Trump's Tariffs Haven't Killed the U.S. Economy. But Firing Jerome Powell Might.

Summary

Podcast Summary: Plain English with Derek Thompson

Episode Title: Trump's Tariffs Haven't Killed the U.S. Economy. But Firing Jerome Powell Might.
Release Date: July 17, 2025
Host: Derek Thompson
Guest: Jason Furman, Harvard Economist

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Introduction

In this episode of Plain English with Derek Thompson, host Derek Thompson delves into the economic ramifications of former President Donald Trump's tariff policies and the potential consequences of his recent actions targeting Federal Reserve Chair Jerome Powell. Bringing on Harvard economist Jason Furman, Thompson explores why the U.S. economy has remained resilient despite aggressive tariff implementations and what might unfold if Powell is ousted from his role.

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Trump's Tariffs and the U.S. Economy

Initial Expectations vs. Reality

Derek Thompson sets the stage by referencing the widespread economic backlash following Trump's announcement of the Liberation Day tariffs. Economists and business leaders predicted severe consequences, including a recession and shortages of goods. However, three months post-announcement, the U.S. economy exhibits continued growth, low unemployment, and stable inflation.

Key Points:

• Economic Performance: Despite initial fears, the U.S. economy is still growing, unemployment remains low, and inflation has not escalated uncontrollably. (Transcript [00:00] - [06:13])

• Ongoing Tariffs: Trump has introduced additional tariffs on allies such as Canada, Japan, Korea, as well as specific commodities like copper (50%) and Mexican tomatoes (17%). (Transcript [00:00] - [06:13])

• Economic Resilience: The economy's ability to withstand these tariffs suggests a sturdier foundation than many economists anticipated. (Transcript [00:00] - [06:13])

Notable Quote:

"The US Economy is still growing. Unemployment is still low. Inflation hasn't spiraled out of control in the official statistics."
— Derek Thompson [00:00]

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Discussion with Jason Furman

Tariffs' Measured Impact

Jason Furman explains that while Trump's tariff policies have negatively impacted economic growth, the effect is less drastic than initially predicted. He uses an analogy comparing the policies to burning $1,000 per household, translating to a modest reduction in GDP growth.

Key Points:

• Growth Reduction: Tariffs have led to a projected decrease in GDP growth by approximately 1-1.5%, aligning with economic models. (Transcript [06:57] - [08:29])

• Delayed Effects: The implementation and oscillation of tariffs have delayed their full impact on the economy. Businesses stocked up on imports before tariffs took full effect, mitigating immediate consequences. (Transcript [17:40])

• Business Uncertainty: Despite predictions, business investment has not plummeted significantly, suggesting that uncertainty due to tariffs has not crippled economic confidence to the extent feared. (Transcript [06:13] - [10:37])

Notable Quote:

"The tariffs are subtracting from growth. It's not a huge amount in macro crisis matters, but it is a meaningful amount when it comes to families."
— Jason Furman [06:57]

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Economic Feedback Loops and Countervailing Forces

Complexity of Economic Systems

Thompson and Furman discuss how various economic policies interact, creating feedback loops that can buffer or exacerbate initial policy impacts. For instance, while tariffs could slow economic growth, other factors like reduced energy prices due to weakened global trade may help keep inflation in check.

Key Points:

• Inventory Build-Up: Businesses imported goods ahead of tariffs, which delayed their economic impact. (Transcript [17:40])

• Federal Reserve's Role: The Fed has maintained high interest rates partly in response to tariff-induced inflationary pressures, counterbalancing potential price hikes. (Transcript [22:09])

• Global Trade Effects: Tariffs have weakened the global economy, leading to lower energy prices, which help moderate overall inflation. (Transcript [24:40])

Notable Quote:

"Prices are down 7% this year in the CPI, at least, which has a lot to do with Donald Trump's policies, but it's also because they've weakened the global economy."
— Jason Furman [24:40]

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Jerome Powell and Federal Reserve Independence

Potential Firing of Powell

A critical focus of the episode is Trump's recent move to potentially fire Jerome Powell, the Fed Chair, which threatens the independence of the Federal Reserve. Furman emphasizes the importance of this independence for maintaining economic stability and controlling inflation.

