Trump Denies Plan to Ax Powell After Floating Idea to Lawmakers

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1:27faster and compete at the highest level. Michigan, pure opportunity. Seize your opportunity at michiganbusiness.org. Bloomberg Audio Studios, podcasts, radio, news. This is Bloomberg Business Week Daily, reporting from the magazine that helps global leaders stay ahead with insight on the People, companies, and trends shaping today's complex economy. Plus, global business, finance, and tech news as it happens. The Bloomberg Business Week Daily Podcast with Carol Masser and Tim Stenevek on Bloomberg Radio. I want to bring in somebody who has quite a bit of experience with the Federal Reserve. Former Director of the National Economic Council, former Vice Chair of the Federal Reserve, Distinguished Fellow at the Georgetown Soros Center for Financial Markets and Policy, Lael Brainard is with us right now.

2:23It's good to have you with us this afternoon. And that's exactly where I want to start. We spoke to Mike McKee out in Victor, Idaho, and he said there was a collective eye roll when he saw the news earlier this morning from the other members of the Federal Reserve and Fed watchers out there. Do you look at the news that we got this morning, the comments from the president that we got this morning as being different than other criticism of Jay Powell in the past? I think there's a lot of continuity. He has clearly been very frustrated for some period of time with the Federal Reserve and their wait-and-see mode while they wait to see how tariffs are going to affect inflation and the economy.

3:06And, you know, he's very impatient to see rates come down. So I saw those comments today as being certainly in that same spirit, although, of course, the rumors early in the day had more urgency to them. Of course, subsequent to that, he seems to have pulled back the comments. And that's a good thing. I think it would be extremely bad for the United States to have a big rupture in the institutional independence of the Federal Reserve, which is what that would amount to. Exactly. So how do you think this will affect the Fed's credibility in controlling inflation? And more broadly, how will this political move really just affect inflation expectations?

3:49We saw markets react earlier. There was really a huge whiplash from the equity market to the fixed income market. Absolutely. So if the president of the United States were to go ahead and actually make an effort to remove the chair of the Federal Reserve, that would fly in the face of decades of institutional convention that puts the Federal Reserve in an independent position to pursue the control of inflation as well as keeping labor markets strong. And I think it would really raise important questions in the minds of investors in the United States and around the world as to whether the institutional environment that really underpins the value of Treasury securities, the strength of the dollar, and the expectation that inflation will remain low and stable in the United States, all of those things, I think, would be thrown into question.

4:51And that should lead investors to demand more to hold long-term Treasury. So that should lead to the long end of the curve going up. Whenever the Fed chair gives a press conference, he's asked by journalists about the criticism that the president has made or is making about him. You've worked with Jay Powell for years. You know him. In your view, how does he feel about being this punching bag? So I don't know how he feels personally, but I know that anybody in that position would feel that they have an important, well, institutional responsibility, that he was confirmed by the U.S. Senate, that there is a legal set of expectations regarding the Federal Reserve Chair's role.

5:45And of course, monetary policy is set by a committee. It's not set by the chair alone. And so it is the Federal Open Markets Committee that has continued to hold on rates. So it's a much broader institutional environment. And personalizing it by this relentless focus on the chair, I think, is extremely problematic. Again, bad for the United States and ultimately defeats the purpose that I think the president is trying to achieve, which is to see rates go down sustainably in an environment of growth and low inflation. When you look at the history of political pressure exerted upon the Fed, how do you make sense of today?

6:32I'm thinking Nixon, Arthur Burns, is today worse? Is today different? Or are they more or less the same? So I think that the past episodes where we've seen a lot of pressure on the Federal Reserve chair. Two lower interest rates for political reasons have ended extremely badly. And we've seen in those episodes high inflation, and the Fed has really struggled to bring inflation back down. So I think this is a kind of similar set of pressures to what some Fed chairs have felt in the past, but not in the recent past. I think in the, you know, during the period that we have seen low and stable, what they call the great moderation, low and stable inflation, there has been a real understanding that the president, the administration, should allow the Federal Reserve to conduct monetary policy in a way that establishes their credibility on inflation control.

7:39So this is a big change relative to the last three decades, and it's highly problematic. You know, the president has said very explicitly that he wants to see the Federal Reserve lower rates because every percentage point that rates come down, this is what he says, it will save him$300 billion in interest payments on the national debt. And of course, that's more important than ever now that we've just added through the mega law another four trillion dollars to the national debt. And so when you hear the president talking about this, he really seems to be very focused on those interest payments.

