163. Trump Surrenders To China And The Fed

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1:22external costs falling on.

1:34Hello and welcome to The Rest is Money with me, Robert Peston. At least part of this will be Trump's turmoil, but there's other things going on in the world, isn't there, Steph? Yes, there is. Yes, I'm hello. I'm here too, Steph McGovern. We can't get away from Trump, can we? It's just, I mean, honestly, I thought you and I would be working this Easter bank holiday because of everything he was saying about the Fed chair, Jerome Powell. So, you know, just to bring you up to speed on this. So, you know, we talk a lot about the role of central banks, don't we, in setting interest rates and how important they are that they're independent.

2:09And we're going to come into that. But basically, Trump has been kicking off because he thinks that Jerome Powell should have been bringing down interest rates. And he basically suggested that he wanted to fire him. So he was putting out all these different statements like on Truth Social saying Powell's termination cannot come fast enough. He accused him of not doing his job. He was saying he's always too late. He's a little slow. I'm not happy with him. I've let him know it. And if I want him out, he'll be out real fast, believe me. So he's putting out all these kind of, once again, Trump-esque statements about wanting to get rid of Powell, which then freaked out the markets because they're all thinking, hang on a minute, what?

2:52You're going to get rid of the chair of the Fed, who is, you know, this independent organisation that's really important for financial stability and credibility. but now he's come out today and he's basically said I don't want to talk about that because I have no intention of firing him so hopefully someone's had a little word in his ear and he's actually listened to them but Robert this is this you know once again it's that uncertainty it's volatility and I know you and I are going to talk about how important it is that these central banks are independent and what it could mean but just for me another thing that he's done it's it's I I mean, the mind boggles.

3:32So much confusion that the American president sows, you know, says one thing, then does another, then changes his mind again. And it is that uncertainty which has undermined business and consumer confidence so much over the weeks since he officially became president. But I think you've got to get underneath the noise. And my view is that we are at quite a big moment of history in his presidency, which is the moment of capitulation, capitulation on two fronts. First of all, he has backed off, as you say, his plans to coerce the Federal Reserve into cutting interest rates. That was absolutely spooking investors.

4:18The point about America's economic success over decades is so much of that was built on the fact that in times of crisis, investors bought the dollar, bought American assets, invested in U.S. government debt. And so much of that confidence in America stemmed from investors' belief that the independent central bank, the US Federal Reserve, was setting interest rates independently of political pressure to curb inflation, to get inflation at low levels that would not undermine either the value of the dollar or of assets. to target inflation at 2%. And it was that independence that was absolutely central to, as I say, this vital part of America's economic strength.

5:28Now, we've talked at length on this podcast about how so much of what Trump has done has undermined the confidence of investors, not just the attack on central bank independence, the Fed's independence, but also tariffs that pretty much all economists and investors regarded as damaging to America's economic strength, totally irrational. So the other aspect of the capitulation that we've seen is, you know, he said overnight, that these extraordinary, mad, excessive tariffs on China, the 145 % tariff on China, which means it's impossible for China to trade with America. And of course, we've got the retaliatory tariffs from China of 125 % on America, making it impossible for American businesses to trade with China.

6:19He has said overnight that those tariffs will come down, and he implies very, very significantly as a result of negotiation. So for me, this is the moment where the emperor has been exposed as having no clothes. Do you think... Yes, the economics of... I want to know why you think this, because it feels like he's just kind of just backing down a little bit, but it doesn't feel like he could change his mind again. So why do you think this is the moment of capitulation? Because this doesn't feel like fine tuning. It feels like statements, definitive statements that he has surrendered. He said in terms, as you pointed out, I am not going to fire Jerome Powell.

7:11Up to now, he has implied he was capable of doing that. He would do that. His advisors were saying work was going on to see how they could remove him. Jerome Powell let it be known that he was not going to go quietly. This man was trained as a lawyer. He was, as I understand it, telling friends that he has the financial resources to fight this through the courts. And quite apart from the fact that he was not going to go quietly, the markets delivered their verdict on Trump's plans to get rid of him. The dollar's weakness was reinforced. The rise in American interest rates or the rise in the rate that the American government has to pay to borrow was moving to levels that was making America's debt, the government's debt, unaffordable for Donald Trump and his colleagues.

