[Simone Del Rosario]
For several days over the past week, speculation swirled about whether the president would try to fire Federal Reserve Chair Jerome Powell. It was fueled by posts like this, where President Trump wrote, “Powell’s termination cannot come fast enough.”
President Trump: I believe he’s making a mistake by not lowering interest rates. And I think as well as we’re doing, we’d do much better. He’s keeping rates too high.
Simone Del Rosario: This week, President Trump said he had “no intention” of firing the Fed chair. But the two are still very much at odds over interest rates.
Trump: The right thing is to lower interest rates. So we’ll see what happens. I think we’re sitting on something that’s going to be very good. With all the tariff money starting to come in, our country is going to do really well.
Christopher Waller: It wouldn’t surprise me that you might start seeing more layoffs, a tick up in the unemployment rate going forward if the big tariffs in particular come back on.
Simone Del Rosario: Federal Reserve Governor Christopher Waller opened the door to rate cuts on Bloomberg on Thursday.
Christopher Waller: I would expect more rate cuts, and sooner, once I started seeing some serious deterioration in the labor market.
Simone Del Rosario: The committee that makes interest rate decisions meets May 6-7, so we’ll learn soon what they plan to do.
Cleveland Fed President Beth Hammack ruled out a May cut, but said June is on the table.
Beth Hammack: You’ve seen that this is not a Fed that’s afraid of moving quickly if we need to move quickly. And so if we have clear and convincing evidence by June, July…
Simone Del Rosario: Markets are now predicting four cuts this year: One in June, one in July, and two more in October and December.
I’d like to bring in former St. Louis Fed President James Bullard, the current Dean of the Mitch Daniels School of Business at Purdue University. Sir, it’s a pleasure to have you here. I wanted to jump right in. know, markets don’t react well when the president makes failed threats about the Fed chair’s job. However, when it comes to the public pressure to lower interest rates, how does that affect the FOMC?
Jim Bullard:
Well, the FOMC is a large group. They have a lot of great staff around. They’re very analytical, almost to a fault. They look at the data in great detail. They do get a lot of opinions from a lot of different angles. They talk to businesses around the country. They talk to people in the various districts, they get people from Wall Street talking, international input. So really, everybody seems to have an opinion. It’s one of those things. And so it’s not really that unusual to have somebody weighing in. I know it’s a big thing when it’s the president, but he’s just one of many voices that have an opinion about where US monetary policy should go.
Simone Del Rosario:
And we know that he’s been hammering lowering interest rates. He did it during his first term too. Right now there is a lot more widespread criticism that Powell is moving too slow or that he and the FOMC are too reactionary. Do you think that the Fed should be cutting rates this coming month?
Jim Bullard:
Yeah, well, the committee already lowered by 100 basis points during the second half of 2024. And I think that put the committee in very good position for 2025. And they’ve got some more rate cuts projected. So we’ll see if those actually come out or not. I don’t really see them being way out of position. And I think it’s when you’ve got a very volatile environment like the one we’ve had over the last several weeks, usually monetary policy doesn’t want to react too quickly to something because this is the kind of thing that could easily reverse a few weeks later and then all of sudden you’re at the wrong policy rate given the environment. So I think they focus on the, You know, the current data, which remains pretty solid on the whole, and they’re still hoping for inflation to come down. The most recent inflation report was actually pretty good on that dimension. And so we’ll see if they’ll still be on track to cut a little bit later this year.
Simone Del Rosario:
Would you say that the starts and the stops with this tariff policy is kind of freezing the Fed a little?
Jim Bullard:
A little bit, suppose. think we did. Now, one thing is we did see a trade war before in 2018, 2019. It wasn’t at this quite as high a level of proposed tariffs and stuff, but still there was definitely a very big war of words between China and the US. They eventually came to a deal. But during that, it was a similar situation. All of that, the back and forth was all having to be priced in financial markets. The Fed, it did slow down the economy and the Fed ended up reducing the policy rate in the summer of 2019. So we’ll see if that plays out again, but right now it’s hard to tell.
Simone Del Rosario: You talked about this before. You said the economy is doing pretty well. The data that they’re looking at looks good. If there are issues, especially as the tariff policies take bigger effect, where would you expect to see the first signs of cracks?
