The Federal Reserve has finally stood up to Trump. For the first time in three years, it raised interest rates despite the president's protests. Not bad for Fed Chair Kevin Walsh, once written off as nothing more than Trump's sock puppet. But will it work? Can the Fed reign in a cost of living crisis and calm those bond markets.
And while the Republicans are crashing the economy, where are the Democrats, Caddy? They need a plan. And I have a few ideas. Meanwhile, in the Middle East, the US has refused to back Saudi Arabia's war in Yemen while secretly meeting Houthi leaders. You heard that right. Washington sidelined a key ally in favor of a US designated terrorist group. Go figure. Why? Stay tuned to find out.
I want to go to the Fed for a second because Trump tried to defend Walsh last night. I don't know if you saw that because you're in Hong Kong. He told one of the CNN journalists that, you know, Kevin called me. He wants the lower rates, but he's got a unanimous decision by the board and the board is really bad for America and they're really bad people. But Kevin's a good guy because in Trump's mind, I know how he thinks. He's got egg on his face. In his mind, he wants the rates to be lower. But the United States, Caddy, could never do what Trump is asking if they want to maintain their status as the reserve currency. Trump is saying that rates should be 1% or less because we are the best credit in the world by far. That's literally a quote from him. But I just want to point out to everybody listening, you can't have core 3.3% inflation and have 1% rates on your overnight yields. Okay? That is not sustainable for a country and that would break down the fabric of trust in our financial system which is still the deepest most liquid market in the world.
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Yeah, I mean that's basically what Kevin Walsh said, right? He gave a very brief press conference. He said, 'Inflation is too high. I am going to have to do something about it.' He hinted at the fact that there could be another rate raise coming later this year as well, which is what investors here in Hong Kong certainly expect there to be. I thought it was interesting two things. One, he didn't give Kevin Walsh a nickname, which always is a strange thing when Trump doesn't call you out with a nickname. Remember, 'Too Late' Powell. Anyway, for the moment, Walsh seems to be on good ground. And I think it's because Walsh has played the politics of this much better than Jay Powell did. Walsh lobbied, you and I know this. He fought hard for this job. He has wanted this job for a very long time. He lobbied Trump very well. He's a little bit kind of Mark Carney-esque. He's been very good at getting inside Trump's head. He signaled to Trump that this was coming. He gave Trump a bogeyman that he could fight against, which was the board of governors. So there was another enemy that Trump could call out here. He didn't have to call out Kevin Walsh, who after all Trump had said is straight out of central casting. And I think for the moment Walsh is safe, the question I have is how many more raises before Trump turns on Walsh more ferociously.
And does this do enough, Anthony, to reassure people who are looking at this weird and I want you to explain this to me because it's what I'm hearing here in Hong Kong is the US economy is so confusing at the moment. On the one hand, you have the equity markets going bananas largely on the back of AI investment and at the same time despite this raised real concerns about the longer-term state of the US economy, namely the tariff policy, the deficit which keeps ballooning, the lack of competence, people are talking about quite openly now, lack of competence around economic policy with Bessent trying to buy up bonds in order to calm the bond markets. So, so does this do enough? I guess it does enough, doesn't it, to reassure people that the Fed has some independence? And maybe that's the most you can expect.
It does send a signal to the bond market that he's on top of it. And what you don't want to have happen, the 10-year, which Bessent really did not want to go through 5% is now over 5% and now we're looking at expectation management. We don't want it to get to 5.5%. And just to remind people why that would be so important, interest rates are the physical gravity of financial assets. So the higher the rates are, usually the assets go down. But in addition to that, when borrowing costs get high, you're constraining the growth of American businesses. You're constraining capex spending. That would be the AI capex cycle boom that's helping the market, but also other elements of capex spending. But what we're leaving out of the analysis, Caddy, which is we have to explain to people is what the president did. The war in combination with the tariffs has sent the affordability crisis to the moon.
You mean that crisis? That's a hoax, that one, the affordability hoax.
The hoax. And that gas prices are going to be down right after the midterms and all that other stuff. But just think about Bessent is talking to the Congress, our Secretary of Treasury, and he's blaming the crisis on Joe Biden, and they're looking at him like, 'Well, how many more years are you going to do that for? You're two years now into the Trump presidency.' But I want to explain this quickly to people. CPI hit 4.2% in May. That is a direct result of energy prices going up, Caddy. The war's cost in terms of the Treasury just writing checks is about 39 to 40 billion. That's the estimate. But you have another 150 or so billion dollar of energy prices that now need to be absorbed by the Americans. And that doesn't include what's going on here in the United Kingdom or around the world. But just hear me out for a second. $2,400 a year in additional spending on energy for the average American. That's your utility bill or gas bill, etc. And this is the stuff that I am shocked by, Caddy. And if you please push back and tell me differently, why are we not hearing from the Democrats? Why hasn't a Democrat got to a microphone with a whiteboard and said, 'Okay, this is what the president's doing. He campaigned on affordability. The number one issue in the United States is affordability, and he just took the affordability crisis and exponentially made it worse. And here's how he did it.' Why are the Democrats so flatfooted on this issue?