8:13Right. So the markets have delivered their damning verdict on this aspect of policy. And so, you know, Trump has surrendered when it comes to the Fed. And I think it's worth just explaining briefly why Trump wants the Fed to bring down rates. It's really simple. He just wants to make borrowing cheaper for Americans, you know, to bring down, for example, their housing costs. costs and make it seem like they have more money. But the issue is, if this happens, is this will be a kind of short term political win, because the chances are, if people have got more money, they'll spend more, and then that will ramp up inflation, which could cause longer term economic damage.

9:02So while Trump wants to do this, so he feels like he's giving something to the Americans, the Fed are like, no, hang on a minute, mate, this isn't good news for them in the longer term, You're just going to make life more expensive. And so that's why there's this tussle. And it's really important globally that central banks are independent because of this, because of this credibility and stability that the independence brings, because they know that decisions won't be made for short term political wins. It's much more about the longer term. And that is much more stable for an economy. And in my view, equally, he has surrendered on his battle with China.

9:42And, you know, there's so much evidence of why it was doing him personally enormous damage, not just, as I say, the negative markets reaction, which I've been talking about. Just look at the results of Tesla, right? You've got this individual, the world's wealthiest man. Actually, whether he's still the world's wealthiest man, I haven't done the sums recently. He's not as rich as he was as a result of Trump's policies. But Elon Musk working day and night to cut America's public spending. Actually, the results he's showing are way less than he promised. You know, he was promising$2 trillion of cuts in America's budgets.

10:22It's what is it now? At most, a couple of hundred billion. I mean, it's a lot of money, but it's not two trillion dollars. Right. But, you know, we saw the results of Tesla overnight. Profits slumping, sales slumping. You know, two reasons for that. One is that Elon Musk has made anything associated with himself deeply unpopular. you know people just don't want to buy stuff that has the musk brand because of the what many people would say the toxic changes that he's made to america's public services and we've talked a lot about how you know the cuts to usa id are endangering the lives of very vulnerable people particularly in in places like africa places with you know low incomes but separate from that Tesla itself has basically said that the tariffs on China are making it impossible for it to build its cars, even given that its cars, those in America, are more American than most American motor cars.

11:33So if Tesla is saying, you know, these tariffs are making it almost impossible for us to make our stuff, right? What's the American president going to do in those circumstances? He's going to surrender, which is what he's done. But he was told all this before it happened. That's the mad thing about it. Everyone was telling him that there was no way it wasn't going to cost more for Americans to buy things from China and that was going to be a bad thing for them. So it's just, why has it taken him this long? And is it simply a case of the, you know, as we've discussed, the fact that it's gone up so much for them to, you know, the cost of borrowing money has gone up so much?

12:12Or, you know, did he have a nice Easter break and kind of saw sense sat by his Mar-a-Lago pool and just, you know, suddenly realised, actually, I probably don't want to fight with everyone and I should chill out a bit. But the point, the thing that worries me, though, is does this give us any certainty now? Because it doesn't feel like it does. I'm not remotely arguing that we are back to normal times yet, but I am arguing that we are at that tipping point where we will move back to something, I hope, over the next whatever it is, 80 or 70, 80 days before the period closes. which is, as you remember, Trump said, there are 90 days for countries like the UK, like Japan, like South Korea to do trade deals with him to bring the tariff rates down.

13:07I think it is very likely that the 10 % tariff that he has imposed on the entire world will stay in place because he needs the money. But the 10 % tariff the world can live with, it does put up the costs for all businesses. It is a tax on the out of every business that's not situated in the US, but we can live with that. Just as if you're a UK citizen and your taxes go up, you just adjust your spending in different ways. But 145 % is not something the world could cope with. 10 % we can live with. And I think we're just on a path now that will get us to a tariff rate for the world that is not great.

13:55It'll still make the world a bit poorer, but it's manageable. We can live with it. We can plan on that basis. We can invest on that basis. I mean, there are some weird things still going on. I mean, I noticed the Wall Street Journal has reported that as part of a UK trade deal, they are asking that the tariff on US cars coming into the UK be reduced. I think it's from 10 percent at the moment to two and a half percent. Obviously, that's quite attractive for US manufacturers. Do I think that a cut in the tariff from 10 % to 2.5 % will suddenly mean you're going to see vast numbers of American-made cars on our roads?

14:38No, I don't. It's really not going to transform the prospects for US manufacturers. But if that's the kind of thing he wants, and it means that the 25 % tariff that he's currently imposing on US car manufacturers, if that gets cut to, you know, to a half percent, that's a big win for the UK. Big win. I mean, and mentioning the UK, obviously, Rachel Reeves has gone out to Washington, hasn't she, to try and broker some deal. So should we go to a quick break and then come back to what might be going on and what this means for the UK? That would be great.