8:21And that is exactly the kind of institutional environment that would undermine the credibility of the Federal Reserve in fighting inflation and could actually lead investors to demand higher interest rates on long term treasuries. That's the great irony in this whole situation here. We have 20 seconds left. I just want you to make a prediction. Do you think Fed Chair Jay Powell will fulfill his term as the chairman of the Federal Reserve until May of next year? I certainly hope so. And yes, I do. All right. Lael Brainard, thank you so much for joining us on Bloomberg Businessweek Daily. That is, of course, Lael Brainard, former National Economic Council director, former vice chair of the Federal Reserve, distinguished fellow at the Georgetown Saros Center for Financial markets and policy.

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12:10Well, the second batch of big banks reported earnings today. There was a theme. Market volatility sparked by the trade war leading to record quarters for traders. Goldman stock traders posted the largest revenue haul in Wall Street history. Morgan Stanley stock traders scored their best second quarter on record. And Bank of America traders also posted a record second quarter. Watching all of this closely, Ken Leon, Director of Equity Research at CFRA Research. He joins us from Florida. So record quarters for trading across the board today, yet the stock reaction to the downside. Why is that? Well, it's great to be here.

12:46And when you look at the global U.S. banks, they performed very strongly. What we did see was not only trading, but the elevated markets means that fee income across many different businesses like asset management, wealth management, other services generated substantial year over year growth. What we are also seeing is how the capital markets can be the delta for getting stronger growth and also higher estimates expected from the street looking ahead, both for revenue and earnings. Those that are more balanced or exposed to Main Street America, consumer and small business are likely to see much slower growth and some risk of kind of sluggish demand in the future.

13:41I think that's really the difference between the outsized significant performance of Goldman Sachs, strong growth for Morgan Stanley, and then those that were kind of in between were the JP Morgans and then Bank of America, which didn't fire on all cylinders. That's the difference. But, Kent, still, I mean, when zooming out from just today's action, even though, I mean, Goldman only being up half a percent after posting a record quarter when it comes to trading, what is the driver of these financial shares? Is it the yield curve? Is it actually the numbers that we get in the earnings report? Is it something else?

14:21Because I feel like I go through this puzzle at least four times a year when we get these earnings. Yeah. Lucky for you, four times for me, it's every day. And we've been overweighted, the financial sector really, since last November. And the large banks are, you know, in the top 10 of that sector. And what we've seen even in the second quarter or year to date is tremendous performance, more than two times the S &P 500 for diversified banks. But that's not the point. The key point is, where do they go from here? We think the delta, not only for the rest of this year, but really these stocks are going to be priced on 2026 earnings is going to be how they do into next year.

15:11Obviously, two to four rate cuts, some easing on the regulatory framework, and then also some opening up in the capital markets for investment banking. That's going to help these banks. When you look at them in terms of PE multiples or what Gina was talking about, the overall market, they have to earn into these valuations or multiples. When we look at more conservative metrics, which a lot of bank analysts look at, because they're a conservative lot, such as price to net tangible book value, they're pretty expensive. But I think it's earnings growth and what that does in terms of confidence that they can still have upside over the next year or two.

15:59That's the key. Ken, I'd be remiss if we didn't ask you about the drama with regard to Fed Chair Jay Powell. The reports emerging early today that he would be fired by the president and the president was seriously considering doing that. We saw a market reaction from the equity side and from the fixed income side. And then just a little later in the morning, we heard from the president who denied that he would do that imminently. Yet there are certainly concerns about the way that the president feels about the Fed share. We all know that. What would it mean for banks if this were to happen? Would it mean anything?

16:30So I'm a global director and I look at markets all over the world. And also when you look at the bond market and really the 10 and 30 year treasury, the Fed really matters. its independence, the respect and responsibility of its two mandates for inflation and full employment. I just think this is color or drama. You know, J-PAL is highly regarded. And the other issue, of course, is when his term is up next year, likely probably to retire, but he could stay on for a few more years as a governor. OK, so what would happen, though, if he were forced out? I don't see that scenario. You really don't.

17:13I really don't. But at the end of the day - Even if they were to find some potential, look, the president has targeted the handling of the Fed renovation. What if there's something there and he can push him out through that? So President Trump's going to get a dovish Fed chairman in part. Nobody's really hawkish today. The data will suggest possibly a slower U.S. economy rest of this year, which is why we're much more positive on the delta of the capital markets, not Main Street America, to help large banks' earnings. So we're just going to have to see. But, you know, overall, you know, Fed's going to be independent.

