WEBVTT - Former White House Chief Economist Glenn Hubbard Talks Fed Policy, Tax Bill

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>While policymakers are expected to hold rates in June and

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<v Speaker 2>maybe even July, there could be some signs about future cuts.

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<v Speaker 2>Joining us now to discuss as Glenn Hubbard former chair

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<v Speaker 2>of the Council of Economic Advisors. He is currently a

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<v Speaker 2>professor of economics at Columbia Graduate School of Business. Glenn,

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<v Speaker 2>always a pleasure to see you.

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<v Speaker 3>Thank you. Likewise, so there's widespread.

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<v Speaker 2>Consensus the FED will do nothing and keep rates unchanged.

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<v Speaker 2>But do you see enough evidence in the data, particularly

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<v Speaker 2>of late including this morning, that opens a door for

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<v Speaker 2>policymakers to start cutting in the second half of the year.

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<v Speaker 3>You know, I think that door is certainly open. The

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<v Speaker 3>challenge for the FED is if it preemptively cuts too

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<v Speaker 3>soon long yields may go up and undo it. So

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<v Speaker 3>I think that's the real risk. The data are weakening,

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<v Speaker 3>though we saw the retail sales numbers. The job market

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<v Speaker 3>is weakening, so I wouldn't be surprised to see a

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<v Speaker 3>FED cut later in the year. The timing is somewhat uncertain, obviously,

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<v Speaker 3>events and geopolitics other public policy events in the country

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<v Speaker 3>make it hard for the FED.

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<v Speaker 2>To plan right now, what is our confidence that inflation

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<v Speaker 2>has been solved or that this disinflation theme will persist,

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<v Speaker 2>Because it surprised a lot of people that inflation hasn't,

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<v Speaker 2>you know, maken this reappearance the way a lot of

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<v Speaker 2>people anticipate because of the terrafs.

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<v Speaker 3>I don't think inflation has been solved, and I think

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<v Speaker 3>that it will likely stay above the fed's target level,

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<v Speaker 3>which complicates things. I don't think we've seen the effects

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<v Speaker 3>of the tariffs much yet. Businesses first try to absorb

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<v Speaker 3>in margins before passing on. So I think it's too

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<v Speaker 3>early to say on inflation, and that's the risk for

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<v Speaker 3>the FED. If it cuts too soon, then it looks

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<v Speaker 3>like it's getting ahead of itself.

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<v Speaker 1>I'm curious, though, what would a cut do. I mean,

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<v Speaker 1>I'm talking like one quarter point here and there. Does

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<v Speaker 1>that have a material impact on economic activity?

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<v Speaker 3>It won't in and of itself, but it signals a

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<v Speaker 3>change in direction that the FED is moving toward lower

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<v Speaker 3>short rates, which will affect economic activity. But again, on

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<v Speaker 3>the Fed's what is what's happening to that very important

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<v Speaker 3>ten year yield? And if market participants are still worried

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<v Speaker 3>about inflation, that's where its attention should be.

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<v Speaker 1>There's been a lot of discussion about how the FATH

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<v Speaker 1>is also very concerned right now about mortgage rate, about

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<v Speaker 1>the housing market, I should say overall, and obviously how

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<v Speaker 1>mortgage rates feed into that. And I know that technically

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<v Speaker 1>what they do on the short end of the curve

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<v Speaker 1>doesn't have necessarily a direct impact or maybe it does

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<v Speaker 1>onto a thirty year mortgage rate. But psychologically that can

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<v Speaker 1>help to move mortgage rates down.

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<v Speaker 2>Couldn't it.

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<v Speaker 3>Yeah, I mean it helps him too. Is one if

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<v Speaker 3>it affects the real economy that obviously affects housing. The

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<v Speaker 3>other is to the extent that it does move the

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<v Speaker 3>ten year yield, that does figure into mortgage rates.

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<v Speaker 1>Gotcha.

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<v Speaker 2>President Trump has been on a very public campaign to

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<v Speaker 2>pressure Jpalett to lower interest rates. He's talked about it

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<v Speaker 2>at various times in social media postings. He wants a

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<v Speaker 2>one percentage point cut reduction. His latest explanation, his latest

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<v Speaker 2>spin is that it's important to bring down the cost

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<v Speaker 2>of servicing government debt. Is this something Palaus, even in

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<v Speaker 2>a position to com Tono respond to. I mean, it's

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<v Speaker 2>going to come up in that news conference from where

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<v Speaker 2>I'm sure, well, I'm.

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<v Speaker 3>Sure it will, and I think Share Powell and his

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<v Speaker 3>colleagues are trying to do the right thing as the

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<v Speaker 3>FED sees it, which is to keep inflation under control.

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<v Speaker 3>If the Fed does keep inflation under control, that will

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<v Speaker 3>keep interest rates as under control as they can be.

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<v Speaker 3>The question for federal debt rates, though, is high levels

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<v Speaker 3>of deficits in government debt also put upward pressure on

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<v Speaker 3>real interest rates that the Treasury has to pay.

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<v Speaker 2>So I guess the question is is it a reason

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<v Speaker 2>to cut interest rates to reduce government spending on servicing

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<v Speaker 2>the debt?

