The Erosion of the Sources of American Economic Power

DAN KURTZ-PHELAN

Lael, thank you for doing this. There is a huge amount I’m eager to get your perspective on, from the state of the global economy to the future of the Federal Reserve and much else. Some of that, you’ve written on in Foreign Affairs in recent months. All of it, you’ve worked on in senior jobs in the U.S. government in recent years, at Treasury, at the White House, and at the Fed. So we’re thrilled to have you here at this moment in history.

LAEL BRAINARD

Well, I’m delighted to be here.

DAN KURTZ-PHELAN

We’re recording this exactly one year into [U.S. President Donald Trump’s] second term, and his use of tariffs and aggressive use of American economic power more generally has been one of those prominent parts of both his economic policy and also his foreign policy in the past year. How do you assess the consequences of Trump’s trade policy, and especially that use of tariffs for the global and U.S. economies a year in?

LAEL BRAINARD

Well, I think that President Trump’s use of tariffs—overuse of tariffs—as his first and last tool internationally, really for every agenda that he has, has been calamitous. Calamitous in the sense that we now have ruptured long-standing relationships of trust with important allies around the world. And it means that they will now start to form coalitions to pursue their own interests because they believe they no longer can rely on the United States to be a dependable ally. And so I think it’s going to be enormously costly in terms of our national security, our ability to rely on alliances, which are a much lower cost way of guaranteeing American security. But it’s also, of course, been very disruptive on the domestic front, raising prices on a lot of consumer goods at a time when affordability was already top of mind, and raising prices on inputs for American manufacturers so that American manufacturers [are] actually worse off today than they were a year ago as a result of those tariffs on net.

DAN KURTZ-PHELAN

If we focus on the global side of that, I’ve been surprised by both the submissiveness, you could say, of traditional American partners’ response, especially from allies and partners, and the aggressiveness—the effective aggressiveness, frankly—from China in particular. Starting with the former, did it strike you that the allies were unprepared for this second-term economic policy? Were you surprised by their relative quiescence when it came to trade negotiations and responding to tariffs more generally?

LAEL BRAINARD

Absolutely. I think our allies were back-footed, did not expect this aggressive tariff policy to centrally affect allies. The first Trump term was focused on China. It was a set of tariffs, they were broad-brush across many goods in China that are not particularly strategic, but they were broadly in line with strategic goals of American policy at that juncture, which was countering China’s mercantilist practices and trying to rebalance and level the playing field so that America’s factory towns had a chance. That is not the Trump 2.0 tariff policy. Trump 2.0 tariff policy domestically is first and foremost about raising large amounts of revenue from tariffs. So the administration keeps talking about $300 to $400 billion of tariff revenues to compensate for some of the lost revenues associated with the so-called Big Beautiful Bill. The result of that, and in part because China in the intervening period has gotten quite good at wielding retaliatory measures of its own, particularly surrounding rare earths, is that allies in some cases, partners in others, actually have higher tariffs on average than China does.

So you look at the case of Switzerland: 39 percent tariffs. It’s really a head-scratcher unless you go back to that revenue goal. And now what we’re seeing is, because the president has used tariffs unconstrained by congressional oversight, every time there is an irritant internationally, whether it is a former leader that is brought before a court case on corruption charges in the case of Brazil, or now the desire to purchase Greenland, the president just uses tariffs in a punitive way. I don’t think our allies anticipated that this would be the America that they’ve depended on since the Second World War, that it would pursue this kind of feckless international policy.

DAN KURTZ-PHELAN

As you look at these escalating tensions over Greenland, which you mentioned, the Europeans seem to be promising a more aggressive response than they had last time around and after “Liberation Day” in April. What do you expect that might look like, and do they have—let’s put this in Trumpian terms—do they have any cards to play here?

LAEL BRAINARD

Well, they certainly do have important cards to play. America has incredible business interests in Europe, with American multinationals very prominent in most of the markets that the president is now targeting, including important ally the United Kingdom, which only a few months ago he was singling out for special treatment only a ten percent tariff—still very high—but because they have a surplus and were working so well with the United States. The other thing, of course, is we have massive inward investment by European companies, by European car companies, for instance. They employ a lot of Americans, manufacturing, assembling cars. All of those things really are now being questioned. And of course, we also depend on Japan and Europe, foreign allies, to hold a lot of U.S. Treasury securities.

