Catherine Rampell and Stephen Witt: Can We Avert Economic Disaster and the Robot Apocalypse?
The Bulwark Daily
Tim Miller hosts Catherine Rampell and Stephen Witt in a dual discussion on economic policy and AI risks. The episode covers the Federal Res
Key takeaways
- The Federal Reserve faces a difficult balancing act between curbing inflation and avoiding economic stagnation, especially with high job market resilience.
Main topics
- Federal Reserve interest rate policy
- Inflation and stagflation risks
Notable quotes
"If you're a hawk, if you are someone who is biased toward being more worried about inflation, you'd be like, okay, I'm less concerned about these knock-on effects."
Conclusion
The episode underscores the interconnected risks of economic mismanage
Transcript preview
Speaker 5 (0:13) Hello and welcome to the Bulwark Daily. I'm your host, Tim Miller. We have a massive show today. It's a doubleheader. We're doing economics. We're doing AI. So I don't even have time to get to my guy, Thomas Massey, bringing the articles of impeachment against Peter Brian Hegseth. So go check out the next level. It's already up. We had Edgar in for Sarah Longwell. We get into impeaching Hegseth, other impeachment ideas that we have. and other political news of the day. On this show, in segment two, I bring in the author of a New York Times column titled, This is Really Bad, which is just squarely targeting us here at The Bulwark. You know, I mean, that is clickbait for me if I've ever seen it. This is really bad. It's about the AI vibe shift. And I think it's Speaker 4 (0:56) a Speaker 5 (0:56) worthwhile conversation, Speaker 4 (0:57) particularly if you're trying to make sense of the changing narrative and discussions around Speaker 5 (1:02) the AI threats. But first. She's the economics editor here at the Bulwark, author of the Receipts newsletter. And coming up on Friday, a new podcast also called Receipts. It's Catherine Rappel. What's up, Catherine? Speaker 1 (1:16) Hey, thanks for having me back. Speaker 5 (1:18) All right. Welcome. The new pod is going to be in its own feed. So people are Speaker 1 (1:22) going Speaker 5 (1:22) to have to go get that. Go sign up on Friday. Make a little note for yourself right now. And we're really excited about it. What's going to be happening on the pod? Do you have any little teaser for people? Speaker 1 (1:32) For this week, well, we shall see what happens with the Fed today. We're recording this. I should let our audience know before the Fed announces what it's doing with rates. It's probably going to raise rates today on Wednesday. And my expectation is that the president will flip out when that happens, but I don't know. But assuming that that happens, I think that'll probably eat up most of the conversation like for the next week. So we'll be talking about. Plenty of that stuff and other crypto scams and various other things happen in the world. Speaker 5 (2:07) A lot of great economic news. We'll do a little teaser of it right now. Let's talk about the potential state of play. I mean, you said kind of what we think is the baseline expectation for the Fed. But just kind of backing up for people, why does the Fed feel in this moment that they need to raise rates? I mean, we're going to get into the sex, but bond rates, mortgage rates already going up, you know, for reasons. unrelated to what the Fed is doing. Sort of related. Speaker 1 (2:30) What Speaker 5 (2:31) is it about what's happening in the economy that is going to lead the Fed to raising rates? Speaker 1 (2:36) Well, we've had high inflation for over six years at this point. We have a new Fed chair who most of his life has been an inflation hawk, meaning that he has a bias towards raising rates higher and to deal with inflation. That's usually the prescription for dealing with inflation is higher short-term interest rates. So if you take him at his word that he deeply believes that the solution for inflation, for getting stable prices, which is the Fed's responsibility, is tighter monetary policy, which he criticized his predecessors for not having. If you think that he deeply believes that and he wasn't just saying it for political reasons while there was a Democrat in the White House, that is what you should expect the Fed to do today. And he basically said as much in a recent speech where he kind of boxed himself into a corner where he told markets more or less like, unless we see something, some kind of major improvement on the inflation front in the next few weeks, it's up to the Fed to deal with it. How Speaker 5 (3:39) do you think you're balancing? I mean, at some level, inflation has been high, but it came down. I mean, it depends on kind of which sector we're talking about. Obviously, we're seeing a ton of energy inflation, but that's... There's some external reasons for that. But job growth is also, it's not great. I mean, it beat expectations a little bit in the last report. But