Latest / Trumponomics / Is Trump Right About the Fed Getting It Wrong?

Transcript

Is Trump Right About the Fed Getting It Wrong? · Trumponomics

0:02
Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
0:07
Speaker 2: If you just look at the basic data and don't
0:10
Speaker 2: look at the forecast, you would say that we would
0:12
Speaker 2: have continued cutting. The difference, of course, is at this
0:15
Speaker 2: time all forecasters are expecting pretty soon that some significant
0:20
Speaker 2: inflation will show up from tariffs, and you know, we
0:23
Speaker 2: can't just ignore that.
0:33
Speaker 3: I'm Stephanie Flanders, head of Government and Economics at Bloomberg,
0:36
Speaker 3: and welcome to Trumpanomics, the podcast that looks at the
0:39
Speaker 3: economic world of Donald Trump, how he's already shaped the
0:42
Speaker 3: global economy and what on earth is going to happen next.
0:45
Speaker 3: And this week we're digging into whether the Federal Reserve
0:48
Speaker 3: has been wrong in its assumptions about the economic impact
0:52
Speaker 3: of Donald Trump's tariffs. The entire White House wants Federal
0:56
Speaker 3: Reserve Chair Jpowe to lower interest rates. Commerce Secretary Howard
0:59
Speaker 3: Luttner slammed him, saying he's afraid of his own shadow
1:03
Speaker 3: for keeping interest rates so high. Treasury Sectory Scott Besant
1:06
Speaker 3: has also repeatedly pointed to the markets here, arguing that
1:10
Speaker 3: they've sent a clear signal that a cut is overdue.
1:13
Speaker 3: And of course we've heard the President himself nickname the
1:17
Speaker 3: FED Chair many times too late, Powell calling it a
1:20
Speaker 3: fool not a smart person for his refusal to cut rates.
1:24
Speaker 3: So we're asking a simple question. Do they all have
1:27
Speaker 3: a point? I mean, maybe not about the J. Powell
1:30
Speaker 3: being smart part, but have Chairman Powell and the Fed's
1:34
Speaker 3: Interest Rates Setting Committee, the FMC been too slow to
1:37
Speaker 3: cut rates? And the answer to that, it turns out,
1:40
Speaker 3: depends on whether they're correctly judging the likely impact of
1:44
Speaker 3: the President's tariffs on inflation. Because, by his own admission
1:49
Speaker 3: earlier in the year, Chair Powell was expecting to have
1:52
Speaker 3: lowered interest rates by now, and the main reason that
1:55
Speaker 3: changed was the so called Liberation Day when President Trump
1:58
Speaker 3: unveiled his sweeping new time tariff policy. At that point,
2:02
Speaker 3: Powell and nearly all of his FED colleagues decided to
2:05
Speaker 3: air on the side of caution, waiting to see if
2:08
Speaker 3: the trade conflicts and tariffs increased inflation in the US.
2:13
Speaker 3: But were they wrong then and are they wrong today? Well,
2:17
Speaker 3: we have two excellent guests to discuss that. First, we've
2:20
Speaker 3: invited back Orn Cass to Trump Andomics. He's the founder
2:23
Speaker 3: and chief economist of American Compass, author of the once
2:26
Speaker 3: and Future Worker, a vision for the renewal of work
2:29
Speaker 3: in America. He's also served as a domestic policy director
2:32
Speaker 3: for Governor Mitt Romney's twenty twelve presidential campaign, and has
2:36
Speaker 3: been a senior fellow at the Manhattan Institute for many years. Auran,
2:39
Speaker 3: I'm really glad to have you back on Trump andomics.
2:42
Speaker 1: Oh, thank you that this is such a fascinating topic.
2:44
Speaker 1: I'm excited to dig in.
2:46
Speaker 3: That's a very good start. And back again we have
2:49
Speaker 3: Anna Wong, chief US economist for Bloomberg Economics, and before
2:52
Speaker 3: that she worked at the FED, US Treasury and White
2:55
Speaker 3: House Council of Economic Advisors during Donald Trump's first term.
2:58
Speaker 3: Ann A, great to.
2:59
Speaker 4: Have you back.
3:00
Speaker 3: Happy to be eat back, so lurin. There's so many
3:06
Speaker 3: things I could talk to you about. You're relatively distinctive
3:09
Speaker 3: in the currency of commentary on the administration, in being
3:12
Speaker 3: both supportive of the president's basic agenda but very rigorous
3:16
Speaker 3: in thinking about the best way to make it a reality.