At the same time, the Trump administration has increased the national debt by $4 trillion, which means we need a lot of investors to be willing to hold Treasury securities. We are also using tariffs as a punitive mechanism—the president is—to advance his goals in a way that will potentially make foreigners a little bit more wary about the value of those Treasury securities and the desirability of holding them.

DAN KURTZ-PHELAN

If we go back a year, if we went back to the beginning of the Trump term and knew everything that we were likely to see over the ensuing months, I think most people would have predicted much worse results for both the U.S. economy and the global economy at this point, and would have predicted that some of these warnings that you’re issuing now would have already come to pass. Why haven’t they? Why has there been less impact in at least the near-term economic statistics, again, both domestically and globally, than we would have expected if we’d gone back a year?

LAEL BRAINARD

Well, I think there has actually been quite a dampening effect on the U.S. economy, first of all. We saw that inflation had been coming down. It was going into the two to 2.5 percent range at the end of 2024, before the beginning of the Trump administration. And that turned around, moved up to three percent, and the tariff effect has not peaked. So it essentially meant that interest rates couldn’t come down by as much, and that had a slowing effect on, in particular, the housing market. But the other thing is, if you look at growth for a good part of the year, and the [Organization for Economic Cooperation and Development] has some good numbers, growth would actually have been slightly negative but for the AI boom. And it’s really the AI boom that has masked the deleterious effects of the tariffs on aggregate.

So we do have very robust growth in the third quarter, but it’s jobless growth. That jobless growth, in part, is because manufacturers shed thousands of jobs over the course of the year because their input costs went up and because they were cautious about consumers being willing to pay more. The other thing, of course, that masked the effect of the tariffs is, American businesses just got smarter. They had just gone through the pandemic—massive supply shock—and they learned that they need to be very quick, agile about shifting around their supply chains, but also brought in a massive amount of imports in anticipation of those Liberation Day tariffs. In the first quarter, actually, you saw this massive run-up in the trade deficit in the first quarter. And then over the rest of the year, you saw those inventories and the trade deficit really just moderating as those inventories of imported products were brought down.

DAN KURTZ-PHELAN

You noted the lack of real congressional action on tariffs. We have been waiting for the last several days for a ruling from the Supreme Court on Trump’s use of the International Emergency Economic Powers Act as a rationale for some of his tariffs. Do you expect a ruling against Trump on that? And will that have any constraining effect, or he’ll merely pick some other tool?

LAEL BRAINARD

Yeah, so this Supreme Court decision on the president’s highly unusual, in fact, unprecedented use of this national security law, IEEPA, to impose tariffs is enormously important. And the hearing where the Supreme Court justices publicly questioned both the administration and the plaintiffs about the underlying statutory authority did suggest a majority of justices had substantial skepticism about whether, in fact, IEEPA was ever intended to allow for tariffs. Tariffs are a revenue measure; revenue measures are the purview of Congress, and Congress has delegated substantial tariff authority, substantial revenue tariff authority, to the president, but not in that statute. So it did feel that the Supreme Court was skeptical. On the other hand, in case after case, the Supreme Court has given a very expansive interpretation to the executive branch’s authority. So I don’t know where they’re going to end up. It does seem very strongly that they should constrain the president’s ability to use IEEPA. And I think there are a host of important questions there about refunds and how that will affect revenues and companies. But in terms of the president’s power, if the Supreme Court narrows or completely constrains the president’s ability to impose tariffs under IEEPA, that would be extremely important because that has been his interpretation, that he has complete discretion to impose a tariff on any country for any reason by coming up with some kind of an emergency. It has been what’s allowed him to wield tariffs with such immediate effect.

It is the case—you asked about what alternative authorities are available to the president—the administration could very rapidly put in place a successor set of tariffs that would effectively come close to replicating the revenue effects. So Section 122 is authority that, when we have an exigency associated with our trade deficit, the president can impose 15 percent tariffs on countries for a period—or ten to 15 percent—for a period of 150 days. That would allow them to quickly replace a large portion of the revenue that’s coming in for the IEEPA tariffs—not all of it, because some of those countries, like Switzerland, are subject to 39 percent tariffs, or India much higher, Brazil much higher. So the other problem with 122 is that Congress would actually need to . . . Most people interpret the law as requiring Congress to actively pass legislation after that 150 days is over to renew it.

