WEBVTT - Is Trump Right About the Fed Getting It Wrong? 0:00:02.520 --> 0:00:07.040 Bloomberg Audio Studios, podcasts, radio news. 0:00:07.880 --> 0:00:10.080 If you just look at the basic data and don't 0:00:10.080 --> 0:00:12.559 look at the forecast, you would say that we would 0:00:12.560 --> 0:00:15.560 have continued cutting. The difference, of course, is at this 0:00:15.720 --> 0:00:20.880 time all forecasters are expecting pretty soon that some significant 0:00:20.880 --> 0:00:23.560 inflation will show up from tariffs, and you know, we 0:00:23.560 --> 0:00:24.560 can't just ignore that. 0:00:33.479 --> 0:00:36.200 I'm Stephanie Flanders, head of Government and Economics at Bloomberg, 0:00:36.320 --> 0:00:39.080 and welcome to Trumpanomics, the podcast that looks at the 0:00:39.080 --> 0:00:42.199 economic world of Donald Trump, how he's already shaped the 0:00:42.200 --> 0:00:45.080 global economy and what on earth is going to happen next. 0:00:45.520 --> 0:00:48.440 And this week we're digging into whether the Federal Reserve 0:00:48.760 --> 0:00:52.159 has been wrong in its assumptions about the economic impact 0:00:52.240 --> 0:00:56.040 of Donald Trump's tariffs. The entire White House wants Federal 0:00:56.080 --> 0:00:59.600 Reserve Chair Jpowe to lower interest rates. Commerce Secretary Howard 0:00:59.640 --> 0:01:03.000 Luttner slammed him, saying he's afraid of his own shadow 0:01:03.080 --> 0:01:06.600 for keeping interest rates so high. Treasury Sectory Scott Besant 0:01:06.640 --> 0:01:09.840 has also repeatedly pointed to the markets here, arguing that 0:01:10.120 --> 0:01:12.960 they've sent a clear signal that a cut is overdue. 0:01:13.520 --> 0:01:17.000 And of course we've heard the President himself nickname the 0:01:17.000 --> 0:01:20.120 FED Chair many times too late, Powell calling it a 0:01:20.160 --> 0:01:23.680 fool not a smart person for his refusal to cut rates. 0:01:24.240 --> 0:01:27.760 So we're asking a simple question. Do they all have 0:01:27.840 --> 0:01:30.759 a point? I mean, maybe not about the J. Powell 0:01:30.760 --> 0:01:34.000 being smart part, but have Chairman Powell and the Fed's 0:01:34.000 --> 0:01:37.399 Interest Rates Setting Committee, the FMC been too slow to 0:01:37.480 --> 0:01:40.440 cut rates? And the answer to that, it turns out, 0:01:40.520 --> 0:01:44.280 depends on whether they're correctly judging the likely impact of 0:01:44.319 --> 0:01:48.600 the President's tariffs on inflation. Because, by his own admission 0:01:49.080 --> 0:01:52.080 earlier in the year, Chair Powell was expecting to have 0:01:52.160 --> 0:01:55.080 lowered interest rates by now, and the main reason that 0:01:55.240 --> 0:01:58.600 changed was the so called Liberation Day when President Trump 0:01:58.720 --> 0:02:01.920 unveiled his sweeping new time tariff policy. At that point, 0:02:02.520 --> 0:02:05.320 Powell and nearly all of his FED colleagues decided to 0:02:05.360 --> 0:02:08.799 air on the side of caution, waiting to see if 0:02:08.840 --> 0:02:12.600 the trade conflicts and tariffs increased inflation in the US. 0:02:13.320 --> 0:02:17.400 But were they wrong then and are they wrong today? Well, 0:02:17.440 --> 0:02:20.480 we have two excellent guests to discuss that. First, we've 0:02:20.520 --> 0:02:23.239 invited back Orn Cass to Trump Andomics. He's the founder 0:02:23.240 --> 0:02:26.560 and chief economist of American Compass, author of the once 0:02:26.639 --> 0:02:29.400 and Future Worker, a vision for the renewal of work 0:02:29.440 --> 0:02:32.640 in America. He's also served as a domestic policy director 0:02:32.639 --> 0:02:36.400 for Governor Mitt Romney's twenty twelve presidential campaign, and has 0:02:36.440 --> 0:02:39.680 been a senior fellow at the Manhattan Institute for many years. Auran, 0:02:39.680 --> 0:02:41.880 I'm really glad to have you back on Trump andomics. 0:02:42.400 --> 0:02:44.760 Oh, thank you that this is such a fascinating topic. 