Wall St Hits Main St, Neel Kashkari & China Strikes Back 4/11/25

0:04Hi, I'm CNBC producer Zach Valisi, today on Squawk Pod. Do you feel liberated yet? Tariff negotiations between the United States and just about every country we trade with might be on pause. But is the market whipsaw doing damage to the economy that our Federal Reserve spent the last couple of years trying to bring into balance? Neil Kashkari, head of the Minneapolis Fed, joins us. I think we need to finish the job on inflation and then we'll be able to get back to the traditional trade-offs of the dual mandate goals. And for me, for one policymaker, I'm not there yet. Will the tariffs, however they're negotiated, prevent the Fed from getting the job done on inflation?

0:48If we see that attractive deals or whatever the deals are happen very quickly and we have some confidence, then I think that would give me more confidence that whatever these effects are, are going to be shorter lived. I think if I was a New York Post headline writer, I would say Fed to White House, colon, Donnie do a deal. But tariffs on China still in effect. And now Beijing strikes back with levies of 125 % on U.S. goods. Market watcher Marco Popich on the geopolitics of a brewing trade war. U.S. is the bubble. U.S. all of it. Plus the rest of the news that got us squawking on this up, down, in and out historic week for the U.S.

1:32financial markets. When you say that this is a Wall Street problem, it is so far from that at this point. Weekend, anyone? I'm ready to just fall into the masters. It's Friday, April 11th, 2025. Squawk Pod begins right now. Stand Becky by in 3, 2, 1, cue it please. Good morning, everybody. Welcome to Squawk Box right here on CNBC, live from the NASDAQ market site in Times Square. I'm Becky Quick, along with Joe Kernan and Andrew Ross Sorkin. It's Friday, and I guess that brings some relief. It's been a long week. It has been a long week all the way around. Ten days. Ten days in April. Ten days in April this week.

2:19Let's take a look at what's happening right now. Are we feeling liberated? I'm feeling shackled. I'm feeling anxious. Meantime, China retaliating against the raised U.S. tariffs with higher levies of its own. China's finance ministry saying that the country is now going to raise tariffs on imported goods from the U.S. to 125 percent. That's up from 84 percent now. But it added that it will ignore potential further U.S. tariff increases and not retaliate, calling any increases from here, quote, a joke, unquote. A statement from the finance ministry translated by CNBC said that, quote, with tariff rates at the current level, there is no longer a market for U.S.

2:59goods imported into China. Right. And that's why it would be a joke. It's a joke. You don't have to raise them any higher because you're basically cutting off trade. Cutting off trade. The Trump administration confirmed to CBC yesterday that the U.S. tariff rate on Chinese imports is now effectively 145 percent. Despite today's retaliation from China, spokesperson for the country's commerce ministry saying that Beijing is open to negotiate with the U.S. on an equal footing. One corporate note from this morning, Reuters reporting that Tesla has stopped taking new orders from Model S and Model X vehicles on its Chinese website.

3:33Both models are made in the U.S. and imported to China. So you can see the effect of that immediately. And there you have it. And this is what tariffs mean. And if you're isolating, Tana, and that's the whole idea, which now in hindsight, that's the rationale that we're hearing. It's always in hindsight. A lot of times it's in hindsight. We're not isolating them. We're not. We are reaching out. We are driving our other trading partners into their arms. You need them to, yes, and hopefully our other, I'm still optimistic. I mean, South Korea this morning, South Korea, this, do we believe them? Everybody's posturing.

4:05South Korea says we must put in even greater effort to strike a deal. If you believe one side, the Trump administration, there's 75 groveling trade partners that are going to do whatever we want. You believe the other side, it's like, why should we do anything when Trump, when President Trump was hit over the head with market realities? this week in the United States. The scariest thing, I know you said that. You know where I am. The scariest thing for me is that I don't believe, you know, a Trump put, you need to be able to follow through on stopping the declines. I don't think he has... I think he can.

4:38I think that you can. I don't think he does not have it anymore. That's what I mean. And the other thing, like, I think a Fed put, I believe in that because they can do positive, they can flood us with liquidity. All Trump can do at this point is remove negatives. That doesn't give you positives. That doesn't get you back to where you were. And I worry, I'm worried about your toothpaste, too. Not just that we've damaged relations. That's one thing, possibly. But we've damaged, in an overvalued market at the beginning of the year, we've damaged some of the confidence that people have, that CEOs have, that investors have.