3:19
Speaker 3: And you certainly don't follow the president slavishly. But one
3:22
Speaker 3: column you wrote I did want to talk to you
3:24
Speaker 3: about you were really agreeing with Donald Trump in suggesting
3:27
Speaker 3: that the FED had just got the impact of tariff's
3:30
Speaker 3: on inflation completely wrong. So talk us through the reason
3:34
Speaker 3: you think the FED has been wrong to talk about
3:38
Speaker 3: and indeed lots of economists to talk about tariffs being inflationary.
3:41
Speaker 1: Well, I think the interesting thing that I've discovered, as
3:44
Speaker 1: I can get more involved in this fight, is that economists, actually,
3:47
Speaker 1: for the most part, if pressed on this question, will
3:50
Speaker 1: admit that tariffs are not inflationary. The definition of inflation,
3:55
Speaker 1: certainly as it is relevant to a central bank setting
3:59
Speaker 1: monetary party, concerns an ongoing increase in the overall price level.
4:05
Speaker 1: If you choose a specific policy that by design makes
4:09
Speaker 1: a one time change in the price of certain things,
4:14
Speaker 1: that is not inflation in a sense that you would
4:17
Speaker 1: want a central bank to worry about, or that you
4:19
Speaker 1: would ever try to address by raising interest rate or
4:23
Speaker 1: keeping interest rates higher. As far as I can tell,
4:26
Speaker 1: you know, when economists are pushed beyond their talking points
4:29
Speaker 1: of just hating tariffs and wanting to attack them anyway
4:33
Speaker 1: they can, they will admit this is not what inflation
4:36
Speaker 1: means in the way that economists are talking about it
4:38
Speaker 1: for purposes of monetary policy. And so look, if the
4:42
Speaker 1: FED wants to say, given current economic conditions. Broadly, we
4:46
Speaker 1: think rates are at the current level. They could say
4:49
Speaker 1: that the problem is that you have J. Powell out
4:52
Speaker 1: there explicitly saying, I would say we should be cutting
4:56
Speaker 1: except for the fact that we expect for inflation from tariffs.
4:59
Speaker 1: That simply an indefensible position to be adopting.
5:03
Speaker 3: Why do you think economists have been so quick to
5:06
Speaker 3: talk about tariffs as inflationary.
5:08
Speaker 1: Well, because I think economists, and again not hashtag not
5:12
Speaker 1: all economists, but most economists have shown over the last
5:17
Speaker 1: couple of years to have a very deep ideological opposition
5:21
Speaker 1: to tariffs that has quite toxically interfered with their ability
5:26
Speaker 1: to engage in public debates on the issue. I think
5:30
Speaker 1: there are all sorts of perfectly valid criticisms to make
5:33
Speaker 1: of tariffs, but economists are determined it seems to win
5:38
Speaker 1: the political fight over them. And over the last few years, obviously,
5:43
Speaker 1: inflation has become a very salient political concern, and so
5:49
Speaker 1: you could see, you know, as Trump was gaining steam
5:52
Speaker 1: last year, you just saw them start to jump up
5:55
Speaker 1: and lob this talking point in even though you could
5:59
Speaker 1: even go back to Trump's first term and look at
6:01
Speaker 1: not to the same scale as what's going on right now,
6:03
Speaker 1: but Trump imposed very significant tariffs, particularly on China. It's
6:08
Speaker 1: very hard to find back then. A lot of people
6:11
Speaker 1: focusing on inflation related critiques. It's also very hard to
6:15
Speaker 1: find any inflation in the data from that period. But
6:19
Speaker 1: this became a political point to score, and I think
6:23
Speaker 1: unfortunately a lot of economists have decided that the ends
6:27
Speaker 1: justify the needs.
6:28
Speaker 3: So just to be clear, you think that prices will
6:31
Speaker 3: go up or the price level will go up in
6:34
Speaker 3: response to the tariffs, but nothing else will happen after that,
6:37
Speaker 3: and there won't be any kind of increase in wages
6:40
Speaker 3: as people try and sort of catch up with the
6:42
Speaker 3: high cost of living represented by that high price level,
6:46
Speaker 3: or anything else that could be inflationary.
6:49
Speaker 1: Well, I would love to see an increase of wages
6:52
Speaker 1: because we see investments in that lead to rising productivity.
6:56
Speaker 1: But with respect to other macroeconomic effects like you just mentioned,
7:00
Speaker 1: you know, I really do think the right way to
7:03
Speaker 1: analyze tariffs is the way that we analyze other taxes.
7:06
Speaker 1: If somebody proposed the addition of a VAT, economists would
7:10
Speaker 1: not warn that it is inflationary. If anything, they would
7:13
Speaker 1: say it's probably deflationary because we would potentially be raising
7:17
Speaker 1: additional revenue and that could go towards addressing the deficeit.