0:02:44.800 --> 0:02:46.320 I'm excited to dig in. 0:02:46.400 --> 0:02:49.120 That's a very good start. And back again we have 0:02:49.240 --> 0:02:52.600 Anna Wong, chief US economist for Bloomberg Economics, and before 0:02:52.639 --> 0:02:55.160 that she worked at the FED, US Treasury and White 0:02:55.200 --> 0:02:58.640 House Council of Economic Advisors during Donald Trump's first term. 0:02:58.720 --> 0:02:59.400 Ann A, great to. 0:02:59.360 --> 0:02:59.799 Have you back. 0:03:00.120 --> 0:03:06.919 Happy to be eat back, so lurin. There's so many 0:03:06.919 --> 0:03:09.680 things I could talk to you about. You're relatively distinctive 0:03:09.880 --> 0:03:12.720 in the currency of commentary on the administration, in being 0:03:12.760 --> 0:03:16.000 both supportive of the president's basic agenda but very rigorous 0:03:16.040 --> 0:03:19.520 in thinking about the best way to make it a reality. 0:03:19.840 --> 0:03:22.880 And you certainly don't follow the president slavishly. But one 0:03:22.919 --> 0:03:24.440 column you wrote I did want to talk to you 0:03:24.520 --> 0:03:27.800 about you were really agreeing with Donald Trump in suggesting 0:03:27.840 --> 0:03:30.720 that the FED had just got the impact of tariff's 0:03:30.720 --> 0:03:34.360 on inflation completely wrong. So talk us through the reason 0:03:34.440 --> 0:03:37.960 you think the FED has been wrong to talk about 0:03:38.000 --> 0:03:41.160 and indeed lots of economists to talk about tariffs being inflationary. 0:03:41.600 --> 0:03:44.480 Well, I think the interesting thing that I've discovered, as 0:03:44.520 --> 0:03:47.960 I can get more involved in this fight, is that economists, actually, 0:03:47.960 --> 0:03:50.839 for the most part, if pressed on this question, will 0:03:50.880 --> 0:03:55.720 admit that tariffs are not inflationary. The definition of inflation, 0:03:55.920 --> 0:03:59.200 certainly as it is relevant to a central bank setting 0:03:59.280 --> 0:04:05.000 monetary party, concerns an ongoing increase in the overall price level. 0:04:05.560 --> 0:04:09.640 If you choose a specific policy that by design makes 0:04:09.680 --> 0:04:13.680 a one time change in the price of certain things, 0:04:14.240 --> 0:04:17.279 that is not inflation in a sense that you would 0:04:17.360 --> 0:04:19.719 want a central bank to worry about, or that you 0:04:19.720 --> 0:04:23.279 would ever try to address by raising interest rate or 0:04:23.360 --> 0:04:26.599 keeping interest rates higher. As far as I can tell, 0:04:26.760 --> 0:04:29.640 you know, when economists are pushed beyond their talking points 0:04:29.640 --> 0:04:32.760 of just hating tariffs and wanting to attack them anyway 0:04:33.160 --> 0:04:36.080 they can, they will admit this is not what inflation 0:04:36.279 --> 0:04:38.920 means in the way that economists are talking about it 0:04:38.960 --> 0:04:42.320 for purposes of monetary policy. And so look, if the 0:04:42.360 --> 0:04:46.159 FED wants to say, given current economic conditions. Broadly, we 0:04:46.240 --> 0:04:49.160 think rates are at the current level. They could say 0:04:49.200 --> 0:04:52.040 that the problem is that you have J. Powell out 0:04:52.080 --> 0:04:55.520 there explicitly saying, I would say we should be cutting 0:04:56.080 --> 0:04:59.400 except for the fact that we expect for inflation from tariffs. 0:04:59.720 --> 0:05:03.240 That simply an indefensible position to be adopting. 0:05:03.720 --> 0:05:05.919 Why do you think economists have been so quick to 0:05:06.000 --> 0:05:08.320 talk about tariffs as inflationary. 0:05:08.279 --> 0:05:11.960 Well, because I think economists, and again not hashtag not 0:05:12.000 --> 0:05:17.080 all economists, but most economists have shown over the last 0:05:17.120 --> 0:05:21.360 couple of years to have a very deep ideological opposition 0:05:21.440 --> 0:05:26.839 to tariffs that has quite toxically interfered with their ability 0:05:26.880 --> 0:05:30.320 to engage in public debates on the issue. I think 0:05:30.360 --> 0:05:33.840 there are all sorts of perfectly valid criticisms to make 0:05:33.880 --> 0:05:37.920 of tariffs, but economists are determined it seems to win 0:05:38.640 --> 0:05:42.960 the political fight over them. And over the last few years, obviously, 0:05:43.040 --> 0:05:48.400 inflation has become a very salient political concern, and so 