Key Points:

• Fed Independence: Insulating the Federal Reserve from political pressures ensures more credible and stable economic policies. Historical data supports that independent central banks lead to lower and more stable inflation rates. (Transcript [33:08] - [35:35])

• Consequences of Interference: Firing Powell could undermine the Fed's authority, potentially leading to increased market volatility, higher long-term interest rates, weakened dollar, and loss of investor confidence. (Transcript [41:12] - [43:55])

• Legal and Philosophical Grounds: Furman discusses both the philosophical reasoning and recent legal rulings that uphold the Federal Reserve's independence, drawing parallels to the checks and balances in other governmental branches. (Transcript [36:41] - [40:39])

Notable Quote:

"There has been decades and decades of research and experience that show independent central banks yield better economic outcomes."
— Jason Furman [35:35]

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Potential Economic Fallout of Altering the Fed

Downside of Rate Cuts

Furman outlines the adverse effects of dramatically lowering the federal funds rate, as Trump proposes. Contrary to stimulating the economy, such a move could signal instability, increase borrowing costs, and decrease the attractiveness of U.S. investments.

Key Points:

• Market Reactions: Firing Powell and cutting rates could lead to a decline in the stock market and a weakening dollar due to reduced investor confidence. (Transcript [43:55] - [45:13])

• Mortgage Rates and Investment: Lowering the federal funds rate does not directly equate to lower mortgage rates, as these are influenced by broader economic factors like inflation expectations and economic risk. (Transcript [41:12] - [43:07])

• Overall Economic Stability: Such interference could potentially trigger a recession, akin to the "drowning of Rasputin" analogy used to describe the fragile resilience of the U.S. economy. (Transcript [46:44])

Notable Quote:

"Instead of interest rates going down to stimulate the economy, cutting rates in this situation would cause financial changes that would undo that stated goal."
— Jason Furman [43:55]

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Philosophical and Constitutional Implications

Checks and Balances in Economic Policy

Thompson and Furman explore the philosophical underpinnings of maintaining central bank independence alongside democratically responsive fiscal policies. This separation ensures that long-term economic stability is not compromised by short-term political agendas.

Key Points:

• Time Consistency: Prevents political leaders from making economically detrimental decisions for short-term gains at the expense of long-term stability. (Transcript [36:41] - [40:39])

• Legal Precedents: Recent Supreme Court rulings uphold the Federal Reserve's autonomy, reinforcing the necessity of its independence from presidential control. (Transcript [40:39])

• Philosophical Rationale: Emphasizes the importance of separating monetary policy from political influence to sustain low and stable inflation and maximum employment. (Transcript [36:41] - [40:39])

Notable Quote:

"It's a simple idea that you insulate your central bank from political pressure to have more credibility and better outcomes."
— Jason Furman [33:08]

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Closing Thoughts

Uncertainty and Economic Humility

In concluding the episode, Furman and Thompson reflect on the inherent uncertainties in economic policymaking. They stress the importance of humility and cautious optimism, acknowledging that while current indicators are manageable, unforeseen factors could alter the economic landscape.

Key Points:

• Antibody Analogy: Economic policies trigger complex responses that can mitigate or amplify their effects, much like a body responding to pathogens. (Transcript [48:24] - [50:02])

• Humility in Forecasting: Recognizing the limitations of economic models and the unpredictable nature of policy impacts encourages a more measured approach to economic predictions. (Transcript [50:02] - [50:41])

Notable Quote:

"The biggest thing I'm uncertain about is actually uncertainty itself and what the consequences and magnitude of the consequences of the uncertainty will be."
— Jason Furman [50:02]

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Key Takeaways

1. Tariffs' Limited Immediate Impact: Despite aggressive tariff implementations, the U.S. economy has shown unexpected resilience, primarily due to the delayed effects of tariffs and counteracting economic factors.

2. Federal Reserve Independence is Crucial: Maintaining the Federal Reserve's autonomy is essential for controlling inflation and ensuring economic stability, free from political interference.

3. Complex Economic Feedbacks: Economic policies do not operate in isolation; various feedback loops can mitigate or exacerbate their intended effects, making outcomes less predictable.

4. Potential Risks of Political Interference: Attempts to manipulate monetary policy through political means, such as firing the Fed Chair, could lead to market instability and undermine economic confidence.

5. Embracing Economic Uncertainty: Acknowledging and respecting the complexities of economic systems encourages more prudent and flexible policymaking.

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Final Thoughts: This episode underscores the delicate balance between governmental policies and economic stability. While Trump's tariffs have not yet devastated the U.S. economy, the potential undermining of the Federal Reserve's independence poses significant risks that could alter the economic trajectory in the near future. Furman advocates for cautious policymaking, valuing the established independence of central banking institutions to navigate the intricate dynamics of the modern economy.

