July 24, 2025 • 31 mins
On this episode of Trumponomics, we discuss whether Jerome Powell has overestimated the risk of inflation stemming from the US trade war.
Joining us are Oren Cass, founder and chief economist at American Compass and Anna Wong, chief US economist at Bloomberg Economics who served in various roles in Trump’s first administration. Along with host Stephanie Flanders, they examine whether the Fed has been getting it wrong on rates, and if so, why.
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Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:07):
If you just look at the basic data and don't
look at the forecast, you would say that we would
have continued cutting. The difference, of course, is at this
time all forecasters are expecting pretty soon that some significant
inflation will show up from tariffs, and you know, we
can't just ignore that.
Speaker 3 (00:33):
I'm Stephanie Flanders, head of Government and Economics at Bloomberg,
and welcome to Trumpanomics, the podcast that looks at the
economic world of Donald Trump, how he's already shaped the
global economy and what on earth is going to happen next.
And this week we're digging into whether the Federal Reserve
has been wrong in its assumptions about the economic impact
of Donald Trump's tariffs. The entire White House wants Federal
(00:56):
Reserve Chair Jpowe to lower interest rates. Commerce Secretary Howard
Luttner slammed him, saying he's afraid of his own shadow
for keeping interest rates so high. Treasury Sectory Scott Besant
has also repeatedly pointed to the markets here, arguing that
they've sent a clear signal that a cut is overdue.
And of course we've heard the President himself nickname the
(01:17):
FED Chair many times too late, Powell calling it a
fool not a smart person for his refusal to cut rates.
So we're asking a simple question. Do they all have
a point? I mean, maybe not about the J. Powell
being smart part, but have Chairman Powell and the Fed's
Interest Rates Setting Committee, the FMC been too slow to
(01:37):
cut rates? And the answer to that, it turns out,
depends on whether they're correctly judging the likely impact of
the President's tariffs on inflation. Because, by his own admission
earlier in the year, Chair Powell was expecting to have
lowered interest rates by now, and the main reason that
changed was the so called Liberation Day when President Trump
(01:58):
unveiled his sweeping new time tariff policy. At that point,
Powell and nearly all of his FED colleagues decided to
air on the side of caution, waiting to see if
the trade conflicts and tariffs increased inflation in the US.
But were they wrong then and are they wrong today? Well,
we have two excellent guests to discuss that. First, we've
(02:20):
invited back Orn Cass to Trump Andomics. He's the founder
and chief economist of American Compass, author of the once
and Future Worker, a vision for the renewal of work
in America. He's also served as a domestic policy director
for Governor Mitt Romney's twenty twelve presidential campaign, and has
been a senior fellow at the Manhattan Institute for many years. Auran,
I'm really glad to have you back on Trump andomics.
Speaker 1 (02:42):
Oh, thank you that this is such a fascinating topic.
I'm excited to dig in.
Speaker 3 (02:46):
That's a very good start. And back again we have
Anna Wong, chief US economist for Bloomberg Economics, and before
that she worked at the FED, US Treasury and White
House Council of Economic Advisors during Donald Trump's first term.
Ann A, great to.
Speaker 4 (02:59):
Have you back.
Speaker 3 (03:00):
Happy to be eat back, so lurin. There's so many
things I could talk to you about. You're relatively distinctive
in the currency of commentary on the administration, in being
both supportive of the president's basic agenda but very rigorous
in thinking about the best way to make it a reality.
And you certainly don't follow the president slavishly. But one
(03:22):
column you wrote I did want to talk to you
about you were really agreeing with Donald Trump in suggesting
that the FED had just got the impact of tariff's
on inflation completely wrong. So talk us through the reason
you think the FED has been wrong to talk about
and indeed lots of economists to talk about tariffs being inflationary.
Speaker 1 (03:41):
Well, I think the interesting thing that I've discovered, as
I can get more involved in this fight, is that economists, actually,
for the most part, if pressed on this question, will
admit that tariffs are not inflationary. The definition of inflation,
certainly as it is relevant to a central bank setting
monetary party, concerns an ongoing increase in the overall price level.
(04:05):
If you choose a specific policy that by design makes
a one time change in the price of certain things,
that is not inflation in a sense that you would
want a central bank to worry about, or that you
would ever try to address by raising interest rate or
keeping interest rates higher. As far as I can tell,
(04:26):
you know, when economists are pushed beyond their talking points
of just hating tariffs and wanting to attack them anyway
they can, they will admit this is not what inflation
means in the way that economists are talking about it
for purposes of monetary policy. And so look, if the
FED wants to say, given current economic conditions. Broadly, we
think rates are at the current level. They could say
(04:49):
that the problem is that you have J. Powell out
there explicitly saying, I would say we should be cutting
except for the fact that we expect for inflation from tariffs.
That simply an indefensible position to be adopting.
Speaker 3 (05:03):
Why do you think economists have been so quick to
talk about tariffs as inflationary.
Speaker 1 (05:08):
Well, because I think economists, and again not hashtag not
all economists, but most economists have shown over the last
couple of years to have a very deep ideological opposition
to tariffs that has quite toxically interfered with their ability
to engage in public debates on the issue. I think
(05:30):
there are all sorts of perfectly valid criticisms to make
of tariffs, but economists are determined it seems to win
the political fight over them. And over the last few years, obviously,
inflation has become a very salient political concern, and so
you could see, you know, as Trump was gaining steam
(05:52):
last year, you just saw them start to jump up
and lob this talking point in even though you could
even go back to Trump's first term and look at
not to the same scale as what's going on right now,
but Trump imposed very significant tariffs, particularly on China. It's
very hard to find back then. A lot of people
focusing on inflation related critiques. It's also very hard to
(06:15):
find any inflation in the data from that period. But
this became a political point to score, and I think
unfortunately a lot of economists have decided that the ends
justify the needs.
Speaker 3 (06:28):
So just to be clear, you think that prices will
go up or the price level will go up in
response to the tariffs, but nothing else will happen after that,
and there won't be any kind of increase in wages
as people try and sort of catch up with the
high cost of living represented by that high price level,
or anything else that could be inflationary.
Speaker 1 (06:49):
Well, I would love to see an increase of wages
because we see investments in that lead to rising productivity.