0:05:49.000 --> 0:05:52.279 you could see, you know, as Trump was gaining steam 0:05:52.360 --> 0:05:55.520 last year, you just saw them start to jump up 0:05:55.560 --> 0:05:59.479 and lob this talking point in even though you could 0:05:59.480 --> 0:06:01.440 even go back to Trump's first term and look at 0:06:01.560 --> 0:06:03.719 not to the same scale as what's going on right now, 0:06:03.839 --> 0:06:08.200 but Trump imposed very significant tariffs, particularly on China. It's 0:06:08.320 --> 0:06:10.880 very hard to find back then. A lot of people 0:06:11.440 --> 0:06:15.760 focusing on inflation related critiques. It's also very hard to 0:06:15.800 --> 0:06:19.120 find any inflation in the data from that period. But 0:06:19.720 --> 0:06:23.640 this became a political point to score, and I think 0:06:23.720 --> 0:06:27.280 unfortunately a lot of economists have decided that the ends 0:06:27.400 --> 0:06:28.240 justify the needs. 0:06:28.880 --> 0:06:31.800 So just to be clear, you think that prices will 0:06:31.839 --> 0:06:34.120 go up or the price level will go up in 0:06:34.160 --> 0:06:37.760 response to the tariffs, but nothing else will happen after that, 0:06:37.839 --> 0:06:40.680 and there won't be any kind of increase in wages 0:06:40.760 --> 0:06:42.720 as people try and sort of catch up with the 0:06:42.800 --> 0:06:46.240 high cost of living represented by that high price level, 0:06:46.760 --> 0:06:48.640 or anything else that could be inflationary. 0:06:49.520 --> 0:06:51.880 Well, I would love to see an increase of wages 0:06:52.279 --> 0:06:55.720 because we see investments in that lead to rising productivity. 0:06:56.000 --> 0:06:59.800 But with respect to other macroeconomic effects like you just mentioned, 0:07:00.360 --> 0:07:02.400 you know, I really do think the right way to 0:07:03.160 --> 0:07:06.400 analyze tariffs is the way that we analyze other taxes. 0:07:06.800 --> 0:07:10.880 If somebody proposed the addition of a VAT, economists would 0:07:10.920 --> 0:07:13.360 not warn that it is inflationary. If anything, they would 0:07:13.360 --> 0:07:17.239 say it's probably deflationary because we would potentially be raising 0:07:17.240 --> 0:07:21.240 additional revenue and that could go towards addressing the deficeit. 0:07:21.480 --> 0:07:25.120 I think another very good example is carbon taxes. Without 0:07:25.160 --> 0:07:27.720 saying any but the merits of carbon taxes, it's safe 0:07:27.760 --> 0:07:31.960 to say that the many economists that aggressively support carbon 0:07:32.000 --> 0:07:36.320 taxes as efficient and the ultimate in wise neoliberal policy 0:07:36.800 --> 0:07:39.560 do not spend a lot of time worrying that that 0:07:39.720 --> 0:07:43.400 is going to set off some sort of inflationary spiral. 0:07:43.600 --> 0:07:46.760 What you are getting is a change in relative prices. 0:07:47.440 --> 0:07:50.200 Of course, you also have the problem that economists are 0:07:50.280 --> 0:07:52.120 talking out of both sides of their mouth, because what 0:07:52.440 --> 0:07:55.480 they really say is that they think tariffs are going 0:07:55.520 --> 0:07:59.320 to slow the economy down. If they actually took seriously 0:07:59.360 --> 0:08:02.080 their own view of the effects that tariffs would have, 0:08:02.560 --> 0:08:06.760 should probably lean toward looser monetary policy. If anything, this 0:08:06.920 --> 0:08:09.600 is not an argument about the independence of the FED. 0:08:10.120 --> 0:08:12.800 This is not an argument that prices are not going 0:08:12.800 --> 0:08:15.240 to rise in some cases that consumers are going to 0:08:15.240 --> 0:08:18.640 feel the effects. That all is true, and in fact, 0:08:18.680 --> 0:08:21.920 that is the point of tariffs. But if what you're 0:08:21.920 --> 0:08:25.080 asking is how a central bank and how monetary policy 0:08:25.600 --> 0:08:29.680 should address them, it seems to have gotten very unproductively 0:08:29.840 --> 0:08:33.240 entangled in a lot of this political rhetoric as opposed 0:08:33.240 --> 0:08:36.320 to what it is that economists themselves are otherwise arguing 0:08:36.679 --> 0:08:37.880 in almost every case. 0:08:38.600 --> 0:08:40.760 Now, Anna, I know there's lots of different pieces of this, 0:08:40.840 --> 0:08:43.640 so we'll try and sort of unpack different elements. But 0:08:43.920 --> 0:08:47.040 as our chief you, as economists, you're obviously trying, as 0:08:47.080 --> 0:08:49.439 far as any of us is humanly able, to strip 0:08:49.640 --> 0:08:53.280 ideological concerns and politics out of your analysis. You're mainly 0:08:53.320 --> 0:08:56.320 looking day to day at what you're actually seeing in 0:08:56.320 --> 0:08:59.200 the economy and then thinking how that feeds through into 0:08:59.240 --> 0:09:02.200 your full cast and your analysis. But if you're stepping 0:09:02.240 --> 0:09:04.760 back from all of that, a few months ago, would 0:09:04.760 --> 0:09:07.240 you have said these tarerts are going to be inflationary? 0:09:07.960 --> 0:09:10.920 Yeah, a few months ago I had penciled in a 0:09:11.120 --> 0:09:15.760 point three percentage point increase in the core PC from 0:09:15.840 --> 0:09:19.320 all the tariffs, and I still maintained that forecast, And 0:09:19.360 --> 0:09:23.040 I also had written a lot about how I think 0:09:23.120 --> 0:09:25.600 there's a big chunk of the tariffs that would be 0:09:25.679 --> 0:09:30.880 absorbed through profit margin and that services this inflation can 0:09:30.920 --> 0:09:33.280 offset some of them. Given that US at the end 0:09:33.320 --> 0:09:36.920 of the day is a service oriented economy. 0:09:37.520 --> 0:09:40.839 And so what is your response to to Ooren's argument, 0:09:40.880 --> 0:09:43.480 do you think the FED has overdone the risk of 0:09:43.520 --> 0:09:47.440 inflation from these tariffs, because of course we would expect 0:09:47.679 --> 0:09:51.480 a short term increase in prices without necessarily thinking that 0:09:51.559 --> 0:09:55.040 this is an inflation problem that the central bank needs 0:09:55.080 --> 0:09:55.800 to respond to. 0:09:56.840 --> 0:09:59.959 Right. The reason why I had that view a couple 0:10:00.160 --> 0:10:04.360 months ago that there's a possibility that the tariffs would 0:10:04.360 --> 0:10:09.600 not be as inflationary is because of fed's own internal 0:10:09.679 --> 0:10:13.520 models back in twenty eighteen. So, back in twenty eighteen, 0:10:13.600 --> 0:10:17.400 in one of the FOMC meeting, FED staff were studying 0:10:17.679 --> 0:10:21.800 why aren't tariffs as inflationary as they had forecasted. 0:10:21.320 --> 0:10:23.319 The first round of Trump tariffs? 0:10:23.520 --> 0:10:26.920 Yes, and they ran two models. This is a very 0:10:27.240 --> 0:10:31.080 well established internal general equal over model, and one of 0:10:31.080 --> 0:10:36.160 them shows that if tariffs were imposed in primarily intermediate goods, 0:10:36.200 --> 0:10:39.680 which it was back in twenty eighteen twenty nineteen, then 0:10:40.360 --> 0:10:44.479 the inflation would be very short lived and even deflationary 0:10:44.600 --> 0:10:48.800 after the first couple of quarters. And then another version 0:10:48.840 --> 0:10:51.040 of the models, as supposed that all the tariffs were 0:10:51.080 --> 0:10:55.040 on consumption, what happens? It also shows that the tariffs 0:10:55.520 --> 0:10:58.080 would be a one off price level shock. In fact, 0:10:58.320 --> 0:11:03.360 the FED even ransom versions of the optimal monetary policy 0:11:03.480 --> 0:11:07.240 of whether to look through this tariff shock versus not 0:11:07.280 --> 0:11:11.600 looking through, and the model would find that raising rates 0:11:11.640 --> 0:11:15.080 in respond to the price increase would not actually reduce 0:11:15.480 --> 0:11:20.000 inflation any further from the tariff. So the conclusion is 0:11:20.040 --> 0:11:24.679 that if inflation expectations are anchored, there is no point 0:11:24.880 --> 0:11:29.199 in responding to the tariffs. So what's changed in this 0:11:29.400 --> 0:11:32.360 round in trade war? Number two in the FED thinking 0:11:32.840 --> 0:11:37.199 and respond to tariffs, from my observation is number one, 0:11:37.360 --> 0:11:40.640 they seem to be not so sure whether that inflation 0:11:41.160 --> 0:11:45.960 expectations are anchored, so that is