5:15And that's the toothpaste. And consumers. That's the toothpaste. Because yesterday was horrific. I will say this. When you say that this is a Wall Street problem, it is so far from that at this point. I went to my son's basketball game yesterday, and every single person there was asking me what the declines in their 401k means, what will stop this. These are people who, some of them are retired, living on a fixed income. Grandparents who were there, others who had friends who had just retired, lost$100 ,000 of their million-dollar retirement. That's why we're so lucky, because none of us are anywhere near the age of retirement, the three of us.

5:50What are you looking at? What are you looking at? But, you know, this is real pain that sits up and makes people pay attention. And this is very much a Main Street issue at this point. I'm ready to just fall into the masters and just not even think about anything else and just have it on and not even turn my phone off, not look at Twitter. But seriously, from a negotiating perspective, because you know that I think we're in the worst possible places. I don't know whether that's true. I hope that's not true. Look, I hope it's not true. That's pessimistic. That's pessimistic. I hope it's not true either.

6:22And by the way, I imagine all of these countries are physically calling. Yeah, acting, making it look good. I imagine they would like to see a deal. It's not looking good. It's like we would like to find a way to do a deal with you. We want to talk to you about this mess because we don't want this mess to be the mess it is. But when they sit there and then say, OK, well, what do we have to? Because we're saying we have to give you something. We're saying give us something. And they're now going to be saying, like, no, no, no, you give us something. You want to go after China with us? You give us something.

6:53We're not giving you anything. It's a bit of a circular firing. Yeah, and here's what's going to happen. Supposedly, and I don't know which 75, I don't know who isn't calling at this point. We don't know because you know that the Trump administration, their spin is going to be that this is very positive. Every deal that is announced, if there are any, over the next 90 days, you're going to hear us saying, oh my God, look at this. You're going to hear the Trump administration just trumpeting how great it is. My guess is you will see trade agreements. You will. But how are we going to judge whether they're good?

7:25How are we going to judge whether they have teeth? The things other than tariffs, how do we know whether they're addressing it? At this point, it's just take away some of the bads, and people will cheer that. Maybe. I hope so. You didn't see Rory yesterday. I didn't. I'm pretty busy. All the, yeah, you've got a lot going on. I didn't see the very end. I just saw it this morning. He was four under going into 15. Oh, and he collapsed on 15. Double bogeyed 15, hard 16, double bogeyed 17. I mean, he's even. That's fine. Although I know Rose once again was leading after the first. He managed to finish with 22 putts.

7:59He did all 18 points. He was amazing. He's so solid. I love that guy, too. He's really a nice guy. On this vote, the yeas are 2-16, the nays are 2-14. The motion is adopted. Without objection, the motion to reconsider is laid on the table. hey everybody um good to see you all uh it's a good day in the house and i told you not to doubt us the media always does the democrats always do but we get the job done house republicans narrowly that goes without saying right uh since it's the house adopting a revised but was it 216 214 i think narrowly passing after the special elections no i i think that was the end of what it of what this actual vote was, but that's almost as good as you can do with Massey and some of the others.

8:47Revised budget blueprint that will be needed to advance President Trump's agenda. Oh, here it is. The vote was 216 to 214, with two Republicans joining all Democrats. That's a shocker there. In opposition, board collective. The president had endorsed the budget plan, which the Senate adopted last weekend in its own narrow vote. House Speaker Mike Johnson scrapped the vote Wednesday a night after he couldn't strike a deal with some GOP holdouts who wanted commitments on deeper spending cuts. Yesterday's narrow House vote is just one that congressional Republicans need to take as they work to pass President Trump's agenda of tax cuts, immigration enforcement, military expansion, and raising the federal debt ceiling.

9:34And you wonder how many rabbits Mike Johnson can pull out of it. I mean, he's not 0 for any, he's 10 for 10, whatever it is. He has not, he's been able to do it somehow. With extreme pressure and help from President Trump himself. From President Trump. And calls going to these people. But he's been wrangling the cats and... But their timeline is still far more aggressive than the Senate Republicans. Senate Republicans are saying August for their timing on this. His is May. But when does he not, you know, does that would be a bad signal if one of these times he's unable to get the. And it is hard with the Freedom Caucus.