7:21
Speaker 1: I think another very good example is carbon taxes. Without
7:25
Speaker 1: saying any but the merits of carbon taxes, it's safe
7:27
Speaker 1: to say that the many economists that aggressively support carbon
7:32
Speaker 1: taxes as efficient and the ultimate in wise neoliberal policy
7:36
Speaker 1: do not spend a lot of time worrying that that
7:39
Speaker 1: is going to set off some sort of inflationary spiral.
7:43
Speaker 1: What you are getting is a change in relative prices.
7:47
Speaker 1: Of course, you also have the problem that economists are
7:50
Speaker 1: talking out of both sides of their mouth, because what
7:52
Speaker 1: they really say is that they think tariffs are going
7:55
Speaker 1: to slow the economy down. If they actually took seriously
7:59
Speaker 1: their own view of the effects that tariffs would have,
8:02
Speaker 1: should probably lean toward looser monetary policy. If anything, this
8:06
Speaker 1: is not an argument about the independence of the FED.
8:10
Speaker 1: This is not an argument that prices are not going
8:12
Speaker 1: to rise in some cases that consumers are going to
8:15
Speaker 1: feel the effects. That all is true, and in fact,
8:18
Speaker 1: that is the point of tariffs. But if what you're
8:21
Speaker 1: asking is how a central bank and how monetary policy
8:25
Speaker 1: should address them, it seems to have gotten very unproductively
8:29
Speaker 1: entangled in a lot of this political rhetoric as opposed
8:33
Speaker 1: to what it is that economists themselves are otherwise arguing
8:36
Speaker 1: in almost every case.
8:38
Speaker 3: Now, Anna, I know there's lots of different pieces of this,
8:40
Speaker 3: so we'll try and sort of unpack different elements. But
8:43
Speaker 3: as our chief you, as economists, you're obviously trying, as
8:47
Speaker 3: far as any of us is humanly able, to strip
8:49
Speaker 3: ideological concerns and politics out of your analysis. You're mainly
8:53
Speaker 3: looking day to day at what you're actually seeing in
8:56
Speaker 3: the economy and then thinking how that feeds through into
8:59
Speaker 3: your full cast and your analysis. But if you're stepping
9:02
Speaker 3: back from all of that, a few months ago, would
9:04
Speaker 3: you have said these tarerts are going to be inflationary?
9:07
Speaker 4: Yeah, a few months ago I had penciled in a
9:11
Speaker 4: point three percentage point increase in the core PC from
9:15
Speaker 4: all the tariffs, and I still maintained that forecast, And
9:19
Speaker 4: I also had written a lot about how I think
9:23
Speaker 4: there's a big chunk of the tariffs that would be
9:25
Speaker 4: absorbed through profit margin and that services this inflation can
9:30
Speaker 4: offset some of them. Given that US at the end
9:33
Speaker 4: of the day is a service oriented economy.
9:37
Speaker 3: And so what is your response to to Ooren's argument,
9:40
Speaker 3: do you think the FED has overdone the risk of
9:43
Speaker 3: inflation from these tariffs, because of course we would expect
9:47
Speaker 3: a short term increase in prices without necessarily thinking that
9:51
Speaker 3: this is an inflation problem that the central bank needs
9:55
Speaker 3: to respond to.
9:56
Speaker 4: Right. The reason why I had that view a couple
10:00
Speaker 4: months ago that there's a possibility that the tariffs would
10:04
Speaker 4: not be as inflationary is because of fed's own internal
10:09
Speaker 4: models back in twenty eighteen. So, back in twenty eighteen,
10:13
Speaker 4: in one of the FOMC meeting, FED staff were studying
10:17
Speaker 4: why aren't tariffs as inflationary as they had forecasted.
10:21
Speaker 3: The first round of Trump tariffs?