Transcript

[Craig Horlebeck]

Hey, it's Craig Horlebeck here to tell you that the NFL is back whether you like it or not. And we are covering all the latest news, trades, rankings and more on the Ringer Fantasy Football show with my two co hosts who are both named Danny. Check the Ringer Fantasy Football show out on Spotify or on our new YouTube channel. This episode is brought to you by Contentful Marketers. You know that feeling when your content just works? When you crush a viral trend before 10am when one tiny tweet to a landing page sends click through rates through the roof? That's contentful, dynamic content made blissfully simple. Contentful makes it easy for you to create and share custom content quickly on websites, apps or any digital platform. No stress, no limits, only possibilities. Come get the [e-mail] this episode is brought to you by Zendesk, introducing the next generation of AI agents built to deliver resolutions for everyone with an easy setup that can be completed in minutes, not months. Zendesk AI agents resolve 30% of interactions instantly, quickly giving your customers what they need. Loved by over 10,000 companies, Zendesk AI makes service teams more efficient, businesses run better and your customers happier. That's the Zendesk AI effect. Find out [e-mail] today Donald Trump's economy When Donald Trump announced his Liberation Day tariffs, the response from economists was practically unanimous. This was a state of emergency. The president was taking the US economy back to the 19th century based on erroneous ideas about trade and growth, and it could lead to a recession or painful shortages of goods. That's what I heard from experts and economists and business leaders in the weeks after those initial Liberation Day tariffs. But now it's been three months since that first announcement, and one might reasonably ask, so where are all the emergencies? The US Economy is still growing. Unemployment is still low. Inflation hasn't spiraled out of control in the official statistics. There aren't wall to wall news reports about shortages at stores. Meanwhile, Trump has recommitted to his tariff strategy, recently announcing a new round of taxes on imports with higher rates on allies like Canada, Japan and Korea, plus a 50% tariff on copper and a 17% duty on most tomatoes from Mexico. One explanation could be that the US Economy is stronger and more resilient than many economists think. Three years ago, the Federal Reserve started to jack up interest rates in response to inflation. Many prominent economists then predicted that the US Would inevitably sink into a recession as growth slowly asphyxiated due to the rising cost of lending. But it never happened. The economy just kept chugging along. Then this year, Trump's plan to raise taxes on everything we buy from overseas also seemed to many like it would inevitably push the economy into a recession. But it hasn't happened. As I polished off the research for this open, I thought about the Russian mystic and advisor Rasputin, who by one famous account survived several assassination attempts. He ate cake laced with cyanide, then he drank several cups of poisoned wine. Then he got shot in the chest. And he still just kept coming at his would be assassins. You could say, I suppose, that this is the Rasputin economy poisoned by inflation, shot by high interest rates, bludgeoned by tariffs, drowning in uncertainty, and maybe soon, the firing of the Fed chair, Jerome Powell. And yet it's still kicking. Of course, there's another explanation, which is that the economists were right about the effect of tariffs. It's just taking time to see how right they were. This last week, the Bureau of Labor Statistics reported that inflation is heating up. The cost for core goods, excluding autos, rose at their fastest monthly pace in three years. Several manufacturing surveys which go around asking factory owners how business is doing are showing major signs of strain as well. Job growth has slowed industries that rely heavily on workers who came to the country illegally, which suggests that the president's immigration policies are also starting to bite. Today, these data points amount to a summer drizzle, something subtle and barely felt. But maybe in a few months, they'll feel like a mid July thunderstorm. Finally, just minutes before we recorded this episode, the Wall Street Journal reported that Donald Trump has circulated plans to fire the Fed chair Jerome Powell, an unprecedented violation of the independence of the Federal Reserve, something which could punish the stock market, dramatically increase interest rates, reduce investment in the US and maybe be the final thing that shoots and drowns this Rasputin economy. Two years ago, to hold the experts to account after they falsely predicted a recession, I brought on Harvard's Jason Furman to the show to act as a defense attorney on behalf of the field of economics. Today, we're doing it again, and the central questions here could not be any clearer. Number one, if Trump's economic ideas are so bad, so chaotic, so destructive, why isn't the economy doing much worse and perhaps even more urgently today? Number two, if Donald Trump fires Jerome Powell, is that the final blow for a wobbly US Economy? I'm Derek Thompson. This is plain Eng. Jason Furman, welcome back to the show.

[Jason Furman]

Great to be back with you.

