Former Federal Reserve economist: Fed's significant rate cut in September is completely justified!

Last Friday, Kevin Hassett, a researcher at Stanford University, former economist at the Federal Reserve, and former chairman of the Council of Economic Advisers under the Trump administration, expressed his views on inflation in an interview.

Q: In the early stages of this Federal Reserve cycle, you mentioned that the Fed was behind the curve. How do you evaluate their performance so far, especially the 50 basis point rate cut?

Hassett: We need to go back to the fiscal policy explosion at the beginning of the Biden administration and realize that the Fed, in some economically illiterate way, separated fiscal policy from inflation forecasts and kept telling us that the surge in inflation was temporary. The Fed has indeed lagged behind the curve in helping offset fiscal policy shocks, which have caused or contributed to inflation. They really missed some things they shouldn't have missed. Every macroeconomics textbook says that if fiscal policy is shocked, it could trigger inflation.

You might say that maybe because of the central bank's independence, officials are thinking that if fiscal policy wants to take action, and if we use a more stringent monetary policy to offset it, we are playing politics. I don't know what they were thinking when they decided to wait, but they let inflation get out of control.

I attended the Jackson Hole conference a year and a half later, and everyone understood that there was a lot to catch up on. I think if you look back at their rate hikes, by some standards, they were the most aggressive in history. Like all economic policies, Fed policy can make mistakes. They acknowledge that they made a mistake and are actively responding. So, I would give them a low score because they started too late, but in terms of learning from mistakes and actively responding, I would give them a higher score.

Based on the data, the recent move to lower interest rates makes sense. We have just crossed or approached the edge of the Taylor Rule. But suddenly, the data has been exceeding everyone's expectations. So in hindsight, this may be a mistake, but I wouldn't call it a mistake because based on the data at the time, it seemed like a sharp slowdown was happening. The sentiment data for this meeting was the bad employment data we got in the summer. Historically, this would be seen as a mistake, but I think when you score economic policymakers, you need to understand the circumstances in which they made decisions. For me, I wouldn't give them a low score for their September move, although in hindsight, it seems they might wish they hadn't done it.

Q: Until April this year, you also said we might be heading towards a stagflation-like situation. Do you still see this as a risk?

Hassett: The economic data in the past month or so has really surprised me. Look at the GDPNow data, considering how much the unemployment rate has risen, this is an almost unprecedented data series.

I have two thoughts. The first is that employment data seems noisier than before. This may be related to how people respond to surveys. It may also be related to a surge in illegal immigrants in the workforce who may not want to participate in surveys. I don't know the specific reasons On the other hand, my intuition about GDP growth is related to the great work done by my colleague Erik Brynjolfsson at Stanford University on the impact of artificial intelligence on productivity. In the late 1990s, when the Internet suddenly became an important thing, we experienced a period of high equity returns, with income and growth exceeding expectations. Productivity indicators at that time struggled to keep up with what was happening. It may be that artificial intelligence is beginning to impact data to a degree that no one had anticipated.

Question: What impact might Trump's proposed tariff policy have on inflation?

Hassett: If you look at the Republican agenda, the first item listed is the "Reciprocal Trade Act," which would raise U.S. tariffs to the level that our trading partners impose on us. If we adopt a policy where the U.S. says, "Regardless of how much tariffs you impose on us, we will impose the same tariffs on you," then this triggers a potential game theory response