Holtz-Eakin Says No Rate Hike Would Undercut Fed Credibility

Show Transcript

Bloomberg Sep 15 10:06 · 9581 Views

Douglas Holtz-Eakin, President of the American Action Forum and former Director of the Congressional Budget Office, says the Federal Reserve should raise interest rates this week and warns that failing to do so would undercut its credibility as inflation remains its central challenge. He also calls President Donald Trump’s proposed $5,000 dividend checks an “unthinkably large” stimulus that could force the Fed’s hand, arguing that Washington has shown little fiscal discipline as borrowing costs rise and the government moves closer to borrowing simply to cover interest on previous debt. He speaks with Kailey Leinz on Bloomberg’s "Balance of Power."

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy. Read more

Transcript

00:00 When the president announced these $5000 Trump dividend checks
00:04 on the stage in Dallas, TX last week, what was your immediate reaction?
00:08 What would the consequence be if he were to follow through on this?
00:12 This is just unthinkably large.
00:15 The closest parallel would be the American Rescue Plan
00:18 the Biden administration
00:20 passed in
00:22 2021 and which spawned the inflation they were still fighting.
00:25 I mean, so
00:26 to put a $1.2 trillion stimulus into the US economy
00:31 at full employment
00:33 with, with inflation, you know, cornflation is still running at 3.
00:36 It's just a, a huge policy error.
00:39 But
00:39 there's no way that should happen.
00:41 And we'd be
00:42 either fighting the inflation or the Fed would Jack up rates and we'd we'd fight a recession.
00:46 But I mean, this just
00:47 forces their hand in a way that's unthinkably bad.
00:51 Well, and I want to get to the Fed in a minute, Douglas.
00:54 But if we consider what we saw in the bond market today, which was briefly the 10 year yield topping
00:58 5%, we know the 30 year yield's been hovering at
01:01 the highest level we've seen
01:03 in a couple of decades.
01:04 Even if the president can't follow through, if Congress doesn't bless this, what signal does this send to financial markets about how realistic
01:11 this administration is about the concept
01:14 of fiscal consolidation that the president, the Treasury Secretary was teasing just weeks ago?
01:19 You
01:20 know, the administration doesn't have a strong hand.
01:22 This president's never shown any real
01:25 fiscal discipline.
01:26 The secretary of treasurer's been trying to make the case that they understand the problem, that growth can solve the problem.
01:31 That's a that's a risky bet at best.
01:33 And this undercuts him.
01:35 So
01:35 it would be a good idea for the administration to get all its economic officials
01:40 and the president talking from the same song sheet at a minimum, and actually doing something would be better.
01:47 Well, as you
01:48 say, that there's no real fiscal discipline in the Republican administration that is currently in power.
01:52 It's striking because you have a history of working for Republican George HW Bush.
01:57 You directed the CBO under George W Bush, You were the chief economic policy adviser to John McCain's 2008
02:03 presidential campaign.
02:04 I just want to tell our viewers what where you're coming from here.
02:07 With all of that experience, do you now see the Democrats as the more fiscally responsible party, or is there simply not one in Washington anymore?
02:14 I think it's the latter.
02:15 There simply isn't one in Washington anymore.
02:17 I
02:18 mean, right now,
02:20 out on the campaign trails, some of the progressive Democrats
02:22 are promising things that are much, much bigger than what the president promised.
02:25 So
02:26 though I can tell you those don't add up either.
02:28 So,
02:29 you know, we really do need
02:32 people to pay some attention to
02:33 the bond market.
02:34 Certainly, it's sending a signal.
02:36 The rating agencies, when Moody's downgraded Treasuries, they said
02:40 you have too much debt and interest takes too much of your revenue.
02:42 I mean, that's not a complicated message
02:44 that says do something, cut the spending, control the growth of
02:48 the entitlements, do things you need to do so that you get the house back in order.
02:53 And so far, no one's shown any interest in doing that
02:57 well.
02:58 And as we consider where bond yields are a 10 year above 5%, how does that directly translate into the interest burden
03:05 of the US and the payments that the government has to make?
03:09 The
03:10 right now business as usual is for the federal government to borrow $2 trillion a year, 1 trillion of which is interest on previous borrowing.
