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Well, Wall Street has had a rocky road
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since the announcement of tariffs by the
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Trump administration. And while we are
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off the levels that we saw earlier this
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year, we also haven't seen a larger
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collapse either. So, what should we
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expect moving forward? Pleasure to be
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joined right now by it Goldstein who is
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a professor of finance here at the
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Wharton School. It great to talk as
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always. Thank you, sir. Great talking to
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you. You know, it's interesting. You
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know, we've talked so much about
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uncertainty and how the markets hate
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uncertainty. Well, certainly this has
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given it uh maybe one of the the biggest
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shocks of uncertainty we've seen in
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quite a while. Maybe going back Julie
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the early days of the
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pandemic. Yes, this is absolutely true.
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I think the story of uh the last few
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months or I would say the the first 100
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days of the administration is a story
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about uncertainty. Uh because it has
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been a rocky ride. you know tariffs are
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introduced and then they're paused and
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then they are reintroduced and then
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there is discussion about Fed
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independence and there is the
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possibility that is being floated about
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replacing the chairman of of the Fed uh
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and all these things are just creating a
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lot of uncertainty a lot of anxiety and
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I think that uh you know the fact that
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we see the stock market is generally
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going down but also with a lot of
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volatility
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uh is certainly reacting to this
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uncertainty because one thing that we
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know from finance is that uh uncertainty
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and risk are having a big impact on the
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value of assets, the value of stocks,
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the value of other financial securities
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and and this is clearly on display here.
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You mentioned about uh the the
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conversation around Feder Powell. How
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has that impacted what we've seen on the
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markets? Obviously, as you said, we we
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saw those couple of days where, you
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know, there was a sharp decline in the
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markets. Uh but, you know, have the
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markets kind of settled in that it
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doesn't seem like there's going to be
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any movement to remove Powell at this
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point?
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Yeah. You know, I mean, taking a step
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back here, I would say one of the things
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that most economists would agree on is
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it is important to have independence for
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the central bank. uh in the case of the
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US, you're talking about the Federal
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Reserve. We want that to be independent.
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Uh because we know a lot from economic
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theory, but also from historical
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episodes. Governments always have this
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temptation
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uh to create more money, to uh have uh
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inflation, to reduce rates, to sort of
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have looser conditions that would help
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uh economic activity. But but this is a
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shortterm bias because this is creating
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a boost in the short term uh but then uh
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as uh the the market as the economy uh
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gets used to it uh then uh the effect is
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subsiding and in the long run this is
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really damaging because what happens in
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the end of the day is you are left with
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the inflation and you don't really have
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any of the uh positive uh economic
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effects. So, so the reaction to it uh
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over time was really to have this uh
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central bank who is independent and is
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going to try to resist the temptation.
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If the government is trying to uh create
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looser conditions, the central bank will
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say no, you know, we are worried about
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inflation, so we are going to tighten
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conditions when we see that inflation is
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is picking up. Um and and this is very
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important because then you have the
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restraint from the central bank and
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you're not tempted to fall into this
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trap of short-term uh economic uh
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stimulus. Now, when you see uh talks
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that are being floated about uh reducing
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the independence of the central bank and
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potentially even firing the chairman of
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the the Fed, that is creating a lot of
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anxiety because that is kind of saying,
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you know, what if they're all of a
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sudden going to change the rules of the
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game and we are not going to be in this
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uh system that has more uh caution and
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responsibility. Uh what is that going to
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do? That's going to be bad for the
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economy going forward. and that is
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creating a lot of anxiety. So I think we
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saw a lot of that. I think at the end of
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the day the administration so far got
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the message from the market that it will
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not be a good idea to try to replace the
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chairman of the Fed at this point and
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they said they're not going to they're
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not going to do it. But in the end of
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the day, when you're thinking about it,
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there is still a lot of uh uh
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uncertainty going forward about just how
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independent uh the the Fed is going to
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be, who is going to replace uh Powell uh
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when the time comes and what will it
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look like at that point? And is the
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administration then also getting the
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message in terms of the level of tariffs
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and and is there somewhat of an
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expectation by those in and around Wall
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Street that we may see tariffs at some
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point longer term? Maybe it's 10%
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whatever that number is, but a lot lower
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than obviously what the president has
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talked about uh you know so far. And
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maybe are they starting to bake that
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into what we see you know in terms of
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the results on Wall Street?
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I think so. Yes. I think the general
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expectation is that the message from the
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market is going to be loud and clear and
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that ultimately this is going to rain in
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the administration and they will not go
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in the wildest scenarios of very high
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tariffs as uh they were talking about
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for for a while. uh you know when you're
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thinking about the response of the
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market uh you're thinking about there is
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the stock market and I think for a while
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the the administration was saying okay
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we can live with uh low stock prices for
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a while because this is just the
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investors this is not uh sort of the the
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simple uh uh people the working class um
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but uh when you started seeing a
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reaction from the bond market I think
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this was a lot more uh devastating uh
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because once you see that the bond
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market is uh reacting. You basically
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risk a very major financial crisis. You
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risk the ability of uh the US government
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to fund its debt and all these things
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can have uh much more severe
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implications and when this came I think
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this uh really uh generated some
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understanding that you know we cannot
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really persist on this path for much
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longer. So what's the best case scenario
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then to play out that uh maybe serves
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the purposes of what the administration
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is trying to do but also kind of leads
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us on a path to to the growth that we I
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think expect to see in Wall Street uh
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moving forward.
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That's uh that's a good question. Uh uh
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I I would say the the best case scenario
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is that uh the administration uh
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understands that uh the path of uh you
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know reduced uh independence of the Fed
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and uh increase tariffs this is not a
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viable path. This is not a stable path
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and they're just going to uh walk it
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back uh to to a large extent. uh maybe
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have some modest uh changes but
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certainly not changes that they were
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discussing and that this is all going to
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be uh built back in to to asset prices
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and and we will see uh more come uh in
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in the market going forward. This is
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probably the the best the best case uh
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scenario. Whether this is going to pan
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out or not, I don't know. I mean that
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there there seems to be uh some taste
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for some uh volatility and some
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uncertainty and we see new measures and
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new announcements coming out every day.
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Um so whether we will see the best case
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scenario or not uh it remains to be
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seen.
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Either thanks very much for your time
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today. Okay, thank you very much. Ei
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Goldstein who's professor of finance and
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professor of economics here at the
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Wharton School.