15:18Welcome back to The Rest is Money with me, Steph McGovern. And with me, Robert Peston. And, you know, I mean, I feel a bit sorry for Rachel Reeves because too often on this podcast, we point out there's been, you know, more things going wrong for her, more bad news. And there have been a couple of things that we're just going to reflect on. One is the IMF downgrading the growth forecast for the UK fairly significantly. I mean, America's growth forecast fell by more. But, you know, ours has come down a lot. I should point out that the UK is still set to grow faster than many of our big European competitors.

15:57But any reduction in growth after years of economic stagnation is bad news. At least a significant proportion of that downgrade is Trump's fault. Both the costs of the tariffs and the uncertainty created by his chaotic economic policy. It's not the whole story, though, is it, Steph? No, it isn't the whole story. And that's what I'm really interested in from what the chief economist said at the IMF, because he basically said, yes, OK, some of it is Trump's tariffs. But there are also UK specific factors that are a problem here, too. So one is utility bills and the fact that they are still going up loads.

16:36And actually, we're going to be talking to the chief executive of Ofgen, the energy regulator, about this in one of our future episodes. so you can hear more on that. But also the borrowing costs and she's kind of had like a double whammy of bad news on that front. So not just the IMF saying, hang on a minute, yes, Trump's tariffs are a problem for everyone in the world, but also you've got your own issues, love, like you have got the fact that utility bills are so high and the fact that your borrowing costs are going up. And then this week we found out that the borrowing costs are even worse than we've thought, haven't we, Robert?

17:12So there is a real sense that nothing is looking good for her. And, you know, we've interviewed her a couple of times in the last various big statements of budgets and everything else. And she kept kind of bringing out this line of not having to put taxes up again after that 40 billion tax increases in autumn. And then in the spring statement saying spending cuts were going to have to be massively slashed. But we asked her, will you have to put up taxes? And she said, you know, she kind of circumvented the question as politicians do. But it is looking likely that we're just going to have to put taxes up in the autumn, aren't we, again?

17:47Because there's no money there and borrowing costs are just going up more and more. Look, we've already pointed out that in the spring statement, she did not manage to rebuild the sort of shock absorber into the public finances that one would have liked. You know, as a result of, you know, among other things, the welfare cuts, the cuts to spending on help for those with disabilities. She did succeed in not breaking her fiscal rules, remind people what they are. One is the day to day spending should in five years time be covered totally by tax revenues, not by borrowing. And then the other rule is that her definition of the national debt should be falling in five years time.

18:42Her margin, her cushion remains tiny by historical standards. standards and the thing that has happened that you know is you know genuinely a concern for anybody working in the treasury and must be a particular concern for her is the disclosure by the office for national statistics that borrowing is running at levels that are significantly higher than her independent forecaster the office for budget responsibility had been forecasting. And just to illustrate in a way, you know, how serious and disappointing these borrowing figures were. So public sector net borrowing came in above 16 billion for the month.

19:31And most economists were forecasting sort of 3 billion less than that, right? So that's a 3 billion, more than 3 billion difference, actually. But here is where it's really interesting. Okay. Tax revenues were actually a bit higher than most economists. So, for example, those at Capital Economics were expecting tax revenues a bit more than£90 billion. Actually, they turned out to be£93.5 billion. So if you're a chancellor, you say, yippee, you know, more money is coming in. And it does sort of show that there is perhaps a little bit more activity in the economy than people thought. However, what's gone wrong is that public spending is 14.6 billion above what the OBR, the Office for Budget Responsibility, was forecasting only a few weeks ago.

20:30Right. And that is the bit of it that is going to concern those who lend to the UK. Despite the fact you've got a government saying it's going to rein in spending, that at the moment spending is way above what the official forecasts were. And it means that, you know, there's a very, very, very good chance that come the autumn when she has her budget, she will once again be in breach of her own fiscal rules. And at that point, she faces a very uncomfortable choice. She can either cut spending again. And at the spring statement, she already created a meaner envelope, to use the technical term. She already squeezed the resources available in coming years for public services by a little bit.

21:20and so she faces a very uncomfortable choice in the autumn between cutting spending more and if you are not among the so-called protected departments of health and defence, you're going to feel very uncomfortable and very worried about that or she's got to put taxes up again and against a backdrop where none of us, if you're a business, you know you are struggling to absorb significant rises in costs whether it is the national insurance rise whether it's the rise in business rates you know whether it's the rise in the national minimum wage and if you're a household energy costs rising again you know it's not as though your living standards are going through the roof even though you know the data on what's happening to wages is that wages are rising more than inflation.