Jim Bullard: Well, you see some things happening, the imports trying to get ahead of any tariffs. So we saw more imports in the first quarter, which will probably show up in the GDP report for the first quarter. So there is strategic behavior on the parts of firms trying to avoid tariffs that might be out there in the future. We might get beyond. So now you’ve got this 90 day reprieve for many countries. So you might see similar behavior in the second quarter, depending on what the expectations are for actual tariffs getting implemented after 90 days. So you do see some things happening, but not in the labor market so far, unemployment insurance claims, for instance right on target compared to other years that have been pretty good years for GDP. So, so far so good on that dimension.
Simone Del Rosario:
And I need to talk to you a little bit more about the inflation picture. Help me understand where inflation is in the current interest rate equation. The Fed raised interest rates, obviously, to fight inflation. It’s come down significantly. Are we no longer worried about inflation at this point? What about the tariff impact on inflation? It feels like something we’re not really talking about as much anymore because tariffs are really dominating the conversation.
Jim Bullard: Yeah, I think that’s fair. Inflation was quite high in 2022 and 2023. The Fed took very aggressive action, some of the most aggressive that we’ve seen in the post-war era. And it all paid off very well as inflation came down, especially in the second half of 2023 and to some extent into 2024 and 2025 here. And now you’re looking at continued disinflation, but still above target, but not too far above target. So I think ideally the committee would like to see the inflation rate asymptote into 2%, I think. And that would be a great outcome if that actually happens. The tariffs feeding through to inflation, there’s been a ton of talk about this.
I push back against that a little bit. That’s not really inflation. That’s a one-time increase in the price level. And also those products are in competitive markets just like everyone else. So just because your product happened to get a tariff put on it, it doesn’t mean that you can just forget about all your competition on the store shelf. You still have to sell into a market that has other products in it that don’t have the tariff side.
I think people forget this. They kind of assume that firms can just raise their prices anytime. That’s actually a very difficult thing to do. You often lose customers in that environment. It’s very hard to get the customers to come back. So I just don’t think that it’s quite as inflationary as people think. Of course, some products have inelastic demand and there you can maybe raise the price more readily, but even there you might ask the question.
If it’s so easy to raise your prices and you’re not gonna lose your customers, why didn’t you do it before? Why weren’t you priced at the higher level before? And that’s because, well, you already made an optimal pricing decision that gave you the current price that you have, and you’re not just gonna tag 25 % on it or 125 % on it and expect to get the same amount of sales.
It’s a little bit deeper, I think, than a lot of the discussion has been so far that this just automatically translates into an increase in the price level.
Simone Del Rosario:
Honestly, it’s very hard to find this perspective. So I’m really glad that you’re giving it today and providing us with a different viewpoint that perhaps these tariffs aren’t as inflationary as we hear about constantly. So that is really interesting. I’m really glad you brought that up. I was just thinking as we were talking about, I saw a report about a lot of canceled shipments from China to the United States. I’m wondering about a repeat of a supply chain issue though.
Jim Bullard:
Yeah, very interesting data about, you know, supertankers and other, I’m sorry, you know, these big ships sitting outside the port. Maybe they don’t want to come into the port and pay the tariffs where they are. Maybe there’ll be a tweet out tomorrow that gives them a reprieve and then they can land the ship. I think.
But that’s the kind of behavior that’s out there in a volatile environment. That timing might mean quite a bit for the value of the cargo on that particular ship. so they might behave like this. I think it’s not nothing. It does affect behavior. But actually, the biggest effect on behavior, I think, is that the uncertainty makes investors back off of very large investment decisions that they might otherwise make. So if they can delay, they will in this environment. They don’t want to build the billion dollar plant if they’re not quite sure what the tariff arrangements are going to be. And it’s that that feeds directly into GDP. And that’s where you could see a slower growth rate of GDP because projects that otherwise would have come online in this quarter won’t come online in this quarter. They’ll be delayed for 90 days or 180 days or a year while the CEO is waiting to see what the rules of the game are gonna be.
Simone Del Rosario:
Yeah, and we’ve seen that downgrade in GDP projections for the United States quite significant based off of this uncertainty. Jim Bullard, former St. Louis Fed president and the current dean at Purdue University, thank you so much.
Jim Bullard:
Thanks for having me.