10:23
Speaker 4: Yes, and they ran two models. This is a very
10:27
Speaker 4: well established internal general equal over model, and one of
10:31
Speaker 4: them shows that if tariffs were imposed in primarily intermediate goods,
10:36
Speaker 4: which it was back in twenty eighteen twenty nineteen, then
10:40
Speaker 4: the inflation would be very short lived and even deflationary
10:44
Speaker 4: after the first couple of quarters. And then another version
10:48
Speaker 4: of the models, as supposed that all the tariffs were
10:51
Speaker 4: on consumption, what happens? It also shows that the tariffs
10:55
Speaker 4: would be a one off price level shock. In fact,
10:58
Speaker 4: the FED even ransom versions of the optimal monetary policy
11:03
Speaker 4: of whether to look through this tariff shock versus not
11:07
Speaker 4: looking through, and the model would find that raising rates
11:11
Speaker 4: in respond to the price increase would not actually reduce
11:15
Speaker 4: inflation any further from the tariff. So the conclusion is
11:20
Speaker 4: that if inflation expectations are anchored, there is no point
11:24
Speaker 4: in responding to the tariffs. So what's changed in this
11:29
Speaker 4: round in trade war? Number two in the FED thinking
11:32
Speaker 4: and respond to tariffs, from my observation is number one,
11:37
Speaker 4: they seem to be not so sure whether that inflation
11:41
Speaker 4: expectations are anchored, so that is the precondition of monetary
11:46
Speaker 4: policy not looking through these tariff shocks. And second, they
11:51
Speaker 4: seem to be really embracing a new trade literature that
11:56
Speaker 4: use a new type of trade models, and those trade
12:00
Speaker 4: models would come to different conclusions than the models that
12:04
Speaker 4: the FED used in twenty eighteen. And the new conclusion
12:06
Speaker 4: is that in fact, tariffs on intermediate goods would be
12:10
Speaker 4: persistently inflationary due to the impact on productivity. So from
12:16
Speaker 4: where I see it, those two are the key differences
12:19
Speaker 4: intellectual key differences for why the FED is responding differently
12:24
Speaker 4: than from the lesson they learned in twenty eighteen and
12:26
Speaker 4: twenty nineteen.
12:27
Speaker 3: That's an interesting comparison. The importance for the judgment called
12:32
Speaker 3: by the central bank of whether or not they view
12:35
Speaker 3: inflation expectations to be well anchored. Is there a risk,
12:40
Speaker 3: because people are already worried about inflation, that this so
12:44
Speaker 3: called one off increase in prices will actually cause people
12:48
Speaker 3: to demand catch up wages and then sort of spiral
12:51
Speaker 3: after that and it will become inflationary. Or are they
12:54
Speaker 3: pretty confident going into it that this is just a
12:57
Speaker 3: one off that inflation's going to stay low, in which
12:59
Speaker 3: case you probably don't want to do anything. And you
13:02
Speaker 3: had an example, I think in Japan when they increased VAT,
13:06
Speaker 3: the central bank didn't do anything, allowed the inflation to
13:09
Speaker 3: effect to come in, and then inflation fell back down
13:13
Speaker 3: and there was no issue with how the central bank
13:16
Speaker 3: had left it because expectations were well anchored, Whereas in Turkey,
13:20
Speaker 3: where there was a lot more question mark around the
13:23
Speaker 3: independence of the central bank and the likelihood of further inflation,
13:26
Speaker 3: they had increased taxes VAT through the two thousands, and
13:30
Speaker 3: that had actually helped to further un anchor inflation expectations.
13:35
Speaker 3: The sort of pre existing situation in terms of what
13:37
Speaker 3: people are expecting about inflation matters, And I guess coming
13:41
Speaker 3: back to you are and I mean, is it your
13:43
Speaker 3: view that there was no risk of that kind because
13:47
Speaker 3: inflation expectations coming in this period were basically well anchored.
13:51
Speaker 1: If you are wondering how consumers feel about inflation, then
13:56
Speaker 1: of course what the Central pain does and says is
14:01
Speaker 1: quite endogenous to that question. So what you can't have,
14:05
Speaker 1: and apparently we do now have, is a set of
14:08
Speaker 1: models that say tariffs are not inflationary, a set of
14:11
Speaker 1: economists to say, oh, but we really don't like tariffs,
14:15
Speaker 1: and therefore we are going to spend years running around
14:17
Speaker 1: shouting that tariffs are inflationary, even though we know that
14:21
Speaker 1: our own models say that they are not, until we
14:24
Speaker 1: persuade consumers that they will be inflationary, at which point
14:28
Speaker 1: we can say, you see now, they will be inflationary
14:30
Speaker 1: and use that as an excuse to impose a monetary
14:33
Speaker 1: policy directly counter to the political choices that people have
14:38
Speaker 1: made supporting an agenda that focuses heavily on accepting a
14:43
Speaker 1: change in the price level to induce higher levels of
14:46
Speaker 1: domestic investment. And so this is where I just get
14:49
Speaker 1: so frustrated that the sorts of things that I'm talking
14:51
Speaker 1: about are pointed at. It's like, oh, he doesn't respect
14:53
Speaker 1: central bank independence. I would like nothing more than a competent, honest,
14:58
Speaker 1: independent roach to setting monetary policy, and that is not
15:03
Speaker 1: what we are getting right now. If the FED had
15:05
Speaker 1: spent the last couple of years accurately communicating, if the
15:08
Speaker 1: economists had spent the last couple of years accurately communicating
15:12
Speaker 1: what their own view of terror effects on price levels
15:15
Speaker 1: would likely be, we could have this conversation. I think
15:19
Speaker 1: it is. It is very hard to stummach situation where
15:22
Speaker 1: they have created this consumer mentality that they now say
15:26
Speaker 1: that they need to counter with policies that their own
15:29
Speaker 1: models said they should not need to be using.