But with respect to other macroeconomic effects like you just mentioned,
you know, I really do think the right way to
analyze tariffs is the way that we analyze other taxes.
If somebody proposed the addition of a VAT, economists would
(07:10):
not warn that it is inflationary. If anything, they would
say it's probably deflationary because we would potentially be raising
additional revenue and that could go towards addressing the deficeit.
I think another very good example is carbon taxes. Without
saying any but the merits of carbon taxes, it's safe
to say that the many economists that aggressively support carbon
(07:32):
taxes as efficient and the ultimate in wise neoliberal policy
do not spend a lot of time worrying that that
is going to set off some sort of inflationary spiral.
What you are getting is a change in relative prices.
Of course, you also have the problem that economists are
talking out of both sides of their mouth, because what
(07:52):
they really say is that they think tariffs are going
to slow the economy down. If they actually took seriously
their own view of the effects that tariffs would have,
should probably lean toward looser monetary policy. If anything, this
is not an argument about the independence of the FED.
This is not an argument that prices are not going
(08:12):
to rise in some cases that consumers are going to
feel the effects. That all is true, and in fact,
that is the point of tariffs. But if what you're
asking is how a central bank and how monetary policy
should address them, it seems to have gotten very unproductively
entangled in a lot of this political rhetoric as opposed
(08:33):
to what it is that economists themselves are otherwise arguing
in almost every case.
Speaker 3 (08:38):
Now, Anna, I know there's lots of different pieces of this,
so we'll try and sort of unpack different elements. But
as our chief you, as economists, you're obviously trying, as
far as any of us is humanly able, to strip
ideological concerns and politics out of your analysis. You're mainly
looking day to day at what you're actually seeing in
the economy and then thinking how that feeds through into
(08:59):
your full cast and your analysis. But if you're stepping
back from all of that, a few months ago, would
you have said these tarerts are going to be inflationary?
Speaker 4 (09:07):
Yeah, a few months ago I had penciled in a
point three percentage point increase in the core PC from
all the tariffs, and I still maintained that forecast, And
I also had written a lot about how I think
there's a big chunk of the tariffs that would be
absorbed through profit margin and that services this inflation can
(09:30):
offset some of them. Given that US at the end
of the day is a service oriented economy.
Speaker 3 (09:37):
And so what is your response to to Ooren's argument,
do you think the FED has overdone the risk of
inflation from these tariffs, because of course we would expect
a short term increase in prices without necessarily thinking that
this is an inflation problem that the central bank needs
to respond to.
Speaker 4 (09:56):
Right. The reason why I had that view a couple
months ago that there's a possibility that the tariffs would
not be as inflationary is because of fed's own internal
models back in twenty eighteen. So, back in twenty eighteen,
in one of the FOMC meeting, FED staff were studying
(10:17):
why aren't tariffs as inflationary as they had forecasted.
Speaker 3 (10:21):
The first round of Trump tariffs?
Speaker 4 (10:23):
Yes, and they ran two models. This is a very
well established internal general equal over model, and one of
them shows that if tariffs were imposed in primarily intermediate goods,
which it was back in twenty eighteen twenty nineteen, then
the inflation would be very short lived and even deflationary
(10:44):
after the first couple of quarters. And then another version
of the models, as supposed that all the tariffs were
on consumption, what happens? It also shows that the tariffs
would be a one off price level shock. In fact,
the FED even ransom versions of the optimal monetary policy
of whether to look through this tariff shock versus not
(11:07):
looking through, and the model would find that raising rates
in respond to the price increase would not actually reduce
inflation any further from the tariff. So the conclusion is
that if inflation expectations are anchored, there is no point
in responding to the tariffs. So what's changed in this
(11:29):
round in trade war? Number two in the FED thinking
and respond to tariffs, from my observation is number one,
they seem to be not so sure whether that inflation
expectations are anchored, so that is the precondition of monetary
policy not looking through these tariff shocks. And second, they
(11:51):
seem to be really embracing a new trade literature that
use a new type of trade models, and those trade
models would come to different conclusions than the models that
the FED used in twenty eighteen. And the new conclusion
is that in fact, tariffs on intermediate goods would be
persistently inflationary due to the impact on productivity. So from
(12:16):
where I see it, those two are the key differences
intellectual key differences for why the FED is responding differently
than from the lesson they learned in twenty eighteen and
twenty nineteen.
Speaker 3 (12:27):
That's an interesting comparison. The importance for the judgment called
by the central bank of whether or not they view
inflation expectations to be well anchored. Is there a risk,
because people are already worried about inflation, that this so
called one off increase in prices will actually cause people
(12:48):
to demand catch up wages and then sort of spiral
after that and it will become inflationary. Or are they
pretty confident going into it that this is just a
one off that inflation's going to stay low, in which
case you probably don't want to do anything. And you
had an example, I think in Japan when they increased VAT,
the central bank didn't do anything, allowed the inflation to
(13:09):
effect to come in, and then inflation fell back down
and there was no issue with how the central bank
had left it because expectations were well anchored, Whereas in Turkey,
where there was a lot more question mark around the
independence of the central bank and the likelihood of further inflation,
they had increased taxes VAT through the two thousands, and
(13:30):
that had actually helped to further un anchor inflation expectations.
The sort of pre existing situation in terms of what
people are expecting about inflation matters, And I guess coming
back to you are and I mean, is it your
view that there was no risk of that kind because
inflation expectations coming in this period were basically well anchored.
Speaker 1 (13:51):
If you are wondering how consumers feel about inflation, then
of course what the Central pain does and says is
quite endogenous to that question. So what you can't have,
and apparently we do now have, is a set of
models that say tariffs are not inflationary, a set of
economists to say, oh, but we really don't like tariffs,
(14:15):
and therefore we are going to spend years running around
shouting that tariffs are inflationary, even though we know that
our own models say that they are not, until we
persuade consumers that they will be inflationary, at which point
we can say, you see now, they will be inflationary
and use that as an excuse to impose a monetary
policy directly counter to the political choices that people have
(14:38):
made supporting an agenda that focuses heavily on accepting a
change in the price level to induce higher levels of
domestic investment. And so this is where I just get
so frustrated that the sorts of things that I'm talking
about are pointed at. It's like, oh, he doesn't respect
central bank independence. I would like nothing more than a competent, honest,
(14:58):
independent roach to setting monetary policy, and that is not
what we are getting right now. If the FED had
spent the last couple of years accurately communicating, if the
economists had spent the last couple of years accurately communicating
what their own view of terror effects on price levels
would likely be, we could have this conversation. I think
(15:19):
it is. It is very hard to stummach situation where
they have created this consumer mentality that they now say
that they need to counter with policies that their own
models said they should not need to be using.