But the president has other authorities. He’s already taking a number of sectoral cases under 232 authority, like on steel and autos have already gone through, semiconductors, lumber, and pharmaceuticals. So a lot of sectors could find themselves with tariffs. And then, of course, Section 301 has already been used for China, both in the first Trump and Biden administrations. So a lot of those Section 301 tariffs will simply replace IEEPA tariffs, to the extent that’s necessary, and there’s an active ongoing case with Brazil. They can quickly put in place a number of Section 301 cases on countries. The only thing there that will require a little bit of time is there’s a lot more procedural requirements about making the proposed tariffs publicly available and allowing for comment. So there’s some time frame in there that would be necessary for most countries to undergo that 301 process. But of course, with the 15 percent tariffs in place under Section 122, that gives them the window that they need.

DAN KURTZ-PHELAN

So if I’m understanding you correctly, even if there is a ruling against the administration, it wouldn’t massively change the tariff regime and the tools that Trump has at his disposal.

LAEL BRAINARD

It would change the tools in a material way, and it would slightly constrain the tariffs, but through a patchwork of other authorities, they can come close to replicating the revenue effects. The reason I say the tools do matter here, though, is the president’s ability to simply say, “I’m peeved about your response on Greenland, so I’m just going to start imposing a ten percent tariff and then it’s going to escalate to 25 percent on you ten, eight countries.” If the Supreme Court narrows or eliminates the ability to use tariffs under IEEPA, that discretion could be massively constrained.

DAN KURTZ-PHELAN

I’ve been surprised, in talking to people who were in senior policymaking jobs in previous administrations, including some of your colleagues in the Biden administration, that they’ve watched Trump over the last year and said, “While we disagree with ends, I wish we’d been a little more creative about the use of some of these tools and willing to use power in ways and develop leverage in ways that we weren’t.” I think about a conversation we had on this podcast with Juan Gonzalez, who was running Latin America policy at the [National Security Council] in the Biden administration, who said, “I wonder if we should have thought about stationing warships off the coast of Venezuela during the election in 2024,” just to cite one example. Can you imagine using tariffs perhaps more aggressively or more agilely than has traditionally been the case in American foreign policy, perhaps for different ends, but learning a little bit from Trump about how to use some of these tools? Is there any positive lesson here?

LAEL BRAINARD

So I think there are some positive lessons on the domestic front about expediting process. Let me just say, though, I think under the Biden administration, tariffs were used pretty aggressively with China, and I think they were used more intelligently with China because they were coupled with domestic incentives. It’s not enough to simply put in place, which the Biden administration did, 100 percent tariffs on cars. They have to be coupled with incentives, for instance, to the extent that new assembly plants are needed for [electric vehicle] manufacture or for battery manufacture, that the playing field with China is so unlevel because of the very distorted statist model they have, that in order to have smart policy, you need to have the combination of much more targeted tariffs. Like, why high tariffs on baby clothes? That’s not a strategic industry. We want cheap, affordable baby clothes for American parents who are struggling with affordability.

It’s got to be targeted on strategic industries like batteries, like semiconductors, and then it needs to be coupled with domestic incentives in those same areas as well as with really tough and smart tech controls. So tariffs, I think the Biden administration was really developing, with bipartisan support, a smart approach there.

Where I do think this administration has been able to push aggressively, much more rapidly, is in areas like permitting, where it just took too long to get some of these infrastructure projects and investments up and running. And in calling out some of the areas where the affordability challenges are greatest, getting the private sector to come to the table. So I don’t think this administration is ultimately going to be putting in place a ten percent cap on credit card fees because that does have massive disruption effects on the industry. But I think getting the industry to the table to talk about, How is it possible that at a time when interest rates are down below four percent, that you’re charging 22 percent on credit cards? That’s not acceptable. So I do think a tougher approach, on the other hand, running roughshod over Congress, no, I don’t think that’s the right way to go.

DAN KURTZ-PHELAN

I want to come back to some of these affordability questions later in our conversation, but I also want to focus on China a bit. In contrast to the response from allies and partners in response to Trump’s tariffs and other trade actions in recent months, China has been quite aggressive, especially in its use of its control of the critical-mineral supply chain. Have you been surprised by China’s response? Have you been surprised by both the effectiveness and the assertiveness of it?