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<v Speaker 3>Is that reason enough? No? I mean, I think the

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<v Speaker 3>reason to cut rates would be if you think you

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<v Speaker 3>have solved the inflation problem and or there's a problem

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<v Speaker 3>in the real economy that the FED wants to do.

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<v Speaker 3>The lower interest rates definitely would help fiscal policy, but

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<v Speaker 3>the government itself has a lot of role to play there.

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<v Speaker 1>I am curious about the bill that's working its way

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<v Speaker 1>through Congress. It's to this tax bill, and I know

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<v Speaker 1>that the way it's being pitched by the Republicans that

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<v Speaker 1>it would actually provide some boostack and activity, irrespect of

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<v Speaker 1>a lot of the concerns about the long term effects

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<v Speaker 1>on debt servicing. Is there a sense that with the

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<v Speaker 1>tax cuts, at least what we know publicly the tax

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<v Speaker 1>cuts are preserved, with the new tax cuts in there,

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<v Speaker 1>that that could be enough of a ballast for the economy.

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<v Speaker 1>Or do we have to worry about the drag from

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<v Speaker 1>the I guess the fact that these aren't being paid for.

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<v Speaker 3>Well, I'm going to give you the classic economists the

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<v Speaker 3>answered yes to both of those. Yes, the tax cuts

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<v Speaker 3>are beneficial for the economy, particularly the business tax cuts

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<v Speaker 3>for investment, and certainly not passing a bill would be

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<v Speaker 3>bad for the economy. That said, there are two issues.

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<v Speaker 3>One is that the deficit is high as a result

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<v Speaker 3>of this, and that may put upward pressure on interest rates.

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<v Speaker 3>The Congressional Budget Office today just issue to report on that.

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<v Speaker 3>The other is, we could get the pro growth elements

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<v Speaker 3>of this tax bill with a much lower deficit of

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<v Speaker 3>be a different bill, so Congress could go back and

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<v Speaker 3>work on that. But yes, we need the tax bi.

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<v Speaker 1>I mean, you've had a seat at the table for

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<v Speaker 1>this process in the past, and I am curious how

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<v Speaker 1>much of the focus is on the long term rather

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<v Speaker 1>than just say, you know, the next year or two

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<v Speaker 1>until the next election, making sure that we have, you know,

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<v Speaker 1>basically something in the wind column to show to the

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<v Speaker 1>American people. Or are they really thinking long term about

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<v Speaker 1>what the ramifications of these policies will be on the

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<v Speaker 1>economy five ten years down the road.

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<v Speaker 3>Well, I think the administration is thinking about the long term,

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<v Speaker 3>and I hope that it will pivot to a more

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<v Speaker 3>long term growth oriented agenda, which isn't just about taxes.

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<v Speaker 3>It's about deregulation, it's about permitting reform, it's about how

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<v Speaker 3>we deal with AI. I'd like to see that pivot.

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<v Speaker 3>But yes, I think they do care about that.

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<v Speaker 2>What's the number one thing that you think investors are

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<v Speaker 2>not paying enough attention to when it comes to the

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<v Speaker 2>economy that they should be taking closer look at, should

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<v Speaker 2>be maybe even slightly worried about.

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<v Speaker 3>Well, Asset prices seem to me to be still relatively

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<v Speaker 3>richly valued, given that we've had to see change in

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<v Speaker 3>tariff policy and geopolitical risks, and yet we have the

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<v Speaker 3>stock market going back up to levels before a so

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<v Speaker 3>called liberation day. I think that is a tail risk

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<v Speaker 3>for the economy.

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<v Speaker 1>I mean, I don't want to put words in your mouth,

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<v Speaker 1>but do you see evidence of a bubble and asset

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<v Speaker 1>prices right now.

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<v Speaker 3>I wouldn't call it a bubble, but I would say

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<v Speaker 3>that markets are pricing for perfection, as if all the

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<v Speaker 3>tariffs will go away, the policy will revert to pre

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<v Speaker 3>April second levels of everything. Maybe that's true, but I

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<v Speaker 3>don't see the evidence for it.

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<v Speaker 2>So it's a case of investors treating all the uncertainty

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<v Speaker 2>as kind of noise before they are counting on the

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<v Speaker 2>President to go back to basically calling us bluff in

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<v Speaker 2>many ways.

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<v Speaker 3>Well, that's one way to put it. I think that

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<v Speaker 3>people could reasonably say, well, you know, these tariffs have

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<v Speaker 3>gone up, they've gone down, maybe they'll go to zero.

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<v Speaker 3>I don't think that's the plan. The administration has suggested

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<v Speaker 3>revenue being raised over ten years, perfectly legitimate thing to claim,

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<v Speaker 3>but that's saying the tariffs will be here to stay,

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<v Speaker 3>and I don't think markets have priced that.

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<v Speaker 1>All right, Glenn, this is really illuminating conversation. Appreciate your question.

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<v Speaker 1>Professor Glen Hubbard, former Council, former Chair of the Council

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<v Speaker 1>of Economic Advisors,