Speaker 3 (15:31):
I like the way you describe it. But one could
also say that the FED itself had played a role
in unanchoring inflation expectations. You know, we highlighted some of
the comments from the Lutnik, and the President himself at
the beginning would say that the FED had got policy
wrong in a very damaging way and had let inflation
(15:53):
get out of control. They would say for political reasons.
Presidence says it was because he was Ja Power's trying
to get the Democrats re elected. But putting that to
one side, that a lot of people would say there
had been a policy mistake which had then left a
situation where there was a potential unanchoring of expectations that
(16:14):
people had begun to expect inflation. So I guess the
critics can't have it both ways. They can't say they
caused a lot of damage by allowing inflation to stay
as high as it was for as long as it was,
but now they shouldn't be taking that into account and
thinking through the long, longer term impact of tariffs.
Speaker 1 (16:32):
Well, I guess I would look at that a little
bit differently, which is that, Yes, I think it is
very fair to say that the FED damaged its credibility
by getting this wrong last time. I do not think
it helps the Fed's credibility that when one party's administration
pursued one set of policies that, frankly, I think most
(16:54):
economists would say are very inflationary, like dumping trillions of
of additional spending into an arguably overheated economy in ways,
you know, long after the economic effects of COVID past,
when you look at that and say, well, you know, hey,
maybe they let's let's hold off, and you get it
(17:16):
completely wrong. And then the other party comes in with
a set of policies that, in fact your own models
say are not inflationary, but there are policies you don't like.
You then take exactly the opposite stance again. If we
want to characterize the Federal as primarily to be the
nation's psychologist and stick its finger in the wind, I
(17:39):
guess it can justify anything it wants to do, but
I think it is it is badly and frankly more
so than Donald Trump, endangering its credibility as an independent
institution if it takes what are clearly such nakedly political
judgments in lieu of actually doing what I economic theory
(18:01):
and common sense say would be good governance of monetary policy.
Speaker 3 (18:08):
And you spent a formative part of your career as
a FED economist, I suspect that you will be conflicted
in answering this question. But do you think that the
FED has been coherent in its approach over the last
couple of years, and particularly the arguments it's had with
itself and made to the public over the last six months.
Speaker 4 (18:28):
Over taris, Yes, definitely, I am conflicted because I think
the truth is I think there's a difference between FED
independence and FED accountability. I wholeheartedly support FED independence, but
on the accountability part, if a public institution demonstrates in
(18:51):
the past five years that it had made so many
policy mistakes and misjudged forecast, then it probably is not
enough to say that, well, most of the economist professions
says this, so we are not alone in making this mistake,
and accountability begins with looking deep into the institution to
(19:15):
figure out why is it that the FED, with all
this very smart economists, and I have to say FED
economists are the smartest people I've met, why do they
persistently take the sides on these economic issues that turned
out to be wrong? And so to Ourn's point, I
(19:36):
would look at this not as you know, the FED
policy mistakes driven by FED economists actively being political to
thwart President Trump's agenda, but more like it is a
bigger issue of group think in the economic profession, for example,
(19:56):
thinking why in twenty twenty one that their focus is
on labor scarring when you know, the thirty people CEA
in the administration already had calculated that the extended unemployment
insurance will more than cover income for half of the population,
and therefore people would be not motivated to work.
Speaker 3 (20:17):
So there were sort of intellectual biases rather than political bias.
You would yes, you're going on that assumption.
Speaker 1 (20:26):
Just to jump in briefly, the idea that intellectual biases
and political biases are separate, I think fair enough.
Speaker 3 (20:34):
Fair enough, I will.
Speaker 1 (20:35):
Take Anna's acknowledgment of intellectual bias as in fact an
acknowledgment of political.
Speaker 3 (20:40):
Okay, But the example there was what you might call
in retrospect and excessive focus and excessive concern for labor
market scarring. But I think economists on all sides would
be concerned about labor market scarring, you know, long term
impacts of COVID for the labor market.
Speaker 1 (20:56):
No, I completely agree that that labor market scarring is
is an important issue. I would just say also that
reindustrialization is an important issue. And so in the moment
where you have an administration with a I would say
quite robustly politically ratified strategy of intentionally raising prices on
(21:18):
imports making a price level change on imports in an
effort to induce high levels of domestic investment, which, by
the way, would would directly indicate and benefit from lower
interest rates. To take that sort of set of priorities
and curR concerns and say no, no, that, you know,
(21:38):
we must stay laser focused on on well, frankly, it's
not clear to me what the focused on at this point.
Whereas when we have a democratic administration saying, oh, we
need to we need to dump trillions of dollars of
stimulus into the economy as a way of addressing a
set of concerns, and weould say, oh, well, let's we
better give them the benefit of the doubt and let
(21:59):
them run with that. That is hard to square.
Speaker 3 (22:03):
Okay, so we've done a lot. We've sort of done
a little bit of climbing in the brain of the
bed as far as we can and thinking about whether
or not it made sense to have the judgments that
they've had. But I mean, some people listening would say,
hang on a minute, can't we just ask anna what's
actually happening in the economy. I know it's early days,
but are we getting a sense of who's right and
(22:24):
who's wrong.