LAEL BRAINARD

I have not been surprised. I think anybody watching China closely—and we both know a number of really impressive people who watch this space very closely and are quite good at charting just how effectively [Chinese leader Xi Jinping] has built out a regime of countervailing pressures, and over the years how single-mindedly they have focused on dominating strategic industries in a variety of areas, but in particular rare earths, and just that stranglehold on rare earths and rare-earth processing, rare-earth magnets, is something that I think people have been watching over a period of time. And so in that sense, no, it should not have been a surprise.

What is disappointing is that as a country, we have been slow to put in place really effective responses. We do have a handful of private-sector companies, both in the United States and abroad, who have tried to make a go of, first, rare-earth mining and processing, and they have a very difficult time sustaining themselves through market financing because China’s producers regularly dump product in such a way that it makes it unprofitable on a pure market basis to continue developing rare-earth processing at scale. And so that’s where we need to use the Defense Production Act. We need to actually subsidize, as well as, we really should be talking about long-term demand contracts to make those businesses sustainable. And we should be talking about allies and partners. This is not a go-it-alone space. Our allies and partners have suffered the same kinds of coercion. We talked about it a huge amount in the previous administration. China’s use of economic coercion, that’s an area where working with allies and partners is paramount.

DAN KURTZ-PHELAN

I think I was in the State Department a decade and a half ago when China first used its control over rare earths against Japan in response to disputes over unrelated issues. This has been a big topic of conversation since then, through the first Trump and Biden administrations. It’s striking how little progress we seem to have made, as you note, in really doing anything to counter it. If you could go back to administrations in which you’ve served, if you could account for that failure, what have we gotten wrong? What explains it, and what would we need to do fundamentally differently to be in a better position the next time we’re in one of these exchanges?

LAEL BRAINARD

Yeah, so I think first of all, we need bipartisan continuity between administrations. We can’t rediscover this national security imperative every time there’s a new administration, rip up the old playbook and start again. We need to build on a consistent policy. That is one of China’s greatest strengths, is the continuity that they have over much longer periods of time. The absolutely clear lesson from the past two decades, I agree with you. I was in the international part of the Treasury Department during that time on the economic side, but we had many conversations about this area. So I think what we started to develop was the ability, more recently, is the ability to provide tax credits that provide a more profitable prospect for private companies that want to make long-term investments in rare-earth mining, as well, importantly, in processing. So you need investment tax credits, you need production tax credits. In some cases, loan guarantees can be helpful, or grants in some cases. And then that use of defense production authority to provide that financing is a very powerful tool. And on top of that, these companies, in order to withstand the vagaries of Chinese dumping, which means that prices go through these massive cycles, and that is very hard to sustain when you have high fixed costs, so it’s really important to have long-term guaranteed demand. And of course the Defense Department can provide some of that, potentially not at scale. And so you need to sit down with the industry, with the automakers, and you need to get them to augment that long-term dedicated demand. No, we’re not going to switch to Chinese producers the minute their price becomes more attractive. We’re really going to stick with this. And I think at least one of our auto companies actually did make some farsighted co-investments in some rare-earth capacity, but I don’t think we supported them as much as we needed to at the time.

DAN KURTZ-PHELAN

In a few months, Trump is supposed to travel to China, I believe in April, for a summit with Xi Jinping. A big economic deal is supposed to be the centerpiece of that visit. What would a good deal look like to your mind?

LAEL BRAINARD

Well, I think we already have given up a bit of leverage in terms of our technology export controls. One of the most important strategic areas where the United States has some advantage—but it won’t last unless we really work hard to preserve and protect it—is in the area of generative AI, frontier models. And in looking at the relative strengths of the two countries, China and the United States, who are really driving forward the AI frontier, our relative strength really has to do with those LLMs and with very advanced semiconductors of the sort that have gotten caught up in technology export controls. China has massive scale advantages. It has the ability to use its scale and intense competition among various big players in the Chinese market to drive diffusion and to get models that are usable out and test them and augment them. And its other really big advantage is massive advantage on electricity costs.

We have to husband our advantage very carefully. What happened when the two leaders met in Seoul, unfortunately, is that the president found himself countered on our technology export controls with the rare-earth controls that the Chinese had put in place, really, again, ceded ground, showed willingness to relax those potential export controls, and more recently has offered a more advanced chip with upside sharing on the part of the U.S. government, which is the last thing in the world we should be doing. What we should be doing is focusing on controlling those very advanced semiconductors in order to sustain that advantage. The revenues to the U.S. government, it just seems like a very odd diversion away from our traditional approach.