how do you balance that, right? Like, it's not exactly like we have a booming job market right now. Speaker 1 (4:02) Yeah, well, that's basically why the Fed has held off on raising rates for a few years, despite the fact that inflation is high. Like I said, normally the prescription for dealing with high price growth is you raise interest rates, which... makes it so that like money is a little bit more expensive. People don't spend as much money. They don't go out and buy as many cars and houses and whatever stuff they might put on their credit card, et cetera. That's the mechanism. Speaker 3 (4:28) However, Speaker 1 (4:29) because we have had kind of a stagnant labor market and because we have had a bunch of these other interventions from this president that have slowed the economy more broadly, I'm thinking about tariffs, for example. That has made the Fed say, look, I know we're worried about high inflation, but the remedy for dealing with high inflation might kind of have these unintended consequences of killing the recovery, killing the economy. And if we're worried about the health of the economy, maybe we don't want to deal as aggressively with inflation. It's this term stagflation. which Speaker 5 (5:10) people Speaker 1 (5:11) who were around during the 70s may remember. It's the idea that you have high price growth and you have kind of a weak economy. And the thing that you would do to deal with one of those problems will make the other problem worse. So they've kind of been in like a holding position where they're just not raising, they're not neither cutting nor raising rates. And so that's the situation they've been in. But now the economy, the job market, like... seems like it's holding its own. It doesn't seem like we're in a recession. It doesn't seem like we're losing jobs. We're not gaining a ton of jobs. We're also not losing a ton of jobs. Maybe that means, again, if you're a hawk, if you are someone who is biased toward being more worried about inflation, you'd be like, okay, I'm less concerned about these knock-on effects, these unintended consequences. I'm more concerned about keeping our eyes on the prize and dealing with inflation, raising interest rates. And again, that is how Kevin Warsh has generally been understood to think about these problems, which is part of the reason why it was so weird when Donald Trump chose him for this job, because Donald Trump, the only thing he cares about is cutting rates. And I think part of the reason he held off on making a decision about who to appoint as Fed chair is that like markets maybe seem to trust Kevin Warsh, but he was viewed as a hawk, which is the opposite of what Donald Trump wants. Speaker 4 (6:29) And Speaker 1 (6:30) so the real question is like, how does. Kevin Warsh navigate this really difficult position that he's in, where clearly the guy who thinks he's Warsh's benefactor is expecting him to cut rates and markets and everyone else is telling him to raise rates and his own like general outlook on the world would suggest he wants to raise rates. And so that's the thing that I'm wondering about is like, how is he going to deal with the inevitable ire and potential lawfare from this president that his predecessor dealt with? Speaker 5 (7:01) All right. Well, if Donald Trump has a diaper tantrum today, you'll be around on Friday on the new show to discuss it. Speaker 1 (7:07) Yeah, yeah. The other Speaker 5 (7:08) Warsh thing is actually just totally a side point because I saw it this morning is there's a brewing scandal in Greenland. You know, it's Warsh's father-in-law, Lauder, that was like one of the big proponents, friend of Trump, of the gambit that we need to go seize Greenland. It seems like there's a corruption scandal up there, but we're paying off. you know, maybe some of the pro-America factions or pro-America person in Greenland. And Lauder was one of the people that was feeding money to a pro-Trump, whatever, advocate in Greenland. So potentially a lot of drama around the family table over the next week. Speaker 1 (7:42) Wow. I had missed that. It's like it's all one mono scam in some ways, you know? It's like... Threatening to invade our allies also intersects with debasing our currency, also intersects with destruction of rule of law. Like all of these things are related in creative ways that a very clever author couldn't have come up with. Speaker 5 (8:03) We couldn't have drawn up. And the bond market is acting, as you said, it's related, but it's also acting in some ways independent of what's happening with the Fed. We have here from this week, the 10-year note rose above 5 % for the first time since... 