10:14And then I assume it's going to get harder and harder as the tariff thing gets played out. Right. Yeah. New York authorities now say that two of the adult victims who died in that helicopter crash yesterday afternoon were a married couple from Spain. Augustine Escobar was a senior executive with Siemens. In a statement, the company said it was deeply saddened by the crash. On social media site X, Spain's prime minister called the crash an unimaginable tragedy. The helicopter was one of many that fly tourists near Manhattan to take in the sights of New York City. Officials said that it took off from near Wall Street around 3 p.m.

10:50Eastern time yesterday. Lynn lost control after it turned at the George Washington Bridge to fly along the New Jersey shoreline. And the cause of the crash is unclear and under investigation. New York City officials saying the three adults and three children lost their lives. The children are believed to be the married couple's children. And the third adult victim was believed to be the helicopter pilot. And the images, I don't know if you saw them, and I think we showed them a little bit there, but not the full image is just heartbreaking and tragic. and that right there will just, you know, send you into a spiral.

11:30It's such a tragedy. It's terrible, but, I mean, I still, helicopters still just give me the, it's like they're safe, I guess, kind of, most of the time, but definitely the probability goes way up. If you're going to fly constantly, and look at, like, you can't find a single famous person. It's very difficult that died on a commercial airline flight. I can't think of one. Helicopters, I can think of dozens. You know, Frank Wells or Kobe. Stevie Ray Vaughan. Yeah, I can think of so many. Well, there's just the opportunity for a single point of failure in this case, from what they're saying about this.

12:03Is it the twin engine and everything? Or two parts? What they're saying about this one was that the rotor literally separated from the actual helicopter. They call apparently this, they call it the Jesus nut, whatever the thing is that holds the rotor at the top to the helicopter. but it's one thing. So if you lose it and it separates, and you could see the way that helicopter went down, the rotor went one way and the body of the helicopter went the other. Well, that's something you'd like to check probably every flight. How's the Jesus nut? That's apparently what they call it in airline. Helicopters remind me of bumblebees.

12:43They shouldn't be able to fly. It's just hard. You need to just, but it's scary. It's rare. It's still rare. It's still rare. But yeah. We'll be right back.

13:05This is Squawk Pod. This is Becky's mic. Three, two, one. Up and Becky, cue. Good morning, everybody. Welcome back to Squawk Box. We're live from the Nasdaq market site in Times Square. Meantime, I want to get straight over to senior economics reporter Steve Leesman. He's got a special guest for us this morning, sir. Andrew, thank you. We're pleased to be joined this morning by Neil Kaskari, the Minneapolis Federal Reserve president. Neil, thanks for joining us. And I can't think of anybody better to be here because of your experience both at the Minneapolis Fed over many years, but also from investment banking as well as your role in the Treasury during a particularly interesting time, the great financial crisis.

13:43So, Neil, I usually don't do it this way, but I just want to ask you broadly, how are you feeling about this economy right now and financial markets, given all of the changes that are going on? I'm going to ask you the most open-ended question I've ever asked a Federal Reserve official. Well, good to see you. Thanks for having me. It's hard to get a read of what's happening underneath. You know, it's really important for the Fed. Obviously, we're very focused on inflation and employment, trying to understand we've got an uptick in inflation expectations in the near term. It's our jobs to make sure that that does not translate into a long term increase in inflation expectations.

14:23And so I'm paying attention to the same market moves you all are. The bond market, I'm paying particular attention to to try to understand what is it telling us about the underlying inflationary dynamics. And it's a complicated it's a complicated thing to analyze. Before you get to the inflationary dynamic of the bond market, Neil, one of the remarkable developments has been this, that at a time when there's concern across the globe, the general trade has been to trade into U.S. assets as a flight to safety. That's not happening now. The dollar is selling off this morning against a broad range of currencies.