Speaker 4 (22:25):
Our team come at this from both a theoretical and
empirical and data science perspective. So in terms of just
looking at the type of prices that we have been
seeing increase in the past three months since Liberation Day,
so we have seen that of each one percentage point
(22:47):
shock to tariffs, we have estimated approximately zero point three
percentage passed through to consumer prices, and most of this
is concentrated in these discretionary consumer goods like household appliances,
audio equipments and such, and they make up about less
(23:08):
than ten percent of the CPI. On the other hand,
the consumer sentiments shock from Liberation Day, what it did
is immediately dampen services spending and also discretionary stuff such
as travel and hotels. So we have seen both air
fears and hotels more than offset the tariff passed through
(23:30):
so far. So on net, the CPI has still been
very subdued in the past four months. For that reason,
and looking forward to the next couple of months and
next week in the FMC meeting, the FED is most
likely to hold raised constant even with two possible descent
(23:50):
from FED governors Bob Waller and Bowen, and the reasoning
for holding raids constant is that they expect that with
infant horries to sales, the stockpiled inventories running out in
July and August, firms will have to restock at higher prices,
and therefore that the long forecasted inflation search will come
(24:13):
after July. So I think to settle the argument of
whether tariffs are inflationary or not, really, the key data
points will happen over the next two months.
Speaker 3 (24:24):
As you say, at the very least, it seems like
they are airing on the side of caution, and they've
almost made a virtue of that in the comment. I mean,
do you think Anna that they should just cut rates
next week and not be so cautious because they could
always obviously increase interest rates if they got it wrong.
Speaker 4 (24:43):
So I'm arriving at a similar conclusion as Orrent, but
not for the exact reason, which is that I think
that the FED is, you know, being somewhat internally inconsistent
for saying that inflation expectations are very well anchored.
Speaker 3 (25:00):
If they really were, then they wouldn't be so worried
about the long term effects. Yeah, exactly.
Speaker 4 (25:05):
So one thing has to be wrong, which is inflation
expectation really not anchored that well. Or is it that
inflation are anchored well, but then they are expecting something
that is outside of what their models would tell them.
And I would take the side that I think, in fact,
(25:27):
inflation expectations are not very well anchored. So the part
where I'm agreeing with Oren is that maybe the FED
had made several policy mistakes the last four years, perhaps
by caring too much about soft landing and therefore not
returning inflation expeditiously to two percent and leaving a situation
(25:51):
today where you have a terror shock that should be
just a price level impact, should just induce a price
level impact. But because of those not very well anchored
inflation expectations, they couldn't cut.
Speaker 3 (26:05):
Okay, we get to the end. Orn You've reminded us
a couple of times in this conversation that there is
actually a point behind higher tariffs, and certainly from your
perspective and the perspective of all those who who see
this as part of a reindustrialization of America agenda. So
I feel like we should at least end by asking
you how you think that's going. You know, the way
(26:27):
that the tariff's deals are working out. You know, we've
now had a few from quite a lot of the
sort of East Asian high exporting economies have now appeared
to have struct deals with the administration. Do you think
that the kind of level of tariffs that are coming
out of those deals, maybe fifteen twenty percent for most goods,
you know, is consistent with a decent chunk of production
(26:50):
coming back to the US.
Speaker 1 (26:52):
Yeah, I think it certainly is. I think we are
very early days, obviously in a process where the first
step is inducing investment, and so you know, the the
gains that we should expect to see are things that
are going to come out over the next few years.
You Know, what I think is most encouraging is that
(27:15):
raising a sort of baseline across the board tariff, having
much higher tariffs on China. Both of those things I
think are increasingly kind of priced in, so to speak,
as the new status quo. And contrary to virtually every
economists predictions, those those things appear to be things that
you can in fact put into place without the world
(27:37):
coming to an end. And so I think that's a
very good start. I think with these country by country negotiations,
you know, we're starting to see these deals emerge. I
think even those have proved not especially stable thus far,
and so it's going to take some time to see
what has actually been agreed to and what's going into effect.
(27:57):
As you mentioned it at the outset, I have no
shortage of complaints at the tactical level with how things
are going. I think, you know, stability and certainty is
vital to this sort of project working, and we need
a lot more of that. But I think the extent
to which everything that we were told was going to
go horribly wrong has not, and things we were told
(28:20):
could not possibly happen in fact are starting to happen.
I think that is all cause for cause, cause for optimism.
Speaker 3 (28:31):
This is not going to end though, right because I mean,
another thing that's happened that was supposed to be much
harder than it appears to have been, which is the
closing of the border means potentially of quite a dramatic
reduction in labor force growth this year for the US,
and that also is something that could push up wages
(28:52):
along with this sort of increase in import prices. You know,
you've said, you know that you'd like to see that
as a step towards the sort of re endotualization. It's
a natural part of that reindustrialization process in the US.
But it'll trigger all the same kind of debates about inflation, right,
it will.
Speaker 1 (29:11):
And it will trigger all the same humiliating hypocrisy from
a profession that's spent the era of open borders telling
us that this does not affect wages because of course
the immigrants are consumers as well as producers, until the
moment when inflation became a concern, and then they started
arguing no, no, no, no, you need these high levels of
(29:33):
immigration to expand labor supply, as if those people are
not equally consumers and producers. Look, I do think that
restrict immigration would have a positive long run effect on wages.
I think that's a trade off, even if it comes
with again changes in price levels that we should absolutely embrace.
(29:55):
But I have even less patients on this front than
on the trade runt for the spine shattering whiplash of
a switch from telling us that, of course, immigrants have
balanced effect on both sides of the labor markets as
consumers and producers, to telling us that if we pursue
a policy that economists don't like, for ideological reasons it's
(30:20):
going to have wildly imbalanced effects and so we can't
do it well.
Speaker 3 (30:26):
And if anyone wants to hear your views in greater
depth on that subject, it was actually what we discussed
when you came on the show at the beginning of
the year. But or in Cass, thank you so much
for joining us. I suspect if all the scary forecasts
from the implications of Donald Trump's policies continue to not
quite be born out, I suspect we will have you
(30:46):
back again. Thanks very much.
Speaker 1 (30:48):
And if they are all born out, I'm happy.
Speaker 3 (30:50):
To thank you very much, and thank you to Anna.
Thank you. It's good to be here again, and thank
you for listening to Trumponomics from Bloomberg. It was hosted
by me Stephanie Flanders, and I was joined by the
economist Orn Cass and Bloomberg's chief US economist, Anna Wong.