DAN KURTZ-PHELAN

Let me make a brief political detour. Accepting the competitive case for the continued progress of American AI companies and models, the politics of this seem very hard for any candidate running in the years ahead, especially for Democrats. When you look at the concern about jobs, the concern about data centers and electricity prices, plenty of other more abstract concerns, it seems like the competitive pressures and the political imperatives might cut against each other. How would you advise leaders or aspiring leaders to handle that tension from a political economy perspective?

LAEL BRAINARD

Yeah, look, I think that anybody who wants to be a really constructive force in this space from a public perspective, from a political perspective, should be talking about these issues head-on. The United States needs to lead on AI for national security purposes, also for the long-term health and growth prospects of our economy. But transitions with new general purpose technologies are really hard, and we’ve seen historical episodes where this has taken place. We know there will be displacement. We know that if this follows the course of previous massive technological innovations, we’re going to be growing over a decade or more at a faster pace, higher productivity. That means a bigger pie, it means more demand, ultimately means more jobs, but different jobs. But managing the transition—where people in some job areas are going to find themselves squeezed by AI, but in other areas, they’re going to find new opportunities—that means intensive engagement on the part of politicians with the private sector, with the educational institutions and the community institutions that are helping local communities and workers make that change.

And then safety and security. It is important to have a robust discussion about safety and security. In the previous administration, the AI companies were very willing to come to the table. They themselves, because they understand this technology, were able to articulate what those risks are—and they are substantial risks—and develop some guidelines, a safety institute at [the National Institute of Standards and Technology]. And for some reason, this administration has been entirely focused on just pursuing AI without those kinds of guardrails.

And you also mentioned data centers. Frontier models, right now, are very compute-intensive. That may change over time with new chip designs, with new business models, but right now they’re very compute-intensive. And for the first time in decades, we have rapid growth in demand for electricity in the United States. This is a big change, and it is leading to some real tensions in some areas where the existing grid is being taxed by these new data centers. Rates are going up for consumers, and the long-term planning of that area really hasn’t taken into account the competing needs in a way that has protected consumers. So we’ve seen this really massive increase in electricity. I don’t think that’s necessary. I think there are parts of the country where there is excess built capacity, and consumers are actually paying too much because those fixed costs are large relative to their needs. There are things that an administration, a president, a White House that actually cared about some of those spillovers would be more engaged in trying to solve some of those problems.

DAN KURTZ-PHELAN

Before we were all focused on an escalating tariff war between the United States and Europe over Greenland, the biggest story in economic world was the attacks on [Jerome Powell], the chairman of the Fed, and the independence of the Federal Reserve. You were vice chair of the Fed before you took over as head of the National Economic Council in 2023. How do you rate risks to Fed independence right now? When you look at what the Trump administration is doing and what that might mean for the short-term and long-term health of the Fed, where’s your level of concern?

LAEL BRAINARD

Yeah, so I would say the risk to Fed independence from this White House is higher than any risk we’ve seen since Nixon convinced [former chairman of the Federal Reserve Arthur Burns] to run the economy hot during the period before his reelection. We saw what happened in the 1970s. Basically, that short period of rapid growth right before the reelection was followed by a decade of very high inflation, double-digit. And ultimately, interest rates, mortgage rates went up to 18 percent. Unemployment went to 11 percent before the advent of [former chairman of the Federal Reserve Paul Volcker], who really put the economy into recession in order to get inflation down. Since that time, I think there’s been, on the part of presidents of both parties, recognition that the Fed . . . you can jawbone the Fed, but that is about as much as is wise, because the kinds of tactics that this president is using, if they succeed, will lead to higher inflation over many years and reduced credibility of the Federal Reserve. When the Federal Reserve’s inflation-fighting credibility is damaged, it takes higher unemployment to get inflation back down. So very high risk right now.

DAN KURTZ-PHELAN

Just looking at the mechanics of how the Fed sets interest rates, to what extent does the chair influence that process on his or her own? Is that political influence undercut to some degree by other members of the Open Market Committee who can counteract it? Just give us some sense of how that process works and how much of a real change that would be.