15:04yields have been elevated. Is it curious to you and what is it telling you that there is no obvious or traditional flight to safety in the current environment? Yeah, I think your observation is goes to the heart of the matter. And I always go back to fundamentals. Why do we have a trade deficit in America for decades? It's because this is just the math of economics. Investors around the world have viewed America as the best place to invest. And if that's true, we will have a trade deficit. And so now one of the ways that expresses itself is in lower yields across asset classes in America. So if the trade deficit is going to go down, it could be that investors are saying, OK, America no longer is the most attractive place in the world to invest.

15:48And then you would expect to see bond yields go up. Now, it also could be inflation. And that's why this matters a lot to the Fed. I'm not seeing evidence yet that long run inflation expectations are climbing, and it's the Fed's job to make sure that that doesn't happen. But I would expect to see if investors decide, hey, we want to invest elsewhere, all else equal, that ought to be pushing up yields. And you'd see that in what we call the term premium. Neil, can I just throw one other possibility on that? These are pretty short-term moves. We hope they don't become longer-term moves. Could it be a reflection of hedge funds and others that were leveraged and needed to sell things as equity markets dropped, selling the assets that are most liquid and trying to make sure that they have the cash to pay whatever comes.

16:36Certainly, there's a lot of, you're right, Becky, there's a lot of complexity. The basis trade has been getting a lot of attention. But I would just point to something that Steve mentioned, which I think reinforces the story a little bit, and that is that the dollar has been weakening. Normally, when you see big tariff increases, I would have expected the dollar to go up. The fact that the dollar is going down at the same time I think lends some more credibility to the story of investor preferences shifting. Neil, let's talk about things that we never really want to talk about, which is this idea of what's happening in the financial plumbing.

17:08And those are the calls that I make to people to say, hey, how is this stuff happening? And when I say financial plumbing, what I mean is the reason why you can have your paycheck direct deposited and then withdraw cash at the ATM machine, the pipes that connect those two, that's the financial plumbing. And it's all around the globe for the dollar. I made some calls to people, Neil, and one guy said to me, we're not the story now, but we're getting closer. So give us your idea or your sense at all what's happening inside the financial plumbing. Does this rate in a way that was near or close to what happened in the pandemic?

17:46Or are we still far away from that and we shouldn't be worried about that? I think we're quite a ways away from that. I mean, during the pandemic, the pandemic was so unique because the virus was so unknown and how dangerous it was was so unknown that people fled all sorts of assets, stocks, bonds, everything, corporate bonds, treasuries, and they just wanted cold, hard cash. And that's where the Fed had to step in in a very profound way to flood the system with liquidity. Ultimately, we have the ability to manage some of these transitions. So if there's a dislocation, I'm not forecasting this, but if there were a dislocation, we have the ability to smooth out that dislocation.

18:23But going back to the discussion on yields, we're not going to be able to change where yields ultimately settle. All we can do is make that transition path a little less rocky. But the settling of where yields end up settling, that depends on trade policy and fiscal policy and U.S. economic competitiveness. That's out of the Fed's hands. You don't want to stop the market from getting to a new equilibrium that it wants to be at. You can only smooth the transition there. Correct. We don't have the ability to stop it settling wherever it wants to settle. All we can do is smooth the transition if there are big dislocations in markets.

19:01But I'm not seeing big dislocations yet. I'm seeing some stresses, but markets seem to be adjusting okay so far. Neil, I didn't like either scenario for why what was happening was happening. One, inflationary expectations are going back up or two. we're becoming less attractive as the place to invest. Both sound, I can't even pick. That's like a Sophie's Choice. Given the number we saw yesterday, you think that was an outlier, the CPI number? Or does that make it even more troubling that there probably isn't a reason to ratchet up inflationary expectations? So then the only answer would be that we're less attractive as a place to attract capital, which I don't think we want that.

19:47I don't think the Trump administration, at least if it was explained that way, I don't think they'd want it either. Well, when we dug into the CPI data, there was a lot of good news under the hood. One of the biggest drivers of the high inflation of the past couple of years has been housing. We've done a lot of analysis that said as new leases turned over, the housing inflation ought to be coming down. That trend seems to be continuing as we expected based on the new lease data. So I think the fundamentals of the soft landing of inflation have been in place. It's been continuing. That's been good news.