15:31
Speaker 3: I like the way you describe it. But one could
15:35
Speaker 3: also say that the FED itself had played a role
15:40
Speaker 3: in unanchoring inflation expectations. You know, we highlighted some of
15:43
Speaker 3: the comments from the Lutnik, and the President himself at
15:46
Speaker 3: the beginning would say that the FED had got policy
15:50
Speaker 3: wrong in a very damaging way and had let inflation
15:53
Speaker 3: get out of control. They would say for political reasons.
15:56
Speaker 3: Presidence says it was because he was Ja Power's trying
16:00
Speaker 3: to get the Democrats re elected. But putting that to
16:04
Speaker 3: one side, that a lot of people would say there
16:06
Speaker 3: had been a policy mistake which had then left a
16:10
Speaker 3: situation where there was a potential unanchoring of expectations that
16:14
Speaker 3: people had begun to expect inflation. So I guess the
16:17
Speaker 3: critics can't have it both ways. They can't say they
16:19
Speaker 3: caused a lot of damage by allowing inflation to stay
16:23
Speaker 3: as high as it was for as long as it was,
16:25
Speaker 3: but now they shouldn't be taking that into account and
16:28
Speaker 3: thinking through the long, longer term impact of tariffs.
16:32
Speaker 1: Well, I guess I would look at that a little
16:35
Speaker 1: bit differently, which is that, Yes, I think it is
16:38
Speaker 1: very fair to say that the FED damaged its credibility
16:41
Speaker 1: by getting this wrong last time. I do not think
16:46
Speaker 1: it helps the Fed's credibility that when one party's administration
16:50
Speaker 1: pursued one set of policies that, frankly, I think most
16:54
Speaker 1: economists would say are very inflationary, like dumping trillions of
17:01
Speaker 1: of additional spending into an arguably overheated economy in ways,
17:07
Speaker 1: you know, long after the economic effects of COVID past,
17:11
Speaker 1: when you look at that and say, well, you know, hey,
17:14
Speaker 1: maybe they let's let's hold off, and you get it
17:16
Speaker 1: completely wrong. And then the other party comes in with
17:20
Speaker 1: a set of policies that, in fact your own models
17:23
Speaker 1: say are not inflationary, but there are policies you don't like.
17:27
Speaker 1: You then take exactly the opposite stance again. If we
17:32
Speaker 1: want to characterize the Federal as primarily to be the
17:35
Speaker 1: nation's psychologist and stick its finger in the wind, I
17:39
Speaker 1: guess it can justify anything it wants to do, but
17:42
Speaker 1: I think it is it is badly and frankly more
17:47
Speaker 1: so than Donald Trump, endangering its credibility as an independent
17:51
Speaker 1: institution if it takes what are clearly such nakedly political
17:56
Speaker 1: judgments in lieu of actually doing what I economic theory
18:01
Speaker 1: and common sense say would be good governance of monetary policy.
18:08
Speaker 3: And you spent a formative part of your career as
18:11
Speaker 3: a FED economist, I suspect that you will be conflicted
18:16
Speaker 3: in answering this question. But do you think that the
18:18
Speaker 3: FED has been coherent in its approach over the last
18:22
Speaker 3: couple of years, and particularly the arguments it's had with
18:24
Speaker 3: itself and made to the public over the last six months.