[Craig Horlebeck]

So I emailed you a few days ago and I said, jason, it is time for a redux. Three years ago, a bunch of economists predicted that high interest rates would send the US Into a recession. It didn't happen. I asked you to explain why. Three months ago, a lot of economists predicted that Trump's tariffs and his generally chaotic approach to economic management would send the US Into a recession or some similar economic emergency. That hasn't happened yet. And I'd like you to take the central question, the central premise of this episode, right off the bat. And if Trump's economic ideas are so terrible, why isn't the economy doing much worse?

[Jason Furman]

So the problem is just the translation between when economists say terrible and what that looks like in the data. So if you asked everyone in the country to come together and set fire to $1,000, that would seem like a phenomenally stupid idea. And for decades, you'd remember the president who came up with that crazy idea. If you take half a point off economic growth, no one would really quite notice that in the macro data, except people that are totally obsessed with it. And numerically, it's exactly the same as the first thought experiment. Half a point off growth is about $1,000 per household. And by the way, that happens to be what most of the macro models were predicting would the impact of the tariff. And by the way, it looks like that's going to be borne out in the macro data. We had negative half a percent growth in the first quarter. Looks like maybe we'll have about 3% in the second quarter. Averaging the two of those together, we're in sort of the 1 to 1.5% range from growth. That's a big step down from the sort of 2.5% range we were in before all the tariffs hit. So the tariffs are subtracting from growth. It's not a huge amount in sort of macro crisis matters, but it is a meaningful amount when it comes to families.

[Craig Horlebeck]

I love the way you put it, and I think it's a very relatable thing to imagine 160 million households setting fire to US$1,000. The way that I was thinking about it is the US economy is huge, right? This is a $30 trillion behemoth. So even if the White House proposes policy that costs $300 billion, that's 1% of the economy. $300 billion sounds like quite a bit. But if it's just a 1% throttle on US economic growth, will we or will we not notice? That is a harder question. Before we go deeper into explaining or caveating why a slowdown in the US Economy isn't being more clearly felt, I do want to make sure that in the interest of humility, I hold economists and Trump critics like myself to account here. The effective tariff rate today is the highest it's been in 110 years. And I spoke to several CEOs in the aftermath of the Liberation Day tariffs who said that Trump's on, off, on off approach to setting tariffs would decimate business certainty and destroy a lot of investment. And the idea here was being that if a tariff is announced on shirts and you want to build a big shirt factory in America, you need a huge loan from a bank. But no bank is going to actually write a check for tens of millions of doll to build a shirt factory in Iowa if they think the President's gonna change his mind on shirt tariffs the next 15 minutes. So you have tariffs, you have business uncertainty. You add to that the immigration crackdown, you add to that perhaps the debt bomb of the big beautiful bill. I do think that if the economy were sliding off a cliff right now, a lot of liberal economists would be saying, I told you so. The economy has its wobbles, but it's not falling off any cliffs. And so I wonder, as a human, before you put your economic hat on, even just as a person, are you a little bit surprised that we don't have more headlines of chaos and economic misery now in the middle of July, three months after those potentially catastrophic Liberation Day tariffs were announced?

[Jason Furman]

So I'll try to be a human for as long as possible. I'm not sure I'm gonna last more than 30 seconds. But, yes, you see the big headlines, you see the dramatic tariff news, and you expect something commensurately dramatic to happen in the economy. And absolutely, we haven't seen anything that dramatic in the economy. Now, there's still time, and we haven't seen the retaliation, we haven't seen the full magnitude of the tariffs. Things could get worse, but I don't think they're going to be. If we come back six months from now. My best guess is that there isn't some catastrophe that says, you know, the answer to what we were talking about was you just needed to wait six months for the catastrophe. I don't think that's the dominant one. So as a sort of not fully rational thinker, human, yes, I partly relate to that. But then I look at every macro analysis that was done. Every time there was a new round of tariffs, there'd be these incredibly high tariffs. And then you turn to the Yale Budget Lab or Goldman Sachs or the Tax Foundation Whatever group you look to, and they would have economic growth falling by 0.3, 0.5, 0.8, some number like that. And that was reflective of the fact that you said we have a $30 trillion economy. $27 trillion of our economy is not related to goods, imports, that things like hospitals and education and stores and all sorts of things, restaurants, all sorts of things where imports matter. I' not saying they don't matter at all, but they're not the main thing going on in those large swaths of the economy. Now one always did caveat every time you saw those macro models and said, yeah, those macro models sort of build in. If the price goes up 10%, then people will buy 5% less. And if that's 1% of the economy, you multiply those, those types of linear calculations. He always suspected that maybe it left out confidence, uncertainty, nonlinear effects when things were really, really large. That was what I was hearing from business people too, like, oh, we can't make any decisions. We're not going to do anything in the face of this uncertainty. And I think in some ways what we're seeing in the macroeconomy so far redeems the standard macro modeling and suggests that all the fudge factors that are left out of actually probably were properly left out of it. And all that uncertainty, confidence, et cetera, just maybe doesn't matter that much.