the precondition of monetary 0:11:46.000 --> 0:11:51.080 policy not looking through these tariff shocks. And second, they 0:11:51.120 --> 0:11:55.839 seem to be really embracing a new trade literature that 0:11:56.040 --> 0:11:59.920 use a new type of trade models, and those trade 0:12:00.120 --> 0:12:04.200 models would come to different conclusions than the models that 0:12:04.240 --> 0:12:06.640 the FED used in twenty eighteen. And the new conclusion 0:12:06.720 --> 0:12:10.240 is that in fact, tariffs on intermediate goods would be 0:12:10.360 --> 0:12:16.480 persistently inflationary due to the impact on productivity. So from 0:12:16.520 --> 0:12:19.440 where I see it, those two are the key differences 0:12:19.480 --> 0:12:24.040 intellectual key differences for why the FED is responding differently 0:12:24.160 --> 0:12:26.719 than from the lesson they learned in twenty eighteen and 0:12:26.800 --> 0:12:27.559 twenty nineteen. 0:12:27.840 --> 0:12:32.000 That's an interesting comparison. The importance for the judgment called 0:12:32.000 --> 0:12:35.240 by the central bank of whether or not they view 0:12:35.960 --> 0:12:39.559 inflation expectations to be well anchored. Is there a risk, 0:12:40.000 --> 0:12:44.280 because people are already worried about inflation, that this so 0:12:44.400 --> 0:12:47.960 called one off increase in prices will actually cause people 0:12:48.000 --> 0:12:51.120 to demand catch up wages and then sort of spiral 0:12:51.200 --> 0:12:54.319 after that and it will become inflationary. Or are they 0:12:54.320 --> 0:12:57.280 pretty confident going into it that this is just a 0:12:57.280 --> 0:12:59.840 one off that inflation's going to stay low, in which 0:12:59.840 --> 0:13:02.440 case you probably don't want to do anything. And you 0:13:02.480 --> 0:13:06.040 had an example, I think in Japan when they increased VAT, 0:13:06.559 --> 0:13:09.160 the central bank didn't do anything, allowed the inflation to 0:13:09.640 --> 0:13:13.720 effect to come in, and then inflation fell back down 0:13:13.880 --> 0:13:16.040 and there was no issue with how the central bank 0:13:16.120 --> 0:13:20.240 had left it because expectations were well anchored, Whereas in Turkey, 0:13:20.360 --> 0:13:23.120 where there was a lot more question mark around the 0:13:23.120 --> 0:13:26.480 independence of the central bank and the likelihood of further inflation, 0:13:26.800 --> 0:13:30.880 they had increased taxes VAT through the two thousands, and 0:13:30.920 --> 0:13:35.040 that had actually helped to further un anchor inflation expectations. 0:13:35.200 --> 0:13:37.959 The sort of pre existing situation in terms of what 0:13:37.960 --> 0:13:41.160 people are expecting about inflation matters, And I guess coming 0:13:41.200 --> 0:13:43.520 back to you are and I mean, is it your 0:13:43.640 --> 0:13:47.000 view that there was no risk of that kind because 0:13:47.080 --> 0:13:50.840 inflation expectations coming in this period were basically well anchored. 0:13:51.600 --> 0:13:56.600 If you are wondering how consumers feel about inflation, then 0:13:56.679 --> 0:14:01.360 of course what the Central pain does and says is 0:14:01.600 --> 0:14:05.199 quite endogenous to that question. So what you can't have, 0:14:05.400 --> 0:14:08.120 and apparently we do now have, is a set of 0:14:08.160 --> 0:14:11.400 models that say tariffs are not inflationary, a set of 0:14:11.480 --> 0:14:14.600 economists to say, oh, but we really don't like tariffs, 0:14:15.040 --> 0:14:17.440 and therefore we are going to spend years running around 0:14:17.520 --> 0:14:21.200 shouting that tariffs are inflationary, even though we know that 0:14:21.280 --> 0:14:24.160 our own models say that they are not, until we 0:14:24.240 --> 0:14:28.120 persuade consumers that they will be inflationary, at which point 0:14:28.160 --> 0:14:30.800 we can say, you see now, they will be inflationary 0:14:30.880 --> 0:14:33.600 and use that as an excuse to impose a monetary 0:14:33.640 --> 0:14:37.960 policy directly counter to the political choices that people have 0:14:38.080 --> 0:14:43.520 made supporting an agenda that focuses heavily on accepting a 