18:28
Speaker 4: Over taris, Yes, definitely, I am conflicted because I think
18:32
Speaker 4: the truth is I think there's a difference between FED
18:37
Speaker 4: independence and FED accountability. I wholeheartedly support FED independence, but
18:45
Speaker 4: on the accountability part, if a public institution demonstrates in
18:51
Speaker 4: the past five years that it had made so many
18:54
Speaker 4: policy mistakes and misjudged forecast, then it probably is not
19:00
Speaker 4: enough to say that, well, most of the economist professions
19:05
Speaker 4: says this, so we are not alone in making this mistake,
19:09
Speaker 4: and accountability begins with looking deep into the institution to
19:15
Speaker 4: figure out why is it that the FED, with all
19:18
Speaker 4: this very smart economists, and I have to say FED
19:21
Speaker 4: economists are the smartest people I've met, why do they
19:25
Speaker 4: persistently take the sides on these economic issues that turned
19:31
Speaker 4: out to be wrong? And so to Ourn's point, I
19:36
Speaker 4: would look at this not as you know, the FED
19:39
Speaker 4: policy mistakes driven by FED economists actively being political to
19:45
Speaker 4: thwart President Trump's agenda, but more like it is a
19:50
Speaker 4: bigger issue of group think in the economic profession, for example,
19:56
Speaker 4: thinking why in twenty twenty one that their focus is
19:59
Speaker 4: on labor scarring when you know, the thirty people CEA
20:05
Speaker 4: in the administration already had calculated that the extended unemployment
20:10
Speaker 4: insurance will more than cover income for half of the population,
20:14
Speaker 4: and therefore people would be not motivated to work.
20:17
Speaker 3: So there were sort of intellectual biases rather than political bias.
20:20
Speaker 3: You would yes, you're going on that assumption.
20:26
Speaker 1: Just to jump in briefly, the idea that intellectual biases
20:29
Speaker 1: and political biases are separate, I think fair enough.
20:34
Speaker 3: Fair enough, I will.
20:35
Speaker 1: Take Anna's acknowledgment of intellectual bias as in fact an
20:38
Speaker 1: acknowledgment of political.
20:40
Speaker 3: Okay, But the example there was what you might call
20:43
Speaker 3: in retrospect and excessive focus and excessive concern for labor
20:46
Speaker 3: market scarring. But I think economists on all sides would
20:49
Speaker 3: be concerned about labor market scarring, you know, long term
20:52
Speaker 3: impacts of COVID for the labor market.
20:56
Speaker 1: No, I completely agree that that labor market scarring is
21:00
Speaker 1: is an important issue. I would just say also that
21:02
Speaker 1: reindustrialization is an important issue. And so in the moment
21:06
Speaker 1: where you have an administration with a I would say
21:10
Speaker 1: quite robustly politically ratified strategy of intentionally raising prices on
21:18
Speaker 1: imports making a price level change on imports in an
21:21
Speaker 1: effort to induce high levels of domestic investment, which, by
21:26
Speaker 1: the way, would would directly indicate and benefit from lower
21:30
Speaker 1: interest rates. To take that sort of set of priorities
21:35
Speaker 1: and curR concerns and say no, no, that, you know,
21:38
Speaker 1: we must stay laser focused on on well, frankly, it's
21:43
Speaker 1: not clear to me what the focused on at this point.
21:46
Speaker 1: Whereas when we have a democratic administration saying, oh, we
21:49
Speaker 1: need to we need to dump trillions of dollars of
21:51
Speaker 1: stimulus into the economy as a way of addressing a
21:55
Speaker 1: set of concerns, and weould say, oh, well, let's we
21:57
Speaker 1: better give them the benefit of the doubt and let
21:59
Speaker 1: them run with that. That is hard to square.
22:03
Speaker 3: Okay, so we've done a lot. We've sort of done
22:05
Speaker 3: a little bit of climbing in the brain of the
22:08
Speaker 3: bed as far as we can and thinking about whether
22:11
Speaker 3: or not it made sense to have the judgments that
22:13
Speaker 3: they've had. But I mean, some people listening would say,
22:15
Speaker 3: hang on a minute, can't we just ask anna what's
22:18
Speaker 3: actually happening in the economy. I know it's early days,
22:21
Speaker 3: but are we getting a sense of who's right and
22:24
Speaker 3: who's wrong.