17:54And, you know, of course, we're going to get rate cuts either way. I have a thought as to what would happen to the banks if Jerome Powell were forced out. You would see a lot of volatility, and the banks would probably trade it, Ken. And that brings me back to all of these trading records that we saw, at least for Goldman, and then these bumper quarters that the other big banks put up. Of course, we know what happened in April. We had Liberation Day at the start of the month, and then we had the walk back. And it seems like that was a big boost for these banks. And the question that comes about is how sustainable is that?

18:30When you think about all of this revenue that's being made in training, how sustainable is that? It's not the trading. You really need to focus on financial sponsors, which are the large private equity firms. They're sitting on$2 trillion of companies they own. They have to monetize in some way and also afford the investment bankers to get that job done. That's where I would really look as a delta that we haven't seen really in the numbers and size as it relates to mergers and acquisitions, equity underwriting, or other forms of transactions. Look to lower rates, making it more appealing to valuation for both public and private transactions.

19:13That's going to be a bonanza for the large banks. Ken Leon, Director of Equity Research at CFRA. Thanks so much, Ken. Good to see you this afternoon. This is the Bloomberg Business Week Daily podcast. Listen live each weekday starting at 2 p.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa, play Bloomberg 1130. So, Tim, we're now halfway through the year and a lot of uncertainties that loomed earlier haven't really gone away. Markets initially cheered the idea that tariffs may not be severe as feared, but that optimism is starting to fade.

19:53And we're starting to see the first signs of an inflationary impact. So, for instance, this week's CPI is one example of that warning. So bond markets are responding. Longer data yields are beginning to climb. And with us to make sense of all of those market moves is Simeon Hyman. He is global investment strategist and head of investment strategy at ProShares. That's an ETF issuer that manages some$85 billion in assets. So not really that much. I'm kidding. It's a lot. So thank you, Simeon. Before anything, we really have to start with a story of the day, and that is Jerome Powell. The fate of the Fed chair.

20:26As a strategist, how do you make sense of all of this? Are these real so-called threats, or are they just noise? Well, thanks for having me. And what I find very interesting about this is I think that the president is making the same mistake that a lot of investors do. And what do I mean by that? The focus on the Fed funds rate. In the absence of quantitative easing, the Fed only controls the overnight lending rate. Longer term yields are determined by market forces. We can park quantitative easing, the thing that happened in the great financial crisis and in the pandemic. But in the absence of that, what history shows is that if the Fed cuts, that usually is a steepener because it's stimulating the economy and the long end usually sells off a little bit.

21:12So it's almost a misguided focus because if you get what you wish for, that's not going to bring down longer term rates. They're driven primarily by inflation, which we see benign reading this morning, but still overall ticking up just a little bit. And the long end has been selling off for a couple of months. So ironically, the best way to bring rates down would be to bring inflation under control. Correct. I mean, that's really the only way of long term is to keep them in debt. This is macroeconomics 101 that we're talking about here. It's 101, and the numbers are pretty clear. The real rate on the above inflation for the 10-year Treasury historically is somewhere around 2.5%.

21:46So if we really got to 2, then you're talking 4.5, which is where we are. But if we end up sitting around 2.5, 3, that's where you can have that 5 handle. So if the real way to bring rates down is to get inflation under control, how do you view the new tariff regime? Well, that's the risk. And I think part of the tariff story is euphoria around the acknowledgement that it's not going to be as bad as it looked like on Liberation Day. But as you noted, the euphoria is wearing out because if we end up with 10 or 15 percent across the board, that's still a lot more than the three we had prior to this administration.

22:23So the reality that even whatever tariffs come out will be higher than before, that's absolutely inflationary. When you think of historical examples when it comes to political pressures on the Fed, how did markets react? I'm thinking maybe Arthur Burns or Nixon, or maybe this time is different because, I mean, we are in 2025 and the president is different from the previous presidents. What do you make of that? It's not good. I mean, that's what we had in the 70s. We had stagflation because there was a lot of political pressure on the Fed and it took Paul Volcker to clean it up. So the market will embrace the continued independence of the Fed for sure.

23:00And to the point of many sources, like the chair does not make unilateral decisions on interest rate. Like if President Donald Trump replaces Powell, whoever the Fed chair will be, that person's decision may be still overturned. So it's really interesting. But this is clearly a political move, some would say. It's just back to the first principles. If someone goes in there and they ease too quickly and inflation expectations rise, longer term interest rates will go up. Is all this a distraction in your view? I think it's a distraction because the odds are that, as we heard, Powell's not going to be fired and the Fed will probably not be early.