0:14:43.640 --> 0:14:46.040 change in the price level to induce higher levels of 0:14:46.080 --> 0:14:49.280 domestic investment. And so this is where I just get 0:14:49.320 --> 0:14:51.680 so frustrated that the sorts of things that I'm talking 0:14:51.760 --> 0:14:53.840 about are pointed at. It's like, oh, he doesn't respect 0:14:53.920 --> 0:14:58.040 central bank independence. I would like nothing more than a competent, honest, 0:14:58.120 --> 0:15:03.240 independent roach to setting monetary policy, and that is not 0:15:03.280 --> 0:15:05.440 what we are getting right now. If the FED had 0:15:05.480 --> 0:15:08.960 spent the last couple of years accurately communicating, if the 0:15:08.960 --> 0:15:11.960 economists had spent the last couple of years accurately communicating 0:15:12.280 --> 0:15:15.520 what their own view of terror effects on price levels 0:15:15.600 --> 0:15:19.480 would likely be, we could have this conversation. I think 0:15:19.520 --> 0:15:22.120 it is. It is very hard to stummach situation where 0:15:22.240 --> 0:15:26.200 they have created this consumer mentality that they now say 0:15:26.240 --> 0:15:29.160 that they need to counter with policies that their own 0:15:29.200 --> 0:15:31.280 models said they should not need to be using. 0:15:31.960 --> 0:15:35.400 I like the way you describe it. But one could 0:15:35.400 --> 0:15:40.440 also say that the FED itself had played a role 0:15:40.560 --> 0:15:43.840 in unanchoring inflation expectations. You know, we highlighted some of 0:15:43.880 --> 0:15:46.960 the comments from the Lutnik, and the President himself at 0:15:46.960 --> 0:15:50.480 the beginning would say that the FED had got policy 0:15:50.560 --> 0:15:53.200 wrong in a very damaging way and had let inflation 0:15:53.280 --> 0:15:56.320 get out of control. They would say for political reasons. 0:15:56.640 --> 0:16:00.320 Presidence says it was because he was Ja Power's trying 0:16:00.320 --> 0:16:04.680 to get the Democrats re elected. But putting that to 0:16:04.720 --> 0:16:06.800 one side, that a lot of people would say there 0:16:06.840 --> 0:16:10.480 had been a policy mistake which had then left a 0:16:10.520 --> 0:16:14.760 situation where there was a potential unanchoring of expectations that 0:16:14.800 --> 0:16:17.200 people had begun to expect inflation. So I guess the 0:16:17.200 --> 0:16:19.600 critics can't have it both ways. They can't say they 0:16:19.640 --> 0:16:23.240 caused a lot of damage by allowing inflation to stay 0:16:23.240 --> 0:16:25.040 as high as it was for as long as it was, 0:16:25.880 --> 0:16:28.640 but now they shouldn't be taking that into account and 0:16:28.680 --> 0:16:31.920 thinking through the long, longer term impact of tariffs. 0:16:32.800 --> 0:16:35.000 Well, I guess I would look at that a little 0:16:35.000 --> 0:16:38.040 bit differently, which is that, Yes, I think it is 0:16:38.280 --> 0:16:41.120 very fair to say that the FED damaged its credibility 0:16:41.720 --> 0:16:45.960 by getting this wrong last time. I do not think 0:16:46.000 --> 0:16:50.320 it helps the Fed's credibility that when one party's administration 0:16:50.560 --> 0:16:54.480 pursued one set of policies that, frankly, I think most 0:16:54.480 --> 0:17:01.600 economists would say are very inflationary, like dumping trillions of 0:17:01.600 --> 0:17:07.080 of additional spending into an arguably overheated economy in ways, 0:17:07.240 --> 0:17:11.320 you know, long after the economic effects of COVID past, 0:17:11.760 --> 0:17:13.960 when you look at that and say, well, you know, hey, 0:17:14.080 --> 0:17:16.720 maybe they let's let's hold off, and you get it 0:17:16.720 --> 0:17:19.919 completely wrong. And then the other party comes in with 0:17:20.000 --> 0:17:23.240 a set of policies that, in fact your own models 0:17:23.240 --> 0:17:26.439 say are not inflationary, but there are policies you don't like. 0:17:27.160 --> 0:17:32.359 You then take exactly the opposite stance again. If we 0:17:32.480 --> 0:17:35.480 want to characterize the Federal as primarily to be the 0:17:35.560 --> 0:17:39.600 nation's psychologist and stick its finger in the wind, I 0:17:39.600 --> 0:17:42.719 guess it can justify anything it wants to do, but 0:17:42.920 --> 0:17:47.320 I think it is it is badly and frankly more 0:17:47.400 --> 0:17:51.520 so than Donald Trump, endangering its credibility as an independent 0:17:51.560 --> 0:17:56.720 institution if it takes what are clearly such nakedly political 0:17:56.840 --> 0:18:01.720 judgments in lieu of actually doing what I economic theory 0:18:01.760 --> 0:18:07.120 and common sense say would be good governance of monetary policy. 