22:18So there is a bit of an increase in living standards, but not such that anybody would think, oh gosh, I really feel it's a great time for my taxes to go up. So the autumn could be, again, really difficult for her. And the problem is as well, because we keep going on about uncertainty and all the uncertainty Trump has created, but also now people are just going to be speculating until we get to the point where she tells us what these tax rises or spending cuts might be. And that will stop investment. So people, you know, who will be considering investing, whether it's taking on more staff, whether it's, you know, building a factory here, all the different levels of investment, they'll be thinking, well, hang on a minute.

23:02Is it going to be worth it? Could this tax quote, could that? I was just looking now at a message that I've had from a business partner who said, hey, I thought I'd just give you the latest on the warts and all of what's gone up for us in taxes, because obviously we've now started the new financial year. And he's like, increase in business rates risen from just over six grand to over 18 ,000 a year. That's 186 % increase. Service charges, they've gone up by 22%. The rise in national minimum wage, employer national insurance contributions have, again, gone up double digits for us. So already businesses are taking the brunt of this in terms of tax rises with the promise from Rachel Reeves in autumn that she wouldn't come back for more.

23:51She's going to come back for more. So what do we as business owners do? Do we go, well, hang on a minute, let's just see if we can get through this year and then think about investment next year. When originally we were planning to open more, and actually we've opened a few more actually this year, but we could have done it bigger and faster. And that's more jobs. We employ over 100 people. That's more jobs. That's more in the supply chain as well. It's more money and tax revenues. But it's crippling for a business at any level to just work out what to do in uncertainty. When you know what's coming, you can plan for it and, you know, cut your cloth the causing knee.

24:30When you don't know what's coming, it just puts you off doing anything. Look, part of me says, given that Trump represents what economists would call an exogenous shock, that is a shock to the economy beyond the control of the government. I thought that there was an argument for saying, you know, these are such exceptional times that you would at least temporarily perhaps suspend the fiscal rules and just say, look, let's ride through this cycle and we'll get back to them, you know, as and when, you know, the Trump shock diminishes, as it were. But I put this to the prime minister when I saw him in quite a long interview about the economic choices.

25:12It was only a couple of weeks ago. And he was absolutely unambiguous that there are no circumstances in which they will change or break the fiscal rules. I mean, the reason he said it was perfectly clear at the time, there was genuine risk that as a result of the Trump shock, that the UK public finances would be perceived as too weak to withstand them, particularly if the Chancellor was not resolute in trying to limit public spending and rebuild the strength of the public sector balance sheet. And so he made a totally unambiguous statement, as I say, no circumstances in which they will either change or breach the fiscal rules.

26:00And he didn't just say it once, he said it repeatedly, because they are deeply anxious that international investors would start selling the pound and sell UK government debt in a way that would make life even more difficult for them. So they have nailed their colours to the mast. And it does mean, if it seems likely, the fiscal rules are breached, taxes will have to go up or public spending will have to be cut. You know, they have made their decision, this government, they have made their decision that their primary responsibility, they say that growth is their number one priority. It isn't right.

26:37Their number one priority they have made clear is honouring their fiscal rules. And that does mean, whether it's taxes or public spending, that they are going to have to make some very difficult choices. yeah but i always like to be optimistic to end this i would say the one thing we're good at as an economy is dealing with uncertainty in the sense that we still crack businesses just get on with it don't they they just deal with it and get on with it and they might not invest as much and they pay more in taxes and we lose some businesses and all of this but there's also a strong industry here of entrepreneurs, of resilience, of people who just plough on through and just control what they can control and try as much as they can to ignore the politics and all the noise around that.

27:36Because quite often, that's all you can do in life, isn't it? Look, as individuals will get through it, but it's also very important not to confuse the ability of any individual business or consumer to cope with, you know, the macroeconomic impact. And, you know, It is just, I'm afraid, inevitable that with heightened uncertainty, people do spend less, businesses do invest less and we are poorer and we are going to just have to grit our teeth, accept that and we'll get through to the other side. Anyway, I think that is a suitably, what should we say, realistic moment to pause. We'll be back with everybody again in just a few days.

28:17Unless something happens, Robert, if something happens, you'll be texting me at 11 o 'clock tonight on the group chat. And we'll be back on air in two hours, yep. Yeah. But thank you very much for listening. That's it from us on The Rest is Money. Bye-bye. Goodbye.