(31:10):
Trumponomics is produced by Samasadi and Moses and Dam with
help from Amy Keen. Sound design is by Blake Maples
and Sage Bowman is head of podcast for Bloomberg and
please help everyone else find it and enjoy it, rate
it and review it highly. Wherever you found it
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:07):
If you just look at the basic data and don't
look at the forecast, you would say that we would
have continued cutting. The difference, of course, is at this
time all forecasters are expecting pretty soon that some significant
inflation will show up from tariffs, and you know, we
can't just ignore that.
Speaker 3 (00:33):
I'm Stephanie Flanders, head of Government and Economics at Bloomberg,
and welcome to Trumpanomics, the podcast that looks at the
economic world of Donald Trump, how he's already shaped the
global economy and what on earth is going to happen next.
And this week we're digging into whether the Federal Reserve
has been wrong in its assumptions about the economic impact
of Donald Trump's tariffs. The entire White House wants Federal
(00:56):
Reserve Chair Jpowe to lower interest rates. Commerce Secretary Howard
Luttner slammed him, saying he's afraid of his own shadow
for keeping interest rates so high. Treasury Sectory Scott Besant
has also repeatedly pointed to the markets here, arguing that
they've sent a clear signal that a cut is overdue.
And of course we've heard the President himself nickname the
(01:17):
FED Chair many times too late, Powell calling it a
fool not a smart person for his refusal to cut rates.
So we're asking a simple question. Do they all have
a point? I mean, maybe not about the J. Powell
being smart part, but have Chairman Powell and the Fed's
Interest Rates Setting Committee, the FMC been too slow to
(01:37):
cut rates? And the answer to that, it turns out,
depends on whether they're correctly judging the likely impact of
the President's tariffs on inflation. Because, by his own admission
earlier in the year, Chair Powell was expecting to have
lowered interest rates by now, and the main reason that
changed was the so called Liberation Day when President Trump
(01:58):
unveiled his sweeping new time tariff policy. At that point,
Powell and nearly all of his FED colleagues decided to
air on the side of caution, waiting to see if
the trade conflicts and tariffs increased inflation in the US.
But were they wrong then and are they wrong today? Well,
we have two excellent guests to discuss that. First, we've
(02:20):
invited back Orn Cass to Trump Andomics. He's the founder
and chief economist of American Compass, author of the once
and Future Worker, a vision for the renewal of work
in America. He's also served as a domestic policy director
for Governor Mitt Romney's twenty twelve presidential campaign, and has
been a senior fellow at the Manhattan Institute for many years. Auran,
I'm really glad to have you back on Trump andomics.
Speaker 1 (02:42):
Oh, thank you that this is such a fascinating topic.
I'm excited to dig in.
Speaker 3 (02:46):
That's a very good start. And back again we have
Anna Wong, chief US economist for Bloomberg Economics, and before
that she worked at the FED, US Treasury and White
House Council of Economic Advisors during Donald Trump's first term.
Ann A, great to.
Speaker 4 (02:59):
Have you back.
Speaker 3 (03:00):
Happy to be eat back, so lurin. There's so many
things I could talk to you about. You're relatively distinctive
in the currency of commentary on the administration, in being
both supportive of the president's basic agenda but very rigorous
in thinking about the best way to make it a reality.
And you certainly don't follow the president slavishly. But one
(03:22):
column you wrote I did want to talk to you
about you were really agreeing with Donald Trump in suggesting
that the FED had just got the impact of tariff's
on inflation completely wrong. So talk us through the reason
you think the FED has been wrong to talk about
and indeed lots of economists to talk about tariffs being inflationary.
Speaker 1 (03:41):
Well, I think the interesting thing that I've discovered, as
I can get more involved in this fight, is that economists, actually,
for the most part, if pressed on this question, will
admit that tariffs are not inflationary. The definition of inflation,
certainly as it is relevant to a central bank setting
monetary party, concerns an ongoing increase in the overall price level.
(04:05):
If you choose a specific policy that by design makes
a one time change in the price of certain things,
that is not inflation in a sense that you would
want a central bank to worry about, or that you
would ever try to address by raising interest rate or
keeping interest rates higher. As far as I can tell,
(04:26):
you know, when economists are pushed beyond their talking points
of just hating tariffs and wanting to attack them anyway
they can, they will admit this is not what inflation
means in the way that economists are talking about it
for purposes of monetary policy. And so look, if the
FED wants to say, given current economic conditions. Broadly, we
think rates are at the current level. They could say
(04:49):
that the problem is that you have J. Powell out
there explicitly saying, I would say we should be cutting
except for the fact that we expect for inflation from tariffs.
That simply an indefensible position to be adopting.
Speaker 3 (05:03):
Why do you think economists have been so quick to
talk about tariffs as inflationary.
Speaker 1 (05:08):
Well, because I think economists, and again not hashtag not
all economists, but most economists have shown over the last
couple of years to have a very deep ideological opposition
to tariffs that has quite toxically interfered with their ability
to engage in public debates on the issue. I think
(05:30):
there are all sorts of perfectly valid criticisms to make
of tariffs, but economists are determined it seems to win
the political fight over them. And over the last few years, obviously,
inflation has become a very salient political concern, and so
you could see, you know, as Trump was gaining steam
(05:52):
last year, you just saw them start to jump up
and lob this talking point in even though you could
even go back to Trump's first term and look at
not to the same scale as what's going on right now,
but Trump imposed very significant tariffs, particularly on China. It's
very hard to find back then. A lot of people
focusing on inflation related critiques. It's also very hard to
(06:15):
find any inflation in the data from that period. But
this became a political point to score, and I think
unfortunately a lot of economists have decided that the ends
justify the needs.
Speaker 3 (06:28):
So just to be clear, you think that prices will
go up or the price level will go up in
response to the tariffs, but nothing else will happen after that,
and there won't be any kind of increase in wages
as people try and sort of catch up with the
high cost of living represented by that high price level,
or anything else that could be inflationary.
Speaker 1 (06:49):
Well, I would love to see an increase of wages
because we see investments in that lead to rising productivity.
But with respect to other macroeconomic effects like you just mentioned,
you know, I really do think the right way to
analyze tariffs is the way that we analyze other taxes.