0:18:08.080 --> 0:18:11.880 And you spent a formative part of your career as 0:18:11.920 --> 0:18:16.159 a FED economist, I suspect that you will be conflicted 0:18:16.200 --> 0:18:18.199 in answering this question. But do you think that the 0:18:18.240 --> 0:18:22.120 FED has been coherent in its approach over the last 0:18:22.119 --> 0:18:24.439 couple of years, and particularly the arguments it's had with 0:18:24.560 --> 0:18:27.960 itself and made to the public over the last six months. 0:18:28.000 --> 0:18:32.520 Over taris, Yes, definitely, I am conflicted because I think 0:18:32.840 --> 0:18:37.680 the truth is I think there's a difference between FED 0:18:37.760 --> 0:18:45.240 independence and FED accountability. I wholeheartedly support FED independence, but 0:18:45.359 --> 0:18:51.200 on the accountability part, if a public institution demonstrates in 0:18:51.240 --> 0:18:54.520 the past five years that it had made so many 0:18:54.640 --> 0:18:59.920 policy mistakes and misjudged forecast, then it probably is not 0:19:00.440 --> 0:19:05.119 enough to say that, well, most of the economist professions 0:19:05.240 --> 0:19:09.280 says this, so we are not alone in making this mistake, 0:19:09.880 --> 0:19:15.000 and accountability begins with looking deep into the institution to 0:19:15.119 --> 0:19:18.280 figure out why is it that the FED, with all 0:19:18.320 --> 0:19:21.440 this very smart economists, and I have to say FED 0:19:21.480 --> 0:19:25.440 economists are the smartest people I've met, why do they 0:19:25.800 --> 0:19:31.480 persistently take the sides on these economic issues that turned 0:19:31.520 --> 0:19:36.119 out to be wrong? And so to Ourn's point, I 0:19:36.160 --> 0:19:39.440 would look at this not as you know, the FED 0:19:39.480 --> 0:19:44.679 policy mistakes driven by FED economists actively being political to 0:19:45.119 --> 0:19:50.800 thwart President Trump's agenda, but more like it is a 0:19:50.840 --> 0:19:56.160 bigger issue of group think in the economic profession, for example, 0:19:56.240 --> 0:19:59.320 thinking why in twenty twenty one that their focus is 0:19:59.359 --> 0:20:04.119 on labor scarring when you know, the thirty people CEA 0:20:05.040 --> 0:20:10.399 in the administration already had calculated that the extended unemployment 0:20:10.440 --> 0:20:14.600 insurance will more than cover income for half of the population, 0:20:14.720 --> 0:20:17.200 and therefore people would be not motivated to work. 0:20:17.480 --> 0:20:20.600 So there were sort of intellectual biases rather than political bias. 0:20:20.800 --> 0:20:23.240 You would yes, you're going on that assumption. 0:20:26.640 --> 0:20:29.320 Just to jump in briefly, the idea that intellectual biases 0:20:29.359 --> 0:20:34.080 and political biases are separate, I think fair enough. 0:20:34.440 --> 0:20:35.320 Fair enough, I will. 0:20:35.160 --> 0:20:38.959 Take Anna's acknowledgment of intellectual bias as in fact an 0:20:38.960 --> 0:20:40.960 acknowledgment of political. 0:20:40.720 --> 0:20:43.200 Okay, But the example there was what you might call 0:20:43.400 --> 0:20:46.879 in retrospect and excessive focus and excessive concern for labor 0:20:46.920 --> 0:20:49.720 market scarring. But I think economists on all sides would 0:20:49.720 --> 0:20:52.720 be concerned about labor market scarring, you know, long term 0:20:52.760 --> 0:20:55.600 impacts of COVID for the labor market. 