Is Trump Right About the Fed Getting It Wrong?

Episode Summary

Executive Summary: The episode debates whether the Federal Reserve has overreacted to Trump tariffs by delaying rate cuts to guard against inflation. Oren Kass argues tariffs create a one-time price-level shift, not sustained inflation, and that economists/Fed officials have let ideology distort policy. Anna Wong says tariffs likely add some core inflation, but the bigger issue is whether inflation expectations remain anchored; she notes recent data are subdued for now, with more pressure likely later as inventories run down.

Main Topics: Tariffs, inflation, and the Fed’s rate decision (Priority: 5/5): The central debate is whether tariffs should be treated as inflationary and therefore justify holding interest rates higher, or as a one-time price-level shock that monetary policy should look through. Critique of Fed credibility and forecasting (Priority: 5/5): Both guests discuss whether the Fed’s past forecast errors and public messaging have damaged its credibility, making its current tariff caution less persuasive. Role of inflation expectations (Priority: 4/5): Anna Wong emphasizes that the key issue is not just the tariff shock itself, but whether consumers and businesses believe inflation will stay anchored or become persistent. Economics vs ideology in tariff analysis (Priority: 4/5): Oren Kass argues economists are letting anti-tariff ideology shape their interpretation of inflation, while Anna suggests the profession may suffer from broader groupthink and forecasting bias. Empirical evidence from recent price data (Priority: 4/5): Bloomberg Economics data show limited pass-through so far, with tariff-driven price increases offset by weakness in services spending and discretionary demand. Broader Trump economic agenda: reindustrialization and immigration (Priority: 3/5): Kass frames tariffs and tighter immigration as part of a long-run reindustrialization strategy that may raise domestic investment and wages despite short-term price effects.

Key Arguments: Oren Kass argues tariffs are not inflationary in the monetary-policy sense because they create a one-time increase in relative prices, not an ongoing rise in the overall price level. Kass says the Fed and many economists have conflated tariffs with inflation partly because of ideological opposition to Trump’s trade agenda. Anna Wong says her forecast still assumes tariffs add about 0.3 percentage point to core PCE, but much of the impact is being absorbed by profit margins and offset by softer services spending. Wong notes the Fed’s own 2018 models found tariff shocks were likely short-lived and that raising rates would not reduce the tariff-driven price effect if inflation expectations remained anchored. Wong argues the new concern is not the tariff shock alone, but whether inflation expectations are less anchored than policymakers claim. Both guests agree the Fed has made recent forecasting and communication mistakes, though they differ on whether that reflects political bias, intellectual bias, or both. Current data suggest tariff-related price increases have been modest so far, but a larger inflation effect may emerge in coming months as inventories are depleted and firms restock at higher prices. Kass sees tariffs and immigration restrictions as part of a broader strategy to raise domestic investment, reindustrialize the U.S., and eventually support higher wages.

Data Points: Core PCE impact from tariffs: 0.3 percentage point increase - Anna Wong’s earlier forecast for tariff effects on core PCE inflation. Pass-through from tariff shocks to consumer prices: Approximately 0.3 - Bloomberg Economics estimate: each 1 percentage point tariff shock passes through about 0.3 percentage point to consumer prices. Share of CPI in affected goods: Less than 10% - Most tariff pass-through is concentrated in discretionary consumer goods that make up under 10% of CPI. Recent price effect timing: Past three months / past four months - Discussion of price changes since Liberation Day and the fact that CPI has remained subdued over the past four months. Fed meeting outlook: Hold rates constant - Anna says the Fed is most likely to keep rates unchanged at the next FOMC meeting. Possible dissenting governors: 2 - Waller and Bowman are mentioned as possible dissenters at the upcoming FOMC meeting. Tariff shock forecast window: Next two months - Anna says the key test of tariff inflation will come as inventories run down in July and August. Tariff levels in deals: 15% to 20% - Oren references country deals that appear to leave tariffs around this range for most goods. Federal Reserve mistake reference: 2018/2019 - Anna points to Fed internal models and lessons from the first Trump tariff round. COVID-era fiscal stimulus: Trillions of dollars - Kass argues prior large-scale spending in an overheated economy contributed to inflation and harmed Fed credibility.

Pivotal Quotes: "tariffs are not inflationary" — Oren Kass: Kass’s core argument that tariffs create a one-time price-level shift, not ongoing inflation requiring rate hikes. "if inflation expectations are anchored, there is no point in responding to the tariffs" — Anna Wong: Wong explains the Fed’s own model-based logic for looking through tariff shocks when expectations remain stable. "I would like nothing more than a competent, honest, independent approach to setting monetary policy" — Oren Kass: Kass rejects the idea that his argument is anti-Fed independence, insisting the issue is good policy, not politics.

Implications: Markets and policymakers are watching whether tariff-driven price effects stay contained or broaden into persistent inflation. If expectations stay anchored, the Fed may have room to cut later; if not, it may stay cautious longer, affecting rates, investment, and Trump’s reindustrialization agenda.