Adam Posen on a Surreal Jackson Hole in a Post-American World

Episode Summary

Executive Summary: At Jackson Hole, Joe Weisenthal and Tracy Alloway interview economist Adam Posen about the Trump administration’s attacks on Fed independence, tariffs, and a broader attempt to reshape the postwar global economic order. Posen argues the U.S. has been the system’s insurer and beneficiary, warns that credibility shocks are already lifting risk premia and weakening the dollar, and says tariffs will likely fuel stagflation and persistent inflation.

Main Topics: Jackson Hole’s surreal political backdrop (Priority: 5/5): The hosts note the conference’s academic tone is overshadowed by attacks on the Fed, BLS, and other institutions, while Powell avoids directly addressing central bank independence. Central bank credibility and independence (Priority: 5/5): Posen explains that the issue is not just Fed credibility in the abstract, but whether officials will be allowed to deliver policy; attacks by elected officials can undermine inflation anchoring and market confidence. U.S. as global insurer and postwar order (Priority: 5/5): Posen frames the post-1945 U.S. role as providing economic, financial, and security insurance—stable dollars, deep Treasury markets, standards, alliances, and deterrence—while receiving lower borrowing costs and global influence in return. Why the Trump agenda is reshaping markets (Priority: 5/5): He argues the administration is pursuing a regime change in trade, security, and finance that is already visible in a weaker dollar and higher long-term Treasury risk premia, with market behavior starting to resemble an emerging market. Tariffs, stagflation, and inflation pass-through (Priority: 5/5): Posen rejects tariffs as a broad manufacturing strategy, calling them regressive and distortionary. He expects delayed but substantial pass-through into prices, with second-round inflation effects likely sizable and persistent. Long-term rates, r-star, and structural forces (Priority: 4/5): He says long-run rates are higher because of higher fiscal needs, climate/security risks, aging, and potentially AI-driven productivity gains that raise the equilibrium return on capital. UK productivity and central bank lessons (Priority: 3/5): Drawing on his Bank of England experience, Posen says Britain’s persistent productivity slowdown since 2008 and Brexit have left the UK with weak growth, high rates, and difficult fiscal tradeoffs.

Key Arguments: The Fed’s challenge is less about reputation in the abstract than whether political actors will let it do its job; once fiscal dominance or political interference is perceived, long-term bonds and the currency can react immediately. The U.S. has historically benefited from being the world’s insurer: it supplied security, legal/financial stability, and reserve assets, which lowered borrowing costs and increased global demand for U.S. influence and institutions. Current U.S. market signals—especially a weaker dollar and rising long-term yields—suggest the traditional safe-haven relationship is weakening, consistent with an emerging-market-style reaction to domestic instability. Tariffs are not an effective broad tool for reshoring manufacturing; they function as a regressive tax, encourage distortions and corruption, and are better suited only for narrow bargaining or revenue collection in low-capacity states. The inflationary effects of tariffs are likely delayed but real because pass-through is usually high, firms take time to adjust supply chains, inventories absorb some shock initially, and expectations may de-anchor if the Fed is also under attack. Second-round inflation effects are more likely than not because the economy is near full employment, migration restrictions can tighten labor supply, and the dollar is no longer reliably offsetting tariff inflation. Higher long-term rates may reflect a new structural environment: bigger fiscal burdens, more geopolitical risk, climate risk, and possibly higher productivity growth from AI raising the equilibrium return on capital. The UK’s persistent productivity failure since 2008 shows how long-term stagnation can eventually surface in rates, growth, and fiscal stress, especially when compounded by Brexit and weak policy choices.

Data Points: Dollar/Treasury correlation shift: from +0.8 to -0.4 - Posen says intraday/intraweek correlation between the dollar and 10-year Treasury yields reversed after April 1, signaling loss of safe-haven behavior. Timeframe of U.S. safe-haven regime: about 80 years - He describes the U.S. postwar role as global insurer since World War II. Tariff revenue estimate: $200-250 billion per year - Posen says current tariff levels could raise this amount at an annual rate. Foreign investor behavior: Risk premium rising - He says political attacks on institutions are already showing up in higher long-term government bond risk premia. Tariff pass-through: 85%-90% - He cites prior tariff episodes showing most tariff costs are ultimately passed to final buyers. Tariff inflation peak timing: Second quarter of 2026 - Posen expects first-round tariff effects to peak around then. Expected CPI peak: Closer to 5% or a little more - He says his estimate is higher than consensus, which he says is around 4%. Central bank independence evidence base: 40+ years - He notes decades of economics literature and experience supporting independence. UK productivity slowdown: About 12 years - He says the UK has had roughly a dozen years of very low productivity growth after 2008. Historical productivity trend reference: Since 1850/1860 - Posen says UK productivity had shown a long upward trend before the post-2008 break.

Pivotal Quotes: "The U.S.'s main role in the world economy has been to be the insurance provider." — Adam Posen: His central metaphor for the postwar U.S.-led economic order. "What happens is when something screwy happens in the US... interest rates go up, dollar goes down. And that looks like an emerging market." — Adam Posen: He describes how market correlations appear to be reversing under political stress. "Tariffs are good for two things... one specific country with whom you can bargain... The other thing is, if you are an underdeveloped country with no state capacity... tariffs are a way to collect necessary revenues." — Adam Posen: He rejects tariffs as a general industrial strategy.

Implications: Listeners should expect more inflation pressure, weaker safe-haven dynamics, and continued volatility if political attacks on U.S. institutions deepen. The episode suggests the bigger risk is not just tariffs, but a broader loss of trust in U.S. policy credibility and the global system it built.