0:20:56.600 --> 0:21:00.119 No, I completely agree that that labor market scarring is 0:21:00.119 --> 0:21:02.840 is an important issue. I would just say also that 0:21:02.920 --> 0:21:06.680 reindustrialization is an important issue. And so in the moment 0:21:06.720 --> 0:21:10.520 where you have an administration with a I would say 0:21:10.840 --> 0:21:18.280 quite robustly politically ratified strategy of intentionally raising prices on 0:21:18.359 --> 0:21:21.959 imports making a price level change on imports in an 0:21:21.960 --> 0:21:26.560 effort to induce high levels of domestic investment, which, by 0:21:26.560 --> 0:21:30.560 the way, would would directly indicate and benefit from lower 0:21:30.560 --> 0:21:35.760 interest rates. To take that sort of set of priorities 0:21:35.760 --> 0:21:38.399 and curR concerns and say no, no, that, you know, 0:21:38.520 --> 0:21:43.600 we must stay laser focused on on well, frankly, it's 0:21:43.640 --> 0:21:46.360 not clear to me what the focused on at this point. 0:21:46.560 --> 0:21:49.080 Whereas when we have a democratic administration saying, oh, we 0:21:49.119 --> 0:21:51.399 need to we need to dump trillions of dollars of 0:21:51.480 --> 0:21:55.320 stimulus into the economy as a way of addressing a 0:21:55.359 --> 0:21:57.080 set of concerns, and weould say, oh, well, let's we 0:21:57.160 --> 0:21:58.960 better give them the benefit of the doubt and let 0:21:59.040 --> 0:22:02.960 them run with that. That is hard to square. 0:22:03.520 --> 0:22:05.920 Okay, so we've done a lot. We've sort of done 0:22:05.960 --> 0:22:08.840 a little bit of climbing in the brain of the 0:22:08.880 --> 0:22:11.440 bed as far as we can and thinking about whether 0:22:11.520 --> 0:22:13.280 or not it made sense to have the judgments that 0:22:13.280 --> 0:22:15.399 they've had. But I mean, some people listening would say, 0:22:15.400 --> 0:22:18.280 hang on a minute, can't we just ask anna what's 0:22:18.280 --> 0:22:20.959 actually happening in the economy. I know it's early days, 0:22:21.000 --> 0:22:24.520 but are we getting a sense of who's right and 0:22:24.560 --> 0:22:25.159 who's wrong. 0:22:25.680 --> 0:22:29.359 Our team come at this from both a theoretical and 0:22:29.560 --> 0:22:34.439 empirical and data science perspective. So in terms of just 0:22:34.560 --> 0:22:37.880 looking at the type of prices that we have been 0:22:38.280 --> 0:22:42.280 seeing increase in the past three months since Liberation Day, 0:22:42.760 --> 0:22:47.280 so we have seen that of each one percentage point 0:22:47.400 --> 0:22:53.080 shock to tariffs, we have estimated approximately zero point three 0:22:53.400 --> 0:22:58.000 percentage passed through to consumer prices, and most of this 0:22:58.240 --> 0:23:03.560 is concentrated in these discretionary consumer goods like household appliances, 0:23:04.880 --> 0:23:08.520 audio equipments and such, and they make up about less 0:23:08.520 --> 0:23:11.480 than ten percent of the CPI. On the other hand, 0:23:11.720 --> 0:23:16.280 the consumer sentiments shock from Liberation Day, what it did 0:23:16.400 --> 0:23:21.840 is immediately dampen services spending and also discretionary stuff such 0:23:21.840 --> 0:23:26.360 as travel and hotels. So we have seen both air 0:23:26.440 --> 0:23:30.680 fears and hotels more than offset the tariff passed through 0:23:30.720 --> 0:23:34.560 so far. So on net, the CPI has still been 0:23:34.840 --> 0:23:37.679 very subdued in the past four months. For that reason, 0:23:38.200 --> 0:23:41.520 and looking forward to the next couple of months and 0:23:41.880 --> 0:23:44.520 next week in the FMC meeting, the FED is most 0:23:44.640 --> 0:23:50.639 likely to hold raised constant even with two possible descent 0:23:50.840 --> 0:23:56.120 from FED governors Bob Waller and Bowen, and the reasoning 0:23:56.160 --> 0:23:59.320 for holding raids constant is that they expect that with 0:23:59.520 --> 0:24:04.520 infant horries to sales, the stockpiled inventories running out in 0:24:04.720 --> 0:24:08.879 July and August, firms will have to restock at higher prices, 0:24:08.920 --> 0:24:13.560 and therefore that the long forecasted inflation search will come 0:24:13.880 --> 0:24:17.840 after July. So I think to settle the argument of 0:24:18.160 --> 0:24:21.720 whether tariffs are inflationary or not, really, the key data 0:24:21.760 --> 0:24:24.320