that inflation expectations remain well anchored.
And several Fed officials are saying too, exactly what Chris is saying that the impact of second round effects of tariff policies mean that the chances of movements upwards in inflation expectations are on the rise.
Right, so Trump imposed global tariffs and then this week he paused most of the reciprocal tariffs except for China.
But investors are still really confused about where this is all going and the Fed is worried about that.
How badly does Trump need Powell to cut rates in order for this inflation plan to work, because his whole plan is to bring manufacturing jobs back to America.
I mean, I think on that, you know, look, if you're gonna build a factory, if you're gonna invest, low interest rates help, but the overriding factor that's gonna influence business's judgments here is whether or not there's a climate of uncertainty.
So if Trump wants more investments to be made in the US, he needs to have a lot more clarity his own economic policies.
An interest rate cut might help at the margin but my sense is that unless you have clarity, unless there's coherence, you're not going to get the sorts of investments that you're going to need in US manufacturing that Trump wants to see.
We saw that uncertainty reflected in the markets this past week and a half, right?
We saw major equities sell off, we saw bonds sell off, US treasuries sell off for a little bit, we saw gold sell off for a little bit.
We're talking right now Friday, before the U .S. market's open, so we haven't seen what has happened on Friday.
But the broad theme that we've talked about a lot on the show is uncertainty.
Chris, I want to talk to you about the Federal Reserve's role as an independent body that says monetary policy for the U .S. How has that independence come under question under Trump, not just this administration, but during his first time in office too?
Well, it's come under question, essentially, because Trump either tweets about it or now on to social posts about how he knows better than the Fed what interest rates should be, the Fed is always slow and late in his view in cutting rates and that low rates should be better than high rates.
That's pretty extraordinary for a body that is not only supposed to be independent but is independent.
It's quite hard to be put under that pressure because it absolutely can't answer back and and would never answer back against the elected President of the US.
So it just makes life really, really difficult for Jay Powell, for the other board members and the presidents of the regional Feds.
Is it going to get harder?
Well, quite possibly it is going to get harder, because the assumption that we've always worked under is that the president can't fire people on the Fed board, but this is going to be tested very soon in the Supreme Court.
Not that he's tried to fire anyone, but he has fired a woman called Gwynne Wilcox, who was a board member of the National Labor Relations Board, and her protections against being fired were identical in law to the ones that apply to the Fed.
This is going to the Supreme Court.
Next week, we're going to learn whether it goes directly to the Supreme Court or has to go goes to the DC appeals courts first, test. But it's getting to be a very, very delicate test case.
And if the administration wins in the Supreme Court, which quite a lot of people think they will, then the Fed's protection against anything that the President does is far weaker than we thought it was.
Why doesn't Trump just wait it out?
I mean, Powell's term, if I remember correctly, is it over in May of next year?
I think that is a possibility and is still, I don't know what you think Chris, but I think the likeliest cause is still that he will just wait it out.
We've seen this week that Trump does tend to respond to movements in the US bond market, and I think if you sack Jay Powell, you'd have a very very sharp reaction, and the US' government's cost of borrowing and would likely rise quite substantially.
And I think that may not be the legal case that Powell said last year that he has where it's just totally and utterly against the law to fire the Fed Chair that may be weakened by the judgements we see in the coming weeks.
But I think the check of market movements on keeping Fed officials in their jobs is probably quite a strong one.
Yes, I agree with you, Claire, there.
I think the key thing is that everyone knows Powell is leaving quite soon in just about a year's time as Fed chair.
He could stay on the board if he wanted to because his board position lasts longer.
Trump will have no difficulty getting his person to be Fed chair because one board member, his term is ending earlier next year, so there's going to be a vacancy on the board, whatever.
and so, Trump can put in whoever he likes, he's got Congress, that's all quite clear.
But what I think could happen is, if there was any sign that the Fed's other governors were, in Trump's view, not playing ball with his new Fed chair next year, that's when you might see board members being fired.
And yes, the markets might take it very badly, but we've seen this administration do things that markets don't like, and they still have basically done them, making the US look a little bit like...
it's very odd to say this, look a little bit like an emerging economy in some sense in the last few days.
We've seen the dollar fall, we've seen US borrowing, government borrowing costs rise, we've seen stocks fall.
These are very unusual moves to see in combination.
And it's what you see when you see investors having a sudden fear of investing in that country and that is not the position that the US really has ever been in before or would ever want to be in.
That's staggering. I've been doing this job for a long time and I've never heard the US portrayed as a potential emerging market.
That's wild just to think about.