22:25
Speaker 4: Our team come at this from both a theoretical and
22:29
Speaker 4: empirical and data science perspective. So in terms of just
22:34
Speaker 4: looking at the type of prices that we have been
22:38
Speaker 4: seeing increase in the past three months since Liberation Day,
22:42
Speaker 4: so we have seen that of each one percentage point
22:47
Speaker 4: shock to tariffs, we have estimated approximately zero point three
22:53
Speaker 4: percentage passed through to consumer prices, and most of this
22:58
Speaker 4: is concentrated in these discretionary consumer goods like household appliances,
23:04
Speaker 4: audio equipments and such, and they make up about less
23:08
Speaker 4: than ten percent of the CPI. On the other hand,
23:11
Speaker 4: the consumer sentiments shock from Liberation Day, what it did
23:16
Speaker 4: is immediately dampen services spending and also discretionary stuff such
23:21
Speaker 4: as travel and hotels. So we have seen both air
23:26
Speaker 4: fears and hotels more than offset the tariff passed through
23:30
Speaker 4: so far. So on net, the CPI has still been
23:34
Speaker 4: very subdued in the past four months. For that reason,
23:38
Speaker 4: and looking forward to the next couple of months and
23:41
Speaker 4: next week in the FMC meeting, the FED is most
23:44
Speaker 4: likely to hold raised constant even with two possible descent
23:50
Speaker 4: from FED governors Bob Waller and Bowen, and the reasoning
23:56
Speaker 4: for holding raids constant is that they expect that with
23:59
Speaker 4: infant horries to sales, the stockpiled inventories running out in
24:04
Speaker 4: July and August, firms will have to restock at higher prices,
24:08
Speaker 4: and therefore that the long forecasted inflation search will come
24:13
Speaker 4: after July. So I think to settle the argument of
24:18
Speaker 4: whether tariffs are inflationary or not, really, the key data
24:21
Speaker 4: points will happen over the next two months.
24:24
Speaker 3: As you say, at the very least, it seems like
24:27
Speaker 3: they are airing on the side of caution, and they've
24:29
Speaker 3: almost made a virtue of that in the comment. I mean,
24:32
Speaker 3: do you think Anna that they should just cut rates
24:36
Speaker 3: next week and not be so cautious because they could
24:39
Speaker 3: always obviously increase interest rates if they got it wrong.
24:43
Speaker 4: So I'm arriving at a similar conclusion as Orrent, but
24:48
Speaker 4: not for the exact reason, which is that I think
24:50
Speaker 4: that the FED is, you know, being somewhat internally inconsistent
24:55
Speaker 4: for saying that inflation expectations are very well anchored.
25:00
Speaker 3: If they really were, then they wouldn't be so worried
25:02
Speaker 3: about the long term effects. Yeah, exactly.
25:05
Speaker 4: So one thing has to be wrong, which is inflation
25:10
Speaker 4: expectation really not anchored that well. Or is it that
25:15
Speaker 4: inflation are anchored well, but then they are expecting something
25:20
Speaker 4: that is outside of what their models would tell them.
25:23
Speaker 4: And I would take the side that I think, in fact,
25:27
Speaker 4: inflation expectations are not very well anchored. So the part
25:32
Speaker 4: where I'm agreeing with Oren is that maybe the FED
25:36
Speaker 4: had made several policy mistakes the last four years, perhaps
25:40
Speaker 4: by caring too much about soft landing and therefore not
25:45
Speaker 4: returning inflation expeditiously to two percent and leaving a situation
25:51
Speaker 4: today where you have a terror shock that should be
25:56
Speaker 4: just a price level impact, should just induce a price
25:59
Speaker 4: level impact. But because of those not very well anchored
26:03
Speaker 4: inflation expectations, they couldn't cut.
26:05
Speaker 3: Okay, we get to the end. Orn You've reminded us
26:09
Speaker 3: a couple of times in this conversation that there is
26:11
Speaker 3: actually a point behind higher tariffs, and certainly from your
26:15
Speaker 3: perspective and the perspective of all those who who see
26:19
Speaker 3: this as part of a reindustrialization of America agenda. So
26:23
Speaker 3: I feel like we should at least end by asking
26:25
Speaker 3: you how you think that's going. You know, the way
26:27
Speaker 3: that the tariff's deals are working out. You know, we've
26:30
Speaker 3: now had a few from quite a lot of the
26:32
Speaker 3: sort of East Asian high exporting economies have now appeared
26:37
Speaker 3: to have struct deals with the administration. Do you think
26:39
Speaker 3: that the kind of level of tariffs that are coming
26:42
Speaker 3: out of those deals, maybe fifteen twenty percent for most goods,
26:46
Speaker 3: you know, is consistent with a decent chunk of production
26:50
Speaker 3: coming back to the US.
26:52
Speaker 1: Yeah, I think it certainly is. I think we are
26:55
Speaker 1: very early days, obviously in a process where the first
26:59
Speaker 1: step is inducing investment, and so you know, the the
27:04
Speaker 1: gains that we should expect to see are things that
27:07
Speaker 1: are going to come out over the next few years.