If somebody proposed the addition of a VAT, economists would
(07:10):
not warn that it is inflationary. If anything, they would
say it's probably deflationary because we would potentially be raising
additional revenue and that could go towards addressing the deficeit.
I think another very good example is carbon taxes. Without
saying any but the merits of carbon taxes, it's safe
to say that the many economists that aggressively support carbon
(07:32):
taxes as efficient and the ultimate in wise neoliberal policy
do not spend a lot of time worrying that that
is going to set off some sort of inflationary spiral.
What you are getting is a change in relative prices.
Of course, you also have the problem that economists are
talking out of both sides of their mouth, because what
(07:52):
they really say is that they think tariffs are going
to slow the economy down. If they actually took seriously
their own view of the effects that tariffs would have,
should probably lean toward looser monetary policy. If anything, this
is not an argument about the independence of the FED.
This is not an argument that prices are not going
(08:12):
to rise in some cases that consumers are going to
feel the effects. That all is true, and in fact,
that is the point of tariffs. But if what you're
asking is how a central bank and how monetary policy
should address them, it seems to have gotten very unproductively
entangled in a lot of this political rhetoric as opposed
(08:33):
to what it is that economists themselves are otherwise arguing
in almost every case.
Speaker 3 (08:38):
Now, Anna, I know there's lots of different pieces of this,
so we'll try and sort of unpack different elements. But
as our chief you, as economists, you're obviously trying, as
far as any of us is humanly able, to strip
ideological concerns and politics out of your analysis. You're mainly
looking day to day at what you're actually seeing in
the economy and then thinking how that feeds through into
(08:59):
your full cast and your analysis. But if you're stepping
back from all of that, a few months ago, would
you have said these tarerts are going to be inflationary?
Speaker 4 (09:07):
Yeah, a few months ago I had penciled in a
point three percentage point increase in the core PC from
all the tariffs, and I still maintained that forecast, And
I also had written a lot about how I think
there's a big chunk of the tariffs that would be
absorbed through profit margin and that services this inflation can
(09:30):
offset some of them. Given that US at the end
of the day is a service oriented economy.
Speaker 3 (09:37):
And so what is your response to to Ooren's argument,
do you think the FED has overdone the risk of
inflation from these tariffs, because of course we would expect
a short term increase in prices without necessarily thinking that
this is an inflation problem that the central bank needs
to respond to.
Speaker 4 (09:56):
Right. The reason why I had that view a couple
months ago that there's a possibility that the tariffs would
not be as inflationary is because of fed's own internal
models back in twenty eighteen. So, back in twenty eighteen,
in one of the FOMC meeting, FED staff were studying
(10:17):
why aren't tariffs as inflationary as they had forecasted.
Speaker 3 (10:21):
The first round of Trump tariffs?
Speaker 4 (10:23):
Yes, and they ran two models. This is a very
well established internal general equal over model, and one of
them shows that if tariffs were imposed in primarily intermediate goods,
which it was back in twenty eighteen twenty nineteen, then
the inflation would be very short lived and even deflationary
(10:44):
after the first couple of quarters. And then another version
of the models, as supposed that all the tariffs were
on consumption, what happens? It also shows that the tariffs
would be a one off price level shock. In fact,
the FED even ransom versions of the optimal monetary policy
of whether to look through this tariff shock versus not
(11:07):
looking through, and the model would find that raising rates
in respond to the price increase would not actually reduce
inflation any further from the tariff. So the conclusion is
that if inflation expectations are anchored, there is no point
in responding to the tariffs. So what's changed in this
(11:29):
round in trade war? Number two in the FED thinking
and respond to tariffs, from my observation is number one,
they seem to be not so sure whether that inflation
expectations are anchored, so that is the precondition of monetary
policy not looking through these tariff shocks. And second, they
(11:51):
seem to be really embracing a new trade literature that
use a new type of trade models, and those trade
models would come to different conclusions than the models that
the FED used in twenty eighteen. And the new conclusion
is that in fact, tariffs on intermediate goods would be
persistently inflationary due to the impact on productivity. So from
(12:16):
where I see it, those two are the key differences
intellectual key differences for why the FED is responding differently
than from the lesson they learned in twenty eighteen and
twenty nineteen.
Speaker 3 (12:27):
That's an interesting comparison. The importance for the judgment called
by the central bank of whether or not they view
inflation expectations to be well anchored. Is there a risk,
because people are already worried about inflation, that this so
called one off increase in prices will actually cause people
(12:48):
to demand catch up wages and then sort of spiral
after that and it will become inflationary. Or are they
pretty confident going into it that this is just a
one off that inflation's going to stay low, in which
case you probably don't want to do anything. And you
had an example, I think in Japan when they increased VAT,
the central bank didn't do anything, allowed the inflation to
(13:09):
effect to come in, and then inflation fell back down
and there was no issue with how the central bank
had left it because expectations were well anchored, Whereas in Turkey,
where there was a lot more question mark around the
independence of the central bank and the likelihood of further inflation,
they had increased taxes VAT through the two thousands, and
(13:30):
that had actually helped to further un anchor inflation expectations.
The sort of pre existing situation in terms of what
people are expecting about inflation matters, And I guess coming
back to you are and I mean, is it your
view that there was no risk of that kind because
inflation expectations coming in this period were basically well anchored.
Speaker 1 (13:51):
If you are wondering how consumers feel about inflation, then
of course what the Central pain does and says is
quite endogenous to that question. So what you can't have,
and apparently we do now have, is a set of
models that say tariffs are not inflationary, a set of
economists to say, oh, but we really don't like tariffs,
(14:15):
and therefore we are going to spend years running around
shouting that tariffs are inflationary, even though we know that
our own models say that they are not, until we
persuade consumers that they will be inflationary, at which point
we can say, you see now, they will be inflationary
and use that as an excuse to impose a monetary
policy directly counter to the political choices that people have
(14:38):
made supporting an agenda that focuses heavily on accepting a
change in the price level to induce higher levels of
domestic investment. And so this is where I just get
so frustrated that the sorts of things that I'm talking
about are pointed at. It's like, oh, he doesn't respect
central bank independence. I would like nothing more than a competent, honest,
(14:58):
independent roach to setting monetary policy, and that is not
what we are getting right now. If the FED had
spent the last couple of years accurately communicating, if the
economists had spent the last couple of years accurately communicating
what their own view of terror effects on price levels
would likely be, we could have this conversation. I think
(15:19):
it is. It is very hard to stummach situation where
they have created this consumer mentality that they now say
that they need to counter with policies that their own
models said they should not need to be using.