LAEL BRAINARD

Interest rates are set by a committee. It is a majority vote of a committee, the Federal Open Market Committee. That is the seven members of the board, as well as, at any given time, five of the 12 reserve bank presidents. The chair, though, is first, way first, among equals in that process. So it is the chair along with the vice chair of the FOMC and the vice chair of the board, but it’s the chair who decides what to propose to the committee in terms of the statement they’re voting on and in terms of whether that statement includes a rate cut or a rate hike or holding steady, as well as, of course, on whether or not to use asset purchases or to shrink the balance sheet. It is the chair that really proposes, and all members of the committee tend to give deference to the chair’s views because they know how important it is for the public to understand what monetary policy is, for the chair to be able to lead that and articulate it.

Of course, it’s also the chair that communicates most effectively with the public. Market watchers who are trading Treasury securities and other dollar assets, they will put much greater weight on the chair’s words than anybody else’s words. So the chair matters in terms of internal dynamics, as well as in terms of communicating to the public and to financial-market participants.

DAN KURTZ-PHELAN

If you had an openly political chair simply there to do Trump’s bidding, do you think that credibility would change? Would the other members of the committee react differently, give less deference on some levels to the chair, and would market watchers and the public react differently? Can you imagine this becoming more chaotic, rather than the straightforwardly political scenario I think people have been concerned about?

LAEL BRAINARD

I think that is exactly what you’re already hearing a lot of concerns about among people whose jobs are really affected by the Federal Reserve, because they’re trying to understand the future course of interest rates, but that is true in ways that most people are touched by but may not be aware of. So homebuilders, they’re not thinking about interest rates just today; they really need to think about interest rates and inflation five or ten years from now, depending on how long their projects are. That’s certainly true for factory construction, any kind of big investment decision. Then for families, they’re buying homes and cars with long-term loans, and so they’re paying long-term interest rates. Everybody is affected by that perception of whether the chair is credible and making policy the way Congress told the Fed to make policy.

Congress delegated the power to issue currency to the Federal Reserve as an independent agency—it really is a congressional power—and they told them, “Focus on two things: keeping inflation low and stable, and keeping the labor market at maximum employment.” That is the only two things the Congress told the Federal Reserve to focus on. If a chair is appointed by a president who insists that that person is implementing the policies of the White House, then other considerations we have seen historically can creep in, whether it is the cost of financing that large and ballooning debt that the Beautiful Bill really augmented by $4 trillion, or whether it is juicing the economy ahead of an election, which is a very common pattern. And we’ve seen in places like Turkey, where the head of state has repeatedly fired central bank heads for not sufficiently stimulating the economy at times that are politically important, that essentially inflation has soared, reaching very high double digits, and interest rates have gone very high and it’s been really bad for the economy, and that’s the kind of thing that people worry about here.

DAN KURTZ-PHELAN

You warned in a piece last year about the prospects of the dollar. I’ll quote you here: “The dollar is not invulnerable, and now is not the time to make bad choices and count on good luck alone. If their currency falls from its pedestal, Americans will pay the price.” What would a fall from that pedestal look like? If we started to see signs that that was happening, what would we be seeing?

LAEL BRAINARD

It is not the case that the dollar can easily be replaced or is likely to be replaced by another currency. So that kind of scenario is not really what I worry about or other people worry about. What one worries about is just the more rapid erosion of the primacy of the dollar. And what would that look like? Well, we’ve already seen some signs. The dollar weakened by 9.5 percentage points last year on a trade-weighted basis, but in the wake of Liberation Day and the threats on the Federal Reserve chair, it actually, at one juncture, was down by 15 percent. And we’ve seen renewed pressure on the dollar as politics has once again become more fraught with these threats around Greenland. So weakening dollar, on the one hand. We’ve seen that, in central bank reserves, gold has now risen to the same level of reserve holdings as Treasuries. That’s partly due to valuation effects because there’s been so much demand for gold that we’ve seen valuation of gold go up, but it’s partly because foreign central banks are hedging their bets a little bit. And we’ve also seen it in terms of more hedging of dollar exposure, so that when foreign investors want to be part of our big AI boom, they also want to be a little cautious and they want to hedge the dollar because they now have more concern that the [value of the dollar’s] not going to hold.