But I guess it has been a pretty wild week which makes me wanna ask, what if things get really really bad and the bond market continues to, for lack of a better term, throw -up all over itself, is there something the Fed could or would do?
There has been some talk this week about whether or not the Fed might intervene if there was market dysfunction in the market for U .S. treasuries.
I think it's important to just make the point here that, you know, we're not likely to see an emergency rate cut by the Fed.
The Fed's made very clear it'll want to see signs in the data that the U .S. economy is weakening and for US inflation expectations to remain under control before it cuts rates again, that's going to take some time.
Indeed, it may end up the Fed being too late to cut if we do start to see signs of a US recession.
Just for context, for people listening, the last time the Fed had an emergency rate cut or rate cuts was during COVID.
So it really has to get bad for them to do that, which is why I'm curious about whether or not any rate cut, emergency or otherwise, would be seen potentially as a capitulation to Trump and his pressures and if that goes into any of the thinking of the Fed.
I think there is a real risk and that is something that's on the Fed officials minds.
I mean, you mentioned COVID and I think the issue is for the Fed to is that COVID sparked one of the worst bouts of inflation for a generation and a lot of criticism of the Fed that it was too late to act and it didn't do enough early on to bring inflation under control.
So the Fed in that environment where its independence is threatened, where its credibility has been questioned somewhat by what happened to inflation under Covid, it's very reluctant to get ahead of the curve.
It really really wants to see evidence in the hard data that things are getting really bad and that inflation expectations remain under control before it's going to act.
The issue with that I think personally, is that if you wait for unemployment to start to tick up then things might be very bad indeed by that point and the Fed may end up being a little bit too late to act.
Finally guys, I want to end on what this means for real Americans.
We've been talking very high level macro about monetary policy, but you know, for folks who are worried about the price of eggs, who are worried about the alarming rate in which their 401k is dropping and just generally not feeling great about the prospects in the economy, should they care about the disagreements between the President and the Fed?
And what does it mean in practical terms?
Without tariff policies, the Fed was on track to cut interest rates multiple times this year.
It would have seen this week's inflation report and seen that as given it room to cut in the coming months.
With tariff policies, it no longer has that.
So it's the tariffs that are really, really hitting the American consumer.
All right guys, we're going to leave it there, we're going to take a quick break.
And when we come back, we're going to do Out of the Swamp.
I'm Michaela Tandera, host of Behind the Money, a podcast from the Financial Times.
Every week, we take you inside the biggest business and investing stories of the moment.
From Wall Street's most heated courtroom battles.
Both sides feel like the other one is in the wrong.
To how companies are navigating the new Trump administration.
I think the question could be more, will Trump turn on them?
Follow Behind the Money wherever you listen to podcasts.
We are back with Out of the Swamp where we ask our guests to tell us something that they've been watching outside of Washington.
Chris, let's start with you.
What have you been watching?
I'm looking out of the window at a beautiful spring day, and it's been a beautiful early spring across the whole of Europe.
And it does look as if it's spring in some of the economic data here.
The UK's economy grew 0 .5 % in February alone.
That is something that, at a monthly level, hasn't happened for quite a long time.
So, maybe things in Europe are just looking up, both in the weather ahead of Easter and in the European economy.
Wow, that is surprisingly optimistic.
Thank you, Chris. Claire, what do you have for us?
So, Liverpool's my hometown, and I'm a massive fan of the Football Club.
Our star player this season, and indeed for many seasons, has been Mohamed Salah.
So whether or not he's going to sign a new contract has been very much on my mind.
It turns out this week, indeed this morning, I woke up to the news that he'd signed another two year deal.
So I was very happy to hear that.
That is so great. I'm going to go because I never get to do these.
So I'm going to say, even though it's very early in this Major League Baseball season, the New York Mets are tied for first place.
So that is very cool.
Well, thank you guys so much for indulging me on that.
I want to thank our guests, Chris Giles, he's the FT's economics commentator who writes our central bank's newsletter.
We'll have a link to that in the show notes.
Thanks so much, Chris.
Thanks, Mark. And Claire Jones, she's our new US economics editor.
Thanks Claire. It's been a pleasure, Mark.
Thanks a lot for having me on.
This was Swamp Notes, the US Politics Show from the FT News Briefing.
If you want to sign up for the Swamp Notes newsletter, we've also got a link to that in the show notes.
Our show is mixed by Sam Jievinko and produced by Katya Kumkova.
Special thanks, as always to Pierre Nicholson.
I'm your host, Marc Filipino, our executive producer is Topher Forehas and Cheryl Brummley is the FT's global head of audio.
Original music by Hannes Brown.
Check back next week for more US political analysis from the Financial Times.
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