Speaker 3 (15:31):
I like the way you describe it. But one could
also say that the FED itself had played a role
in unanchoring inflation expectations. You know, we highlighted some of
the comments from the Lutnik, and the President himself at
the beginning would say that the FED had got policy
wrong in a very damaging way and had let inflation
(15:53):
get out of control. They would say for political reasons.
Presidence says it was because he was Ja Power's trying
to get the Democrats re elected. But putting that to
one side, that a lot of people would say there
had been a policy mistake which had then left a
situation where there was a potential unanchoring of expectations that
(16:14):
people had begun to expect inflation. So I guess the
critics can't have it both ways. They can't say they
caused a lot of damage by allowing inflation to stay
as high as it was for as long as it was,
but now they shouldn't be taking that into account and
thinking through the long, longer term impact of tariffs.
Speaker 1 (16:32):
Well, I guess I would look at that a little
bit differently, which is that, Yes, I think it is
very fair to say that the FED damaged its credibility
by getting this wrong last time. I do not think
it helps the Fed's credibility that when one party's administration
pursued one set of policies that, frankly, I think most
(16:54):
economists would say are very inflationary, like dumping trillions of
of additional spending into an arguably overheated economy in ways,
you know, long after the economic effects of COVID past,
when you look at that and say, well, you know, hey,
maybe they let's let's hold off, and you get it
(17:16):
completely wrong. And then the other party comes in with
a set of policies that, in fact your own models
say are not inflationary, but there are policies you don't like.
You then take exactly the opposite stance again. If we
want to characterize the Federal as primarily to be the
nation's psychologist and stick its finger in the wind, I
(17:39):
guess it can justify anything it wants to do, but
I think it is it is badly and frankly more
so than Donald Trump, endangering its credibility as an independent
institution if it takes what are clearly such nakedly political
judgments in lieu of actually doing what I economic theory
(18:01):
and common sense say would be good governance of monetary policy.
Speaker 3 (18:08):
And you spent a formative part of your career as
a FED economist, I suspect that you will be conflicted
in answering this question. But do you think that the
FED has been coherent in its approach over the last
couple of years, and particularly the arguments it's had with
itself and made to the public over the last six months.
Speaker 4 (18:28):
Over taris, Yes, definitely, I am conflicted because I think
the truth is I think there's a difference between FED
independence and FED accountability. I wholeheartedly support FED independence, but
on the accountability part, if a public institution demonstrates in
(18:51):
the past five years that it had made so many
policy mistakes and misjudged forecast, then it probably is not
enough to say that, well, most of the economist professions
says this, so we are not alone in making this mistake,
and accountability begins with looking deep into the institution to
(19:15):
figure out why is it that the FED, with all
this very smart economists, and I have to say FED
economists are the smartest people I've met, why do they
persistently take the sides on these economic issues that turned
out to be wrong? And so to Ourn's point, I
(19:36):
would look at this not as you know, the FED
policy mistakes driven by FED economists actively being political to
thwart President Trump's agenda, but more like it is a
bigger issue of group think in the economic profession, for example,
(19:56):
thinking why in twenty twenty one that their focus is
on labor scarring when you know, the thirty people CEA
in the administration already had calculated that the extended unemployment
insurance will more than cover income for half of the population,
and therefore people would be not motivated to work.
Speaker 3 (20:17):
So there were sort of intellectual biases rather than political bias.
You would yes, you're going on that assumption.
Speaker 1 (20:26):
Just to jump in briefly, the idea that intellectual biases
and political biases are separate, I think fair enough.
Speaker 3 (20:34):
Fair enough, I will.
Speaker 1 (20:35):
Take Anna's acknowledgment of intellectual bias as in fact an
acknowledgment of political.
Speaker 3 (20:40):
Okay, But the example there was what you might call
in retrospect and excessive focus and excessive concern for labor
market scarring. But I think economists on all sides would
be concerned about labor market scarring, you know, long term
impacts of COVID for the labor market.
Speaker 1 (20:56):
No, I completely agree that that labor market scarring is
is an important issue. I would just say also that
reindustrialization is an important issue. And so in the moment
where you have an administration with a I would say
quite robustly politically ratified strategy of intentionally raising prices on
(21:18):
imports making a price level change on imports in an
effort to induce high levels of domestic investment, which, by
the way, would would directly indicate and benefit from lower
interest rates. To take that sort of set of priorities
and curR concerns and say no, no, that, you know,
(21:38):
we must stay laser focused on on well, frankly, it's
not clear to me what the focused on at this point.
Whereas when we have a democratic administration saying, oh, we
need to we need to dump trillions of dollars of
stimulus into the economy as a way of addressing a
set of concerns, and weould say, oh, well, let's we
better give them the benefit of the doubt and let
(21:59):
them run with that. That is hard to square.
Speaker 3 (22:03):
Okay, so we've done a lot. We've sort of done
a little bit of climbing in the brain of the
bed as far as we can and thinking about whether
or not it made sense to have the judgments that
they've had. But I mean, some people listening would say,
hang on a minute, can't we just ask anna what's
actually happening in the economy. I know it's early days,
but are we getting a sense of who's right and
(22:24):
who's wrong.