I think you see it in terms of the erosion of how much dollar reserves dominate central bank holdings, how much hedging activity there goes on. Ultimately, you see it also in pricing. Right now, the dollar is the currency that trade is priced in for about 95 percent of transactions in our hemisphere and about 75 percent of transactions in Asia. But China is chipping away at that and they have an active de-dollarization campaign, where they are using their considerable economic weight bilaterally to get countries to invoice in RMB, to hold more RMB, to move away from the dollar.

DAN KURTZ-PHELAN

And do you see, with all the disadvantages of the RMB as a reserve currency for lots of reasons, do you see that taking a big chunk of the dollar’s place? Or are there hard limits on what China is able to do here?

LAEL BRAINARD

Yeah, I think both the two main alternative currencies, if you will, are the euro and the RMB. And you already alluded to the reality that RMB markets are simply not as liquid, as deep as Treasury markets. So investors are not going to feel as comfortable, in general, being as heavily weighted toward RMB securities because they don’t have as much confidence that . . . If there’s a shock and they want to have that liquidity right away, they have seen that China has got more capital controls and is more inclined to put impediments in the way than certainly the United States. You remember during the pandemic—I certainly do—we purchased trillions of dollars of Treasuries in order to provide liquid cash to investors all over the world. And that reassures that those are liquid instruments. Similarly with the euro area, because there’s very little jointly issued debt, there’s very little euro-area debt that really has the full faith and credit of the entire euro area behind it. And so that is also a more limited market for now.

But I think it is pretty unwise to essentially undertake a bunch of policies that raise huge concerns on the part of investors all around the world about the value of the dollar, the institutional underpinnings, the low inflation that is anchored by the independent Fed, the rule of law, the respect for rule of law, all those things, to simply count on the fact that there’s no single alternative to the dollar, that you can flout all of those things all at once and see no negative effects in terms of interest rates here in the United States.

DAN KURTZ-PHELAN

And what would it mean for both American power and for the prospects of the American economy if we did see the shift, the most pessimistic version of that shift that you’re warning of?

LAEL BRAINARD

Over time, it’s really that erosion, that increasing holding of other assets and currencies, inclusive of gold. It means that we pay more in terms of interest on our debt. We’re already paying $1 trillion a year. It rivals the defense budget, how much we pay in interest on our debt. And so we’ve got a massive increase in our debt that has built in as a result of the loss of tax revenues from the Big Beautiful Bill. And it means that we’ll be paying more and more every year just in interest costs on that growing debt. And in the extreme, it means we’re more vulnerable to those kinds of market moments where we see investors suddenly demanding a lot more to hold those securities, or wanting to sell them because they have suddenly new sets of concerns. We saw a little bit in the Liberation Day period, that combination of the high tariff announcements plus threats to Fed independence.

And of course, what people like to talk about, as a more extreme version of that, is the [former Prime Minister Liz Truss] moment in the United Kingdom. I don’t think we are there in the United States, being that vulnerable, but we certainly should be at least aware that right now Americans are benefiting from interest rates that are lower on things like cars and houses because people like to hold dollars all around the world. That convenience yield, that saves Americans money, actually, on their loan payments every year.

DAN KURTZ-PHELAN

I think it’s hard for most of us to process just how big a change it would be for American policy, American economic policy, and the tools that are available to leaders and policymakers if we did enter such a world. I think there’s a lack of imagination when it comes to imagining that.

LAEL BRAINARD

Well, I think we have been in such a strong position and there’s been such solid institutional foundations for decades now that we haven’t had to think about it. But people who have assessed, “Well, what is the benefit? Can we actually see, in dollars and cents, how much better off we are as a country?”, they assess that $150 billion, give or take, every year we pay less in interest servicing just on the national debt as a result of the fact that people are willing to invest in Treasury securities and get a lower yield than they might otherwise. And of course, you can take that same benefit of having lower rates and simply translate that in terms of lower mortgage costs, lower car loans. Those are the kinds of concrete things that could give people a better sense of, this is valuable. This is worth preserving.

DAN KURTZ-PHELAN

I want to, before we close, return to an issue that you brought up earlier, and that has really been one of the central challenges for both the Biden and Trump administrations, and that’s affordability. This is a complaint of publics and lots of other economies as well, but certainly, I think, the central complaint you would hear from most Americans at this point. I know you can cite lots of evidence about the progress that the Biden administration made on bringing inflation down and bringing prices down over the course of your time in the White House over the last couple years of the administration, but politically something there didn’t quite translate, I think it’s fair to say. As you reflect on the lessons of this, both again for Biden and for Trump, what would you do differently? How do you think about the affordability question as a central one in American politics?