27:12
Speaker 1: You Know, what I think is most encouraging is that
27:15
Speaker 1: raising a sort of baseline across the board tariff, having
27:18
Speaker 1: much higher tariffs on China. Both of those things I
27:21
Speaker 1: think are increasingly kind of priced in, so to speak,
27:24
Speaker 1: as the new status quo. And contrary to virtually every
27:30
Speaker 1: economists predictions, those those things appear to be things that
27:33
Speaker 1: you can in fact put into place without the world
27:37
Speaker 1: coming to an end. And so I think that's a
27:40
Speaker 1: very good start. I think with these country by country negotiations,
27:44
Speaker 1: you know, we're starting to see these deals emerge. I
27:46
Speaker 1: think even those have proved not especially stable thus far,
27:51
Speaker 1: and so it's going to take some time to see
27:53
Speaker 1: what has actually been agreed to and what's going into effect.
27:57
Speaker 1: As you mentioned it at the outset, I have no
27:59
Speaker 1: shortage of complaints at the tactical level with how things
28:03
Speaker 1: are going. I think, you know, stability and certainty is
28:07
Speaker 1: vital to this sort of project working, and we need
28:11
Speaker 1: a lot more of that. But I think the extent
28:14
Speaker 1: to which everything that we were told was going to
28:16
Speaker 1: go horribly wrong has not, and things we were told
28:20
Speaker 1: could not possibly happen in fact are starting to happen.
28:25
Speaker 1: I think that is all cause for cause, cause for optimism.
28:31
Speaker 3: This is not going to end though, right because I mean,
28:33
Speaker 3: another thing that's happened that was supposed to be much
28:36
Speaker 3: harder than it appears to have been, which is the
28:38
Speaker 3: closing of the border means potentially of quite a dramatic
28:43
Speaker 3: reduction in labor force growth this year for the US,
28:48
Speaker 3: and that also is something that could push up wages
28:52
Speaker 3: along with this sort of increase in import prices. You know,
28:55
Speaker 3: you've said, you know that you'd like to see that
28:58
Speaker 3: as a step towards the sort of re endotualization. It's
29:00
Speaker 3: a natural part of that reindustrialization process in the US.
29:05
Speaker 3: But it'll trigger all the same kind of debates about inflation, right,
29:10
Speaker 3: it will.
29:11
Speaker 1: And it will trigger all the same humiliating hypocrisy from
29:15
Speaker 1: a profession that's spent the era of open borders telling
29:19
Speaker 1: us that this does not affect wages because of course
29:21
Speaker 1: the immigrants are consumers as well as producers, until the
29:26
Speaker 1: moment when inflation became a concern, and then they started
29:30
Speaker 1: arguing no, no, no, no, you need these high levels of
29:33
Speaker 1: immigration to expand labor supply, as if those people are
29:38
Speaker 1: not equally consumers and producers. Look, I do think that
29:43
Speaker 1: restrict immigration would have a positive long run effect on wages.
29:48
Speaker 1: I think that's a trade off, even if it comes
29:51
Speaker 1: with again changes in price levels that we should absolutely embrace.
29:55
Speaker 1: But I have even less patients on this front than
29:59
Speaker 1: on the trade runt for the spine shattering whiplash of
30:04
Speaker 1: a switch from telling us that, of course, immigrants have
30:09
Speaker 1: balanced effect on both sides of the labor markets as
30:12
Speaker 1: consumers and producers, to telling us that if we pursue
30:15
Speaker 1: a policy that economists don't like, for ideological reasons it's
30:20
Speaker 1: going to have wildly imbalanced effects and so we can't
30:25
Speaker 1: do it well.
30:26
Speaker 3: And if anyone wants to hear your views in greater
30:29
Speaker 3: depth on that subject, it was actually what we discussed
30:31
Speaker 3: when you came on the show at the beginning of
30:33
Speaker 3: the year. But or in Cass, thank you so much
30:35
Speaker 3: for joining us. I suspect if all the scary forecasts
30:39
Speaker 3: from the implications of Donald Trump's policies continue to not
30:44
Speaker 3: quite be born out, I suspect we will have you
30:46
Speaker 3: back again. Thanks very much.
30:48
Speaker 1: And if they are all born out, I'm happy.
30:50
Speaker 3: To thank you very much, and thank you to Anna.
30:54
Speaker 3: Thank you. It's good to be here again, and thank
31:00
Speaker 3: you for listening to Trumponomics from Bloomberg. It was hosted
31:03
Speaker 3: by me Stephanie Flanders, and I was joined by the
31:05
Speaker 3: economist Orn Cass and Bloomberg's chief US economist, Anna Wong.
31:10
Speaker 3: Trumponomics is produced by Samasadi and Moses and Dam with
31:13
Speaker 3: help from Amy Keen. Sound design is by Blake Maples
31:17
Speaker 3: and Sage Bowman is head of podcast for Bloomberg and
31:20
Speaker 3: please help everyone else find it and enjoy it, rate
31:23
Speaker 3: it and review it highly. Wherever you found it