23:38The odds are that, if anything, they err on being a little bit on the late side. So the status quo of the error being on the late side and having the economy get a little too deep in recession before their cuts is still the most likely scenario. What are the legal institutional limits of a U.S. president's ability to really just remove the Fed chair? And how might this add to the ongoing uncertainty in markets? I feel like every day the list just goes longer and longer. What we've heard over the last few months is that compared to the heads of other agencies, it appears that the Federal Reserve Chair is more protected from most presidential actions than some of the other heads of agencies that are not even with us anymore.

24:20So I think there's definitely more protections in place, but none of them are impenetrable as we found out over the last few months in many instances. Still over the last few months, since the post-April 2nd bottom of at least the markets this cycle, we've seen a sustained rally higher in equities, despite the fact that I think for a lot of people would argue we don't really have certainty when it comes to tariff policy. Is the market taking the threat of tariffs going into full effect August 1st seriously right now? There's a little bit of the euphoria that I just spoke about. In other words, since it's not as bad as the stuff from the lawn on April 2nd, there was such a relief rally, and that might have gone a little bit too far.

25:08But I think that's not the only reason that the market has rallied so strongly since roughly April 8th. And, you know, that is the fact that fundamentals are so strong. Whether you look at the S &P 500 or the NASDAQ 100 compared to 20 years ago, return on assets stronger, profit margins stronger. Everything is there in spades. And by the way, the Nasdaq 100 was at 30 times then as well. So there is quality support there. The quality of earnings, the cash flow that is generated per dollar of earnings is much better than it was just a generation ago. Moving forward from today's really huge whiplash of the news, what do you make of the inflation story, especially in light of the big, beautiful bill?

25:52Does it have enough reason to ease? I don't think they can ease that quickly. in the face of the big, beautiful bill, because that's clearly expansionary and it adds to the deficit. It and I'm not taking any sort of scary point of view here that that we're going to have a real deficit problem, but mildly inflationary for sure. And how about dollar weakness? How is this affecting your general views or asset allocation? How much of a tailwind is it or not a tailwind? I think the dollar weakness, combine that with the possible for a little bit of a sell-off further on the long end of the curve, those are related phenomenons because both of them related to inflation pressures in the U.S.

26:38and a little bit of the growing deficit tarnishing the safe haven. So you absolutely do want some other sources of diversification. Think about it this way. If you look at bonds, bonds traditionally the offset to equity risk, But that doesn't always work. It didn't work Liberation Day. Remember, we had the de-dollarization thing and bonds sold off with stocks. And, of course, the wound in everybody's psyche is from 2022. The equity market went down 20%. Long treasuries went down 30 % in 2022. So we can't quite count on either bonds or the dollar for either perfect stability or diversification.

27:20You've got to look elsewhere. Where do you look? a couple of ideas that we think are important first this is a particularly strong environment for cryptocurrency we know that the regulatory environment has improved a little bit um but we also improved a little bit i mean it's like a sea change we're waiting and it looks good you don't i i'm i don't do the political beat yeah the odds are something's going to happen and it doesn't have to be perfect well markets are the crypto markets believe that believe that and then the the view of the leading voices there are the regulation doesn't have to be perfect just give us something that's reasonable we'll know what to do okay whenever somebody is on our air and says cryptocurrency i always get pushed back online because people say bitcoin not all crypto is bitcoin bitcoin is not all crypto so when you say cryptocurrency as an option out there what specifically are you talking about well there are you can go beyond bitcoin and ether is certainly a reasonable opportunity and then you have a couple of sister guys you have solana which is more in the in the ether camp and then you have xrp as an example with the fixed supply that's more in the bitcoin camp so i think there's an opportunity there to be a little bit more diversified and i think the mistake some folks make in the crypto landscape is they think that well it's just a risk asset like everything it's just going up with the equity rally but you remember three years ago when the crypto related banks were bitcoin went up yeah it really can be a diversifier so i think that's one you don't think that it's too has too short of a history to call it a diversifier it emerged after the financial crisis we don't have that long of a history to look out to say that and the fact that it changes its behavior from haven to risk assets depending on its mood, it seems.

29:13This is so intertwined with all the disruptions that are going on right now, and you have to, I would suggest, walk and chew gum. It's almost inseparable from AI in the sense that there's a lot of disruption going on at once. And to ignore it, I think, is at once unparalleled. It doesn't mean that you dive in and hold your nose and just go to the bottom of the ocean. But think about, in the equity markets as well, think about the AI disruption. You know, way back when in the late 90s, there was this book called The Innovator's Dilemma. Yeah. And it said that the thesis of The Innovator's Dilemma was that incumbent companies cannot take advantage of technological innovation because it screws up their cash cows.