LAEL BRAINARD

It was evident to me—I was in the Biden administration for the last two years—and it was very clear even then, the top-line numbers for the economy were really good, right? Three percent growth, unemployment that stayed just around or below four percent for the entire two years. The inflation, which is the rate of increase of prices, came down all the way close to, actually it was between two percent and 2.5 percent. So if you just looked at those things, you could see, well, the economy’s doing well, and [there is] a ton of investment in areas like semiconductors.

But if you listen to consumers, they were so worried about their ability to afford just the basics. And this is particularly true of middle-income households and lower-income households. Housing, extremely expensive. Rents had gone up a lot. We simply don’t have enough housing supply in America for the sort of workforce housing, for first-time home buyers, for young families. There simply needs to be more, some people say between three and four million additional units of housing.

The second thing is, of course, health care. Health care is a perpetual affordability challenge for Americans. And this administration just made it much worse because they essentially cut Medicaid for 11 to 13 million Americans. So they’re going to find it more expensive and much more difficult to be able to get access to Medicaid. And then of course, they’re not renewing the tax credits that make health insurance for 21 million people through the [Affordable Care Act] marketplace affordable. Some of those premiums are going up 100 percent. So that’s a second area, pharmaceutical costs, where the Biden administration really did make some progress and the Trump administration is trying to make some progress, but we still pay way more than other countries.

And then food and grocery, food and grocery were badly affected by supply chain disruptions and then the avian flu. And then this year they’ve been badly disrupted by tariffs on things like coffee, chocolate, bananas, things that we don’t grow very much of in the United States. And there’s really no benefit to tariffs. There’s only the cost to consumers. Now electricity is much higher on the radar screen, in part because we need to build our grid and we just haven’t seen the level of investment that’s necessary, certainly now with the AI boom. All of those things, you add them together and it really feels bad to a lot of American consumers. And you can see that in the consumer sentiment. Consumer sentiment has really plunged over the course of the last year, and the driver of that is really affordability concerns.

DAN KURTZ-PHELAN

Given the likelihood that this will be the central question in American politics and American economic policy in the years ahead, do you see the beginnings of a new strategy for really addressing it in ways we’ve failed to over the last several decades?

LAEL BRAINARD

Absolutely. I think it is vital that politicians show this is their central focus. And a lot of people already in the 2024 election talked about prices being too high as their primary voting concern. And now it seems like affordability has only gotten worse. So I think it is incumbent on anybody who’s running for office to have answers. How are we going to get health care costs for American families down? How are we going to build more houses in a way that is accessible and affordable for most Americans—not just really high-value homes that are only accessible to the top ten percent, but for most Americans that are really hurting? How are we going to expand electricity availability in an affordable way for Americans?

And one that is really top of mind for young families is, childcare can absorb a very high share of income for a young family and is a real deterrent to growing families and having more children. And we really don’t have good solutions there. During the Biden administration, because the pandemic was ongoing, they had a number of pretty expansive policies on child tax credits as well as childcare stabilization. Those made a material difference in terms of allowing more American parents to go to work. So it’s a plus-plus. It allows parents to feel confident that they can afford quality childcare. It also allows them to be productive in the workforce, and it’s good for overall growth. But we need to have politicians actually delivering results there.

What was surprising, I think, certainly to me and to many other observers, was that this president came in saying he was going to lower prices on day one and then went ahead and put in place very high tariffs that actually raised prices, took away health care affordability policies, and has done really very little other than . . . We have seen gas prices coming down, but that’s the only area. Everything else, affordability has actually gotten much worse. And at a time when you’re getting that message in some of these out-of-cycle elections, instead of really materially directly addressing that, we have an administration that’s talking about buying Greenland at another huge price tag for the American people and threatening even higher tariffs on some of our main trade partners, which will come back around and hit American consumers with higher prices.

DAN KURTZ-PHELAN

As the parent of a two-month-old, I feel like we should close on that plea for affordable childcare. So thank you for that. And Lael, thank you so much for this wide-ranging conversation and the great pieces you’ve done for Foreign Affairs in the last few months.

LAEL BRAINARD

Thank you very much.