2023. U.S. mortgage rates are now up over 100 basis points since their February 23rd low, which was the week before the Iran war began. Maybe a coincidence. Who knows? And the average interest rate now in a new 30-year mortgage hit 7.2%. Hopefully, none of our listeners are trying to buy a new house or sell a house. Or Speaker 1 (8:38) refinance. Speaker 5 (8:39) Or refinance a house. I mean, that's brutal. Speaker 1 (8:42) Yeah. Yeah. It's totally brutal. And everything that this administration has done to try to, I don't know, keep the inevitable from happening has just made them look even more feckless. So you have these long bond interest rates rising for a few different reasons, some of which are related to Donald Trump and some of which aren't. So among the issues are inflation has been elevated and interest rates tend to go up when price growth is higher. So that's why I said it's like not totally unrelated to the Fed. We also have a huge amount of debt. in this country. And that's, again, something that precedes Donald Trump, but he has definitely made worse. When a country has more debt, the people, companies who are lending to that country, which is what these government bonds are, tend to demand higher interest rates because they're like, we're not really sure you're going to pay it back. At least that's how it works in other countries. We've kind of been insulated from that sort of feedback or that sort of investor. demand because we have the world's global reserve currency. And so like we've played by different rules than everyone else, but maybe we're kind of losing the privilege to behave that way, that recklessly. So there's, there's that that's happening. There's also a bunch of like AI companies that are issuing their own debt because they're trying to build new data centers or whatever. And so like when they're issuing bonds that they're competing with American. government bonds. So like that, that means that like some of the money gets siphoned away. And so the American government has to offer higher interest rates to entice people to lend us money to buy our bonds. So like there's a bunch of different things that are happening. And again, some of them are related to Trump. Some of them are not related to Trump. Meanwhile, the things that they are doing to try to stop this from happening have worsened everything. So that's like Scott Besant, the treasury secretary saying, we are going to buy up a bunch of these bonds ourselves. And so if they buy more bonds, that should drive these interest rates lower. Because if you have more people who are buying the product, again, the interest rate doesn't have to be as high to entice buyers, right? So this is what he said he was going to do. He said he was going to do this like a month ago. And basically the rest of the market was like, yeah, you don't have a big enough bazooka. You don't have the ability to buy enough bonds to move markets. this way. And so they called his bluff. And he has been sort of flailing ever since demanding that people respect him. Yeah, Speaker 5 (11:15) why don't we play a little bit? Speaker 1 (11:15) Yeah, yeah, yeah, let's play. Yeah, Speaker 5 (11:16) megalomania, megalomaniac Scott Besant presiding over an economy where people have to pay 7 % for a 30-year mortgage right now. This was him on a panel puffing out his chest a little bit. Let's listen to that. Speaker 4 (11:30) Whenever people say, oh, well, Treasury Secretary's taking a risk, I say, well, It's my dream. I have asymmetric information. I am the house now. So when we intervene with the Japanese yen, I have pretty good insight into what the Japanese, what the Bank of Japan is going to do, what Japanese policymakers are going to do. And you can bet against me if you want. Speaker 5 (12:05) I might. I don't know. Donald Trump has bankrupted a casino before, so it wouldn't be the first time that the House has lost. Speaker 1 (12:12) Yeah, exactly. So I would point out a few different things that are problematic about this very hubristic comment that he made. He's like, I'm the house. I can do whatever I want and you can bet against me if you want, but you're going to lose. First of all, it doesn't seem like that's been bearing out so far. Like I said, markets kind of called his bluff. He was trying to get interest rates down. Instead, they went up. Maybe in the long run, he'll be right. And, you know, all of those things that I laid out that were driving up interest rates are going to go away. Speaker 1 (12:41) Like he won't be pushing on a string here, but I think that's pretty unlikely, but I don't know, you know, like there are professionals who may feel differently. But the idea that like he has so much more insight in all of this is just. It's both hubristic, but it's also kind of ironic because Scott Besant made his name as an investor, as a trader working for Stan Truckin Miller, this legendary investor. And one of his most famous ways that he made money, one of his like big claims to fame was that he bet against another hubristic government for trying to basically. In this case, it was the UK, the Bank of England. They were trying to hold up the value of the pound. And he was one of the market participants