I actually don't know that that's a fair reading of Democratic candidates around the country. I mean, if you look at candidates like El-Sayed, you look at candidates like Talarico, you look at Roy Cooper, I don't hear a Democratic campaign ad at the moment that doesn't have the word affordability in flashing big red letters. I mean, that's why Trump is calling this a hoax because they're saying that Democrats invented the word. So I actually think Democrats have got on board. They've kind of abandoned, you know, what AOC calls wokeism around identity issues, which was certainly the issue in the 2024 campaign. And this time it's around class issues, which is another way of talking about affordability. They're basically saying whenever they can, the fat cats are getting richer, but you are paying, and here are a couple of the numbers. You're paying $4.30 for your gas, which might sound, you know, like nothing per gallon to Europeans, but is a lot for Americans. Your mortgage rates are now at about 7%. So, the cost of your housing has got a lot more expensive. The cost of your car payment has got a lot more expensive. The cost of your groceries, the cost of your beef is up. Whatever the White House wants to say. It's why Talarico is ahead in Texas at the moment. It's why Roy Cooper is ahead in North Carolina. It's why El-Sayed is a little bit ahead in Michigan. It's why you've got these Democrats ahead. It's purely this issue of affordability. And I think it's the thing they are campaigning on the most. I'm hearing it in all of their campaign ads. You're not hearing them talk about it.
I don't know. I do hear it tepidly. If I look at the polling, okay, the Democratic party favorability is still underwater by 12 points, right? But they are ahead of the Republicans when it comes to the economy, which is shocking, right? They have an approval rating of like the local cable or the IRS. I mean, they're not doing well in a situation like this. There's something wrong with their communication in my mind. So, let me ask a follow-up question on this. And so, what policies are the Democrats putting forth? Yes, I'll accept what you're saying that there are Democrats that have less of a profile than Donald Trump that are talking about the crisis, but what policies are they putting forth?
I think that's a really good question because I hear them talking about affordability and that they will bring prices down. But I suspect the reason that you're pointing to Democrats' low approval ratings is that no one apart from saying, 'Okay, we are going to get out of the war in Iran and that will bring down gas prices.' If you're on the Bernie Sanders wing of the political spectrum, you're talking about wealth taxes. If you're on the Mankiw wing of the political spectrum, you're talking about, you know, a luxury penthouse tax and that kind of old-fashioned redistributive policies. But I don't hear people buying that. And I think that's why the approval ratings of both parties are particularly low because people are smart. They know that inflation is hard to come down from. If you actually, if you listen to Kevin Walsh and I've spoken to Kevin Walsh about this several times before, what you really need to do is have the kinds of reforms that would shrink the American deficit and that would lead to lower interest rates which would lead to lower prices. But good luck doing that because I'm not hearing a single candidate on the campaign trail at the moment talking about the kind of structural reforms that the American economy actually needs. Are you? I mean that is 2012 talk. That's the broader point. So they're so off message. Hakeem Jeffries actually has something. He's calling it fighting for an affordable America agenda. You know, he's talking about lowering the cost of groceries. Doesn't say how. Lowering the cost of gas and housing. Again, doesn't say how. It's mostly about ethics and tying down Donald Trump and providing guardrails against Donald Trump's corruption and his family's corruption. There's nothing in there that talks about an economic plan that can incentivize lower prices or an economic plan that can create more housing, more supply of housing, etc. So, so I'm just making the point, guys, get it together. You've got a negative approval rating because you're not doing a good job communicating what you're going to do to fix the problem that the country is most worried about.
Okay. So, let me make you, we're going to do some role play. We like a little bit of role play on The Rest Is Politics US. How tall am I? Am I tall in this?
Oh, I think you're Gavin Newsom. I think you've got Gavin Newsom hair. I think you've got the hair.
I mean, you're kind of a Gavin Newsom mixed with a little bit of Rahm Emanuel because Rahm comes up with policy papers for everything. So, I'm sure actually he does have several plans for addressing this because he likes his plans.
But he's so boring, Caddy. Oh my god. At least Newsom can pull a crowd.
You want policy papers. Rahm Emanuel has policy papers. I was listening to Pete Buttigieg actually over the weekend. He was, in the last few days he's been sounding pretty smart about this too. You are now the Democratic communications advisor. In fact, no, let's make you the Democratic candidate for president.
I'm going to channel Newsom's hair. Okay. I haven't been to the colorist recently. There's a little bit of gray in there. Okay, I'm ready. Caddy, go ahead.
You have to come out with an economic proposal to address the question of affordability. But here's your challenge. This is where you get your bonus points. You have to make that proposal sing in a 30-second TikTok video. Go.
Guys, if you're making less than $100,000 a year, I'm going to take your earned income tax credit up so that you have enough money to afford your groceries and pay your rent. And oh, by the way, if I end up getting some type of consumption-based tax, basically you get a tax deduction. That doesn't help the people below 100,000, but...
No, it will. It will because they do get taxed. They still, you're taking $13,000 away from somebody making $70,000.
Give it back to them. Okay. And oh, by the way, if I get a consumption tax put through...
Up to 100,000. I thought you said people over 100,000.
No. No. People up to 100,000. You're up to 100,000. We're going to give you all the money back on the taxes so you can go buy the groceries and you can pay your rent. And oh by the way, if I can get a consumption tax put through, which will help me with the tax cheats and all the billionaires that are avoiding taxes, you're going to be absolved from that as well. And so I'm going to use tax policy and good incentive management to get you and your family back in the game.
And Mr. candidate, how are you going to persuade the Republicans who are in opposition in Congress and who you will presumably need to pass some kind of legislation on this? Because you can't do this with an executive order. You have to pass legislation. How are you going to get them to come on board and help you out with this? Because they are not going to want to help you with anything.
Well, listen, young BBC journalist, let me teach you, grasshopper, okay? The Democrats are the deficit social spenders. The Republicans are known for the tax cuts. And so, I'm going to get some of them. I promise you through good campaigning and good messaging and phone calls into the Congress that there's going to be a good group of those people because they've stood for tax cuts since Ronald Reagan was in office. I'm going to get some of those people and this is going to help them. By the way, you know what? This is a bipartisan move because they'll be able to go back to their districts and say, 'I cut taxes for the people that needed it most.'
