Speaker 1: Bloomberg Audio Studios, podcasts, radio News. We're coming here to Iceland, Draikivik,
Speaker 1: where we're delighted to be joined by Governor Adrianna Kugler.
Speaker 1: Governor Kugler, thank you for joining us. So there's been
Speaker 1: a lot of talk about central bank independence. Jay Powell
Speaker 1: under attack many times by Donald Trump saying, look that
Speaker 1: actually the Fed did not cut How do you think
Speaker 1: and how would you explain to the markets and maybe
Speaker 1: the president of why we're currently in a witnessy mode
Speaker 1: for the Fed.
Speaker 2: Thank you, friend seein for having me here, and so
Speaker 2: let me tell you a little bit. Obviously, we held
Speaker 2: a steady at four point three percent, and I supported
Speaker 2: that because the way I think about it is that
Speaker 2: our policy rate is currently moderately restrictive, and I think
Speaker 2: it makes sense to keep it that way, and it
Speaker 2: makes to keep sense to keep it that way for
Speaker 2: a number of reasons. First of all, we have been
Speaker 2: seeing the progress on this inflation is low down a
Speaker 2: little bit. We have also seen an increase in inflation expectations,
Speaker 2: and we want to keep long run inflation expectations very
Speaker 2: well anchored. So that's the second reason. Third, we see
Speaker 2: some risks upside rates to inflation from the tarts that
Speaker 2: are currently in place, and given that, it makes sense
Speaker 2: to make sure we keep again the federal funds rate
Speaker 2: moderately restricted. On the real side of the economy, on
Speaker 2: the other hand, things have remained resilient. The employment rate
Speaker 2: is still high, and the unemployment rate is still currently
Speaker 2: at historically low rates. And by the same token, private
Speaker 2: activity is judged by PDFP, the private domestic final purchases
Speaker 2: numbers shows us that private activity grew at three percent.
Speaker 2: We saw some conflicting evidence between imports and inventory is
Speaker 2: but overall we see health is still in the real economy.
Speaker 2: So that gives us time to make sure that we
Speaker 2: continue to make progress on inflation and we keep our
Speaker 2: inflation expectations very well anchoraged.
Speaker 1: How problematic or the uncertainty actually of the tariffs. To
Speaker 1: look at scenarios for GDP inflation and rates. So do
Speaker 1: you look at scenarios or do you look at baseline projections?
Speaker 2: Yeah, thank you for asking that we look at a
Speaker 2: broad range of scenarios, in fact, because it is particularly
Speaker 2: important during this time period of a lot of uncertainty.
Speaker 2: Uncertainty is the world of the day, Is you know,
Speaker 2: and so the way we see it is that we
Speaker 2: don't know which way this is going to go. We
Speaker 2: started at two point six percent effective tariferate at the
Speaker 2: beginning of the year. It depends who you are, but
Speaker 2: it's somewhere between twenty and twenty seven percent according to
Speaker 2: many analysis and we do our own analysis but also
Speaker 2: look at private sector analysis on this issue. So it's
Speaker 2: still very high. It may still change. It could come
Speaker 2: down because there could be negotiations or exemptions. It could
Speaker 2: go up some if additional tips get put into place.
Speaker 2: So we're not sure even about the magnitude of the tips.
Speaker 2: We don't know which products are going to be affected
Speaker 2: by the tips. At this point. We have a baseline case,
Speaker 2: as you said, as to the ones that already have
Speaker 2: been implemented, but we don't know if that's going to
Speaker 2: change in the next week, in the next months, in
Speaker 2: the in the next year. So we're keeping close attention
Speaker 2: to many different scenarios and paying attention as to how
Speaker 2: that may affect the economy. So obviously that that is
Speaker 2: the question of the day, how will it affect economy? Right?
Speaker 1: First of all, what's your takeaway from from you know,
Speaker 1: first quarter GDP, and how you see you as consumers
Speaker 1: behaving right now.
Speaker 2: Yeah, as I said, on the real side of the economy,
Speaker 2: what we've got is GDP for the first quarter, so
Speaker 2: it's backward looking, and that backward looking number is showing
Speaker 2: us exactly when one would have expected, which is a
Speaker 2: lot of from loading, so from loading of imports ahead
Speaker 2: of the targets, people trying to buy, both producers and
Speaker 2: consumers trying to get those products before the times get
Speaker 2: put into place. That showed been a huge increase in
Speaker 2: imports and some increase in inventories, but not as much.
Speaker 2: So overall, the GDP numbers showed some witness to point
Speaker 2: three percent minus point three percent. But if you look
Speaker 2: at the private side, on the other hand, you see
Speaker 2: a very resilient economy with three percent growth in PDFB
Speaker 2: the private domestic final purchases part of the economy, which
Speaker 2: shows a resilient consumer and a resilient investors. Well, now
Speaker 2: if you look at some of the more real time data,
Speaker 2: the picture could look a little different. We did see
Speaker 2: high retail sales, but if you ask the consumer what
Speaker 2: they think they're going to do ahead, there's a falling
Speaker 2: consumer confidence and people are thinking, well, maybe you won't
Speaker 2: hold back. Investors are thinking, well, investment may come down
Speaker 2: because we don't know what is coming ahead, and they're
Speaker 2: concerned about TIFFs.
Speaker 1: And there's a lot of talk. Of course, unemployment will rise.
Speaker 1: You could also see terraffs actually putting inflation up. So
Speaker 1: at some point, if it happens in the third quarter
Speaker 1: or the fourth quarter, if you have this employment going up,
Speaker 1: but also inflation being pushed by terriffs, does a higher
Speaker 1: unemployment bring this inflation? Does it somehow make the job
Speaker 1: a little bit easier for the Fed?
Speaker 2: So there are two effects, right, one upside race to
Speaker 2: inflation and upside riads to unemployment or the slow down
Speaker 2: in economic activity. You're right, I think. The way I
Speaker 2: think about it is we're already seen, especially from surveys
Speaker 2: of manufacturers, some indications about tarists putting upward pressure and
Speaker 2: prices in particular and the cause of materials. Those calls
Speaker 2: already been passed on to the consumer. That's already shown
Speaker 2: up in those surveys, whether it's sm surveys, the surveys
Speaker 2: that are done by the regional FEDS. So that's definitely
Speaker 2: showing up in the data, and its showed up in
Speaker 2: goods prices and goods inflation going up as well. That's
Speaker 2: happening now down the road. You're right, there could be
Speaker 2: a slow down, and that's slow down partly because of uncertainty,
Speaker 2: but also because real disposable income is going to fall.
Speaker 2: Also because the real value of financial assets may fall,
Speaker 2: and that will decrease wealth, and so those two effects
Speaker 2: are going to push down aggregate demands. In addition to that,
Speaker 2: I would point out that there could be reallocation of
Speaker 2: economic activity and a reduction in productivity, and that could
Speaker 2: come up. For example, new businesses or existing businesses start
Speaker 2: producing things that used to be produced by those abroad
Speaker 2: and then you're having lower productivity. That could put some
Speaker 2: potentially some downward pressure on prices coming up from the
Speaker 2: other side, but it's not clear whether they'll exactly counteract
Speaker 2: each other. I would say one has to be cautious
Speaker 2: to think that that in itself is going to do
Speaker 2: the trick of getting prices back now.
Speaker 1: Governor Jemakogle, thank you so much for joining us.