who called the bluff and said, you don't have enough bazooka power to do this. It's very similar to what's happening now. He's on the other side of this. He's basically mocking markets for making a bet against him in the same way that he made a bet against the Bank of England. So he should know better than most that when a government is... trying to like put a bandaid on a bullet wound, you know, like they're, they're, they're like trying these little feckless things around the edges to, to stop the inevitable from, from happening, they're likely to lose. So he should know that he is not in this all powerful position just because he says, this is how things are going to go. Does not mean it's. how it's going to go. Like the fundamentals are not on his side, just as they were not on the side of the Bank of England back in whatever it was, 1992. It's Speaker 5 (14:18) also 2026. Like he doesn't have that much more information than people actually. I mean, he might know what Donald Trump's about to bleat. And like that might help him with some short-term bets, right? Well, Speaker 1 (14:27) he probably does have some access to information about like the plumbing of the financial system that normies out there don't have. So I'm not going to suggest that like he does not have. You know, he doesn't have more information than the rest of us. But the main things that matter in all of this are, again, like things that he doesn't have the power to overcome. Those are high inflation, government debt, and these AI companies issuing their own bonds. Like those are a common set of facts. Like whatever inside information he might have about lots of things going on in the financial system cannot overcome like these overwhelming forces that are pushing up. interest rates. And so again, he just kind of looks feckless in all of this in a way that is going to make a lot of people a lot of money in the same way that he made himself and Stan Druckenmiller a lot of money back in 1992. And it's like, he cannot see the irony here. He cannot see how the tables have turned. And instead he just kind of like lashes out. And, you know, you play this clip of him saying, I am the house. He also complained about the Bloomberg Terminal Bros. The Bloomberg Terminal people. And it's like, you were one of those Bloomberg Terminal Bros, bro. That's exactly what you did. Apparently, just as an aside, part of the reason he might have been like calling out Bloomberg specifically by name, Semaphore had a good article about this, is that... He has been pissed at Bloomberg for reporting, I don't know if it was a year ago, about how he had two primary residences. In the same way that, like, Trump is going after Lisa Cook and some other people for supposedly lying on their mortgage documents, which they've denied, Bloomberg had a story, like, a year ago about how he was doing the same thing. And he threatened them, according to Semaphore, and said, like, if you... If you publish this story, I'm not going to go on Bloomberg. The free speech Speaker 5 (16:15) administration. Exactly. Speaker 1 (16:17) Yeah. So anyway, that's like a whole other inside baseball thing. But like, obviously, Bloomberg historically has pretty good relationships with Treasury because their customers need data and, you know, hopefully access to administration insights and things like that. And he's been throwing a hissy fit for the past year. And I think that that is. finding new ways to whatever, reach the world, to like have visibility. He's lashing out at Bloomberg. He's lashing out at people who were betting against him, maybe not realizing that he was in that position 30 years ago. In Speaker 5 (16:54) the same boat, yeah. Speaking of Bloomberg, this is not financial advice for anybody listening to this podcast. Please, if you saw what's happening with my Charles Schwab account, you would not be following me. But I will say that a lot of chatter out there that if rates get much higher, historically... This has been a time that's led to big market corrections. I got a laugh at somebody that posted one of these finance posters who was like, you know, the last time the yield rates reached this high was in some month in 2007. And I've got good news for Mr. Trump. By November of 2008, interest rates were way down. Speaker 1 (17:27) Yeah, exactly. Speaker 5 (17:28) Well, Speaker 1 (17:29) you know, I was talking about like Kevin Warsh is in this very difficult position where Trump really wants him to. cut interest rates and all the fundamentals and his own like world philosophy suggests the opposite. In some ways, the only thing that could really save Kevin Warsh and appease Donald Trump would be a massive recession. A Speaker 5 (17:48) recession. Speaker 1 (17:48) Right? Like those are the conditions in which we would actually cut interest rates, but obviously it would have a lot of other problems. You don't want to be rooting for a recession unless you're a