20:20But given the big moves in trade policies for the past few months and the market dynamics that we've just been talking about, it's pretty stale pretty quickly. And I think even the tariffs after the pause, you know, the effective tariffs are still 100-year highs. And so that suggests that inflation, at least in the short term, will be going back up again. And it's our jobs to make sure at the Fed that it does not lead to long term inflation. Yet when you say that, people hear that in a kind of clinical monetary policy way, the people who are very attuned to your speaking and Fed speak, which is that given the concern about growth, both sides of the mandate, the growth side of the mandate or the employment side of the mandate and the inflation side, you're going to take care of the inflation side first.

21:07Is that a correct read of what you're saying? That's my read of things. You know, if we hadn't had four years of high inflation, I would be more comfortable taking this quote-unquote look-through on inflation policy, which is if there's a one-time consumption tax increase or one-time tariff that pushes up the price level, there's an argument to be made that that's a one-time effect on inflation and just look through it. I would be more sympathetic with that view if inflation had been around our target for the past few years. But coming into this with elevated inflation for four years, and it's still elevated today, that makes me quite nervous about taking that one-time look-through approach because we have this possibility of unanchoring of inflation expectations where people lose confidence that we're really on the job.

21:51And I've heard many of my colleagues speaking in the past few days also echo the focus of we have to make sure that long-run inflation expectations remain anchored. And so, for me, that's got to be job one. Neil, we've been having conversations all week about private credit. We spoke earlier with the CEO of Apollo, Mark Rowan. I'm curious how you think about the universe of private credit and loans through that mechanism, given the connection, talk about financial plumbing, back to the traditional banking system, which is to say that banks, you know, in the last couple of years have gone, you know, as much as they can into trying to provide leverage, if you will, into the private credit system.

22:32and how much we should be talking about that or not? You know, I've dug into it quite a bit. Anytime we see an asset class grow as quickly as private credit has, it raises concerns just to some systemic risk building. My analysis says that private credit funds generally are much, much less levered than banks. Say if a bank is 10 to 1, a private credit vehicle might be 1 to 1 leverage. And the sources of systemic risk are traditionally the intersection between leverage and maturity transformation. So borrowing short and lending long. The private credit funds that I've studied generally have much longer term funding.

23:06And so right now I'm not seeing a systemic risk building in private credit, though it does represent leverage and leverage across the economy is itself a source of economic risk. But I'm not seeing as much evidence as a source of financial stability risk that one might be worried about. So, you know, bears watching. I don't want to declare all clear, but I don't see the fundamental kindling there that would suggest that it's particularly risky. Now, let me ask you a different question, which maybe has to do with just the strength of the economy and how you see these negotiations playing out and therefore sort of what the Fed does or doesn't do about them, which is to say we've now had a bunch of sort of deal-making conversations at the table about if you are an ally of the United States or a supposed ally and you're supposed to be making a deal, to the extent that some of these countries say, you know what, we're not going to do this, or we're going to take much more than 90 days, or we're not going to make a favorable deal, whatever.

24:03And it just doesn't turn out the way you'd want. I'm taking the most negative perspective of this, not from a political perspective, just as we're sort of like trying to figure out the risks of all of this. And so the question becomes, you know, is there a Fed put on those negotiations or is there an administration put on those negotiations or neither? Well, I certainly, Andrew, can't speak to an administration, what the administration will do. That's obviously up to them. And as Steve and I were talking about a few moments ago, the Fed cannot change the ultimate destination of where the economy is going to settle.

24:41All we can do is keep inflation in check and try to keep dislocations from disrupting that transition period. And so we're going to watch all of this very carefully and try to get inflation all the way back down and keep the labor market strong. But as you all have talked about for many, many days or weeks, A tariff pushes up inflation and the margin pushes down economic activity. So it puts the Fed in a particularly challenging position. That's what we have to focus on. And those are the only tools that we have at our disposal. Neil, I'm interested in timing as to when and how the Fed can respond.

25:17I can count on one hand minus three fingers the number of times that I've gotten a call from a Fed official saying they didn't say what they meant. And so when the Fed chair says something, I think he means it. And what he said last Friday was inflation over the coming quarters. And this question is about how long do you need for the inflation numbers to clear before you're confident enough to address the growth side of the mandate? That you're sure that this is a one time increase in the price level? because when I hear coming quarters, that brings me to like October, and I see the market priced in with rate cuts in June.