03:16 So that's that's half of the borrowing is just covering the previous credit card.
03:20 We have to roll over something like $9 trillion in the in the next year.
03:24 So all that's going to be repriced at higher rates.
03:26 And so that that tree is going to turn into something much, much larger.
03:30 And, and we're close to simply borrowing to pay off previous borrowing.
03:33 That's,
03:34 that's a
03:35 place where you're getting a new credit card to replace the old one.
03:37 And we all know that's, that's when you're in trouble.
03:39 So we can't go there.
03:41 It's time to just stop digging the hole and, and, and take a course correction.
03:46 Well, and of course, as we watch interest rates go higher, the president argues that they should be lower in part because he says that the country is doing so well, viewing it perhaps
03:57 as
03:57 a real estate guy, historically, Douglas, he thinks you should get a lower rate if you have better credit worthiness.
04:03 But to your point on the ratings agencies, that isn't necessarily
04:07 true when there's concern over the fiscal trajectory.
04:10 And therefore the full faith and credit,
04:13 believe it or not, right now, 30 year Greek bonds have a lower interest rate than 30 year Treasury bonds.
04:18 That's a, that's a,
04:19 that's a lesson.
04:20 So, you know, it's time to wake up and and get serious about this.
04:24 I understand no president wants higher rates, that they all want lower rates.
04:28 He's not unique in that regard.
04:30 But the reality of the situation is that
04:33 the Fed could very well raise at the short end
04:35 this week
04:36 and it would send the message and the long end would come down.
04:39 The president should welcome them that that's the right thing to do.
04:43 Show that you'll lean against inflation, show that you'll lean against overheating.
04:47 That's that's the Feds real job right now.
04:48 The markets telling it to do that.
04:50 It needs to step up and do that.
04:52 OK, so if the right thing to do is a hike, what is the consequence if they do not?
04:58 I think it's it's.
05:00 Undercuts this Fed's credibility.
05:02 I mean, they,
05:03 the, the Fed needs to rebuild his credibility overall for having let inflation get out of the, the bottle and not getting back to 2%.
05:11 There's a new chairman there who has to establish his credentials.
05:14 I think a failure to take this opportunity
05:17 really, really is harmful to them.
05:20 You know, the Fed has a dual mandate.
05:21 Everyone knows that.
05:22 But there's no trouble on the employment mandate side.
05:24 We're at 4.1% unemployment.
05:26 We're we're creating enough jobs, particularly the slow growth in the labor force,
05:30 that's not an issue.
05:31 So it's A1 mandate Fed and that mandate
05:34 is inflation.
05:35 And right now core inflation is heating up, not not cooling down.
05:38 So that's what they have to take care of.
05:42 Well, as we talk about the feds mandate, I wonder your view on the mandate of the Treasury Secretary, as Scott Besson, of course, has
05:49 amped up buybacks in order to rein in the long end as we were discussing trying to
05:53 get a handle on higher borrowing costs there.
05:56 But he also has
05:57 gotten involved in intervention with the yen.
05:59 He has suggested recently that he's the house
06:02 bet against him
06:03 if you dare.
06:05 Douglas, I just wonder what you think about what we're seeing from Beston.
06:08 And keeping in mind that he's testifying in the house,
06:10 house tomorrow.
06:11 What would you be asking him if you were a lawmaker and had the chance?
06:15 I would like to know why he thinks he can,
06:18 you know, buy back $6 billion in a $30 trillion Treasury market and materially change pricing
06:24 for any length of time.
06:26 Just
06:27 walk through how that's supposed to happen.
06:29 So that's, that's just the mechanics of this.
06:31 And I don't think there's anything there.
06:32 Why are you intervening, intervening on behalf of the yen?
06:35 What is the what is the interest of the United States in doing that?
06:38 It's never really been explained.
06:39 Why did you use euros to do it instead of dollars?
06:42 Why the unusual financing that needs to be explained?
06:45 And I think someone might just want to pull them inside and say, look,
06:50 you're not back trading currencies anymore.
06:51 You don't.
06:52 You don't
06:53 tell people you're the house and dare them to come get you.
06:55 You took down the pound.
06:57 Don't.
06:57 Don't put yourself the position having someone come after you.