Speaker 4 (22:25):
Our team come at this from both a theoretical and
empirical and data science perspective. So in terms of just
looking at the type of prices that we have been
seeing increase in the past three months since Liberation Day,
so we have seen that of each one percentage point
(22:47):
shock to tariffs, we have estimated approximately zero point three
percentage passed through to consumer prices, and most of this
is concentrated in these discretionary consumer goods like household appliances,
audio equipments and such, and they make up about less
(23:08):
than ten percent of the CPI. On the other hand,
the consumer sentiments shock from Liberation Day, what it did
is immediately dampen services spending and also discretionary stuff such
as travel and hotels. So we have seen both air
fears and hotels more than offset the tariff passed through
(23:30):
so far. So on net, the CPI has still been
very subdued in the past four months. For that reason,
and looking forward to the next couple of months and
next week in the FMC meeting, the FED is most
likely to hold raised constant even with two possible descent
(23:50):
from FED governors Bob Waller and Bowen, and the reasoning
for holding raids constant is that they expect that with
infant horries to sales, the stockpiled inventories running out in
July and August, firms will have to restock at higher prices,
and therefore that the long forecasted inflation search will come
(24:13):
after July. So I think to settle the argument of
whether tariffs are inflationary or not, really, the key data
points will happen over the next two months.
Speaker 3 (24:24):
As you say, at the very least, it seems like
they are airing on the side of caution, and they've
almost made a virtue of that in the comment. I mean,
do you think Anna that they should just cut rates
next week and not be so cautious because they could
always obviously increase interest rates if they got it wrong.
Speaker 4 (24:43):
So I'm arriving at a similar conclusion as Orrent, but
not for the exact reason, which is that I think
that the FED is, you know, being somewhat internally inconsistent
for saying that inflation expectations are very well anchored.
Speaker 3 (25:00):
If they really were, then they wouldn't be so worried
about the long term effects. Yeah, exactly.
Speaker 4 (25:05):
So one thing has to be wrong, which is inflation
expectation really not anchored that well. Or is it that
inflation are anchored well, but then they are expecting something
that is outside of what their models would tell them.
And I would take the side that I think, in fact,
(25:27):
inflation expectations are not very well anchored. So the part
where I'm agreeing with Oren is that maybe the FED
had made several policy mistakes the last four years, perhaps
by caring too much about soft landing and therefore not
returning inflation expeditiously to two percent and leaving a situation
(25:51):
today where you have a terror shock that should be
just a price level impact, should just induce a price
level impact. But because of those not very well anchored
inflation expectations, they couldn't cut.
Speaker 3 (26:05):
Okay, we get to the end. Orn You've reminded us
a couple of times in this conversation that there is
actually a point behind higher tariffs, and certainly from your
perspective and the perspective of all those who who see
this as part of a reindustrialization of America agenda. So
I feel like we should at least end by asking
you how you think that's going. You know, the way
(26:27):
that the tariff's deals are working out. You know, we've
now had a few from quite a lot of the
sort of East Asian high exporting economies have now appeared
to have struct deals with the administration. Do you think
that the kind of level of tariffs that are coming
out of those deals, maybe fifteen twenty percent for most goods,
you know, is consistent with a decent chunk of production
(26:50):
coming back to the US.
Speaker 1 (26:52):
Yeah, I think it certainly is. I think we are
very early days, obviously in a process where the first
step is inducing investment, and so you know, the the
gains that we should expect to see are things that
are going to come out over the next few years.
You Know, what I think is most encouraging is that
(27:15):
raising a sort of baseline across the board tariff, having
much higher tariffs on China. Both of those things I
think are increasingly kind of priced in, so to speak,
as the new status quo. And contrary to virtually every
economists predictions, those those things appear to be things that
you can in fact put into place without the world
(27:37):
coming to an end. And so I think that's a
very good start. I think with these country by country negotiations,
you know, we're starting to see these deals emerge. I
think even those have proved not especially stable thus far,
and so it's going to take some time to see
what has actually been agreed to and what's going into effect.
(27:57):
As you mentioned it at the outset, I have no
shortage of complaints at the tactical level with how things
are going. I think, you know, stability and certainty is
vital to this sort of project working, and we need
a lot more of that. But I think the extent
to which everything that we were told was going to
go horribly wrong has not, and things we were told
(28:20):
could not possibly happen in fact are starting to happen.
I think that is all cause for cause, cause for optimism.
Speaker 3 (28:31):
This is not going to end though, right because I mean,
another thing that's happened that was supposed to be much
harder than it appears to have been, which is the
closing of the border means potentially of quite a dramatic
reduction in labor force growth this year for the US,
and that also is something that could push up wages
(28:52):
along with this sort of increase in import prices. You know,
you've said, you know that you'd like to see that
as a step towards the sort of re endotualization. It's
a natural part of that reindustrialization process in the US.
But it'll trigger all the same kind of debates about inflation, right,
it will.
Speaker 1 (29:11):
And it will trigger all the same humiliating hypocrisy from
a profession that's spent the era of open borders telling
us that this does not affect wages because of course
the immigrants are consumers as well as producers, until the
moment when inflation became a concern, and then they started
arguing no, no, no, no, you need these high levels of
(29:33):
immigration to expand labor supply, as if those people are
not equally consumers and producers. Look, I do think that
restrict immigration would have a positive long run effect on wages.
I think that's a trade off, even if it comes
with again changes in price levels that we should absolutely embrace.
(29:55):
But I have even less patients on this front than
on the trade runt for the spine shattering whiplash of
a switch from telling us that, of course, immigrants have
balanced effect on both sides of the labor markets as
consumers and producers, to telling us that if we pursue
a policy that economists don't like, for ideological reasons it's
(30:20):
going to have wildly imbalanced effects and so we can't
do it well.
Speaker 3 (30:26):
And if anyone wants to hear your views in greater
depth on that subject, it was actually what we discussed
when you came on the show at the beginning of
the year. But or in Cass, thank you so much
for joining us. I suspect if all the scary forecasts
from the implications of Donald Trump's policies continue to not
quite be born out, I suspect we will have you
(30:46):
back again. Thanks very much.
Speaker 1 (30:48):
And if they are all born out, I'm happy.
Speaker 3 (30:50):
To thank you very much, and thank you to Anna.
Thank you. It's good to be here again, and thank
you for listening to Trumponomics from Bloomberg. It was hosted
by me Stephanie Flanders, and I was joined by the
economist Orn Cass and Bloomberg's chief US economist, Anna Wong.
(31:10):
Trumponomics is produced by Samasadi and Moses and Dam with
help from Amy Keen. Sound design is by Blake Maples
and Sage Bowman is head of podcast for Bloomberg and
please help everyone else find it and enjoy it, rate
it and review it highly. Wherever you found it
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