[Craig Horlebeck]

That's really surprising to hear. I want to make sure we unpack that one click further. I feel like I'm always hearing from CNBC analysis and Financial Times commentary that the ghost in the machine, right, the invisible genie of the US Economy is this idea of business certainty, right, this, this animal spirit that in order to invest, businesses need confidence that they can grow. Banks need confidence that the businesses will be able to pay back their loans. You need this kind of reciprocal faith between lenders and creditors to invest in the kind of factories and large construction projects and that really are a motor of long term economic growth. Are you suggesting that this sort of animal spirit model of macroeconomics just might be a little bit overblown?

[Jason Furman]

So first of all, I'm not sure. I am uncertain about how important uncertainty is and we're getting a decent test of it right now. There's been these attempts to measure and quantify uncertainty. This famous index that's much talked about, Nick Bloom, Steve Davis, Davis and others, they've done good peer reviewed research that shows how their measure tracks to investment. But what I worry about is that a little bit like consumers have been super pessimistic for the last couple years, but at least until recently, it didn't affect their spending. There's a possibility it's affecting their spending now. We can come back to that if you want to. It was like they were answering pollsters one way and they were spending with their wallets a different way. For businesses, what certainty do you need? You're not going to have crazy taxes, you're not going to have some new regulation that's going to totally undercut what you've done. Your input prices, yes, you'd love to know what those are too, but that they might go up or down by 20%. That's something businesses have coped with and dealt with before and still built a factory even though they weren't totally sure whether their input prices were going to go up or down. So I don't want to minimize it. I myself am uncertain and willing to be proven wrong. But to me, so far, that is the shoe that hasn't dropped and may not drop is the extra effects of uncertainty above and beyond the sort of normal tariff effects.

[Craig Horlebeck]

I want you and I to walk through a few ways that the tariffs still might be worse than they seem. I know that's like a weird sentence construction, but the first reason why the tariffs might be worse than they seem is is that a lot of them haven't quite clicked in yet. The tariffs that were announced on Liberation Day were pulled back, and then some of them are reannounced, and then some of them were pulled back again. And now just a few days ago, there were new tariffs announced on copper, new tariffs announced on Mexican tomatoes. And so it's a little bit difficult to evaluate the economic impact of tariffs that have this half life of like four days to two weeks. What exactly are we measuring here if the tariff policy keeps changing? So that's one thing I want to make sure that we have on the table, that when I say, when I ask you why aren't we seeing the impact of the tariffs that were predicted? Well, one answer to that question might just be that economists and businesses were reacting to a set of tariffs announced in the middle of March that don't actually exist right now. That's important to say. A second thing that I'd love to get your mind on is this question of timing. I read a lot about how in the first quarter this year a lot of businesses, in anticipation of future tariffs, built up their inventories. They imported a lot in March and April to get ahead of import taxes they were afraid would come in May, June, and the rest of the year. Can you talk a little bit about how the timing of the tax incidence of these tariffs might be a really important thing to consider here?

[Jason Furman]

Yeah. So you always expect things will take a bit of time to work their way through the system. And in this case, the just enormous time shifts we've seen have probably delayed that out for the reasons you were saying. So businesses imported a lot to get in ahead of the tariffs. So a lot of the goods that people are buying now came in without the tariffs. Now that doesn't mean you can't mark up the price. And by the way, there's a whole sidebar here on if you believe a lot of the greedflation theories, you'd think businesses would be raising prices like crazy to take advantage of the fact that people are confused about the tariffs. So I don't think we're seeing a lot of that. But anyway, a lot of what people are buying actually came in before the tariffs hit. If it's on the boat on April 1, it doesn't face the tariff. It's only the stuff that arrives a month later that does. A lot of the tariffs on those things get delayed by Customs and Border Patrol by another month and a half for technical reasons. So lots and lots of what people are buying now are not subject to tariffs. And with every passing month they will be. You also have businesses that initially have not passed the full cost on to consumers. Ultimately, they'll probably businesses absorb some of the cost, but they can't afford to absorb as much as they've been absorbing indefinitely. Once they're sure the tariffs are there to stay, then they raise the prices. Auto prices, for example, have been a place where you've seen that the auto companies, possibly under threat from Donald Trump, have been reluctant to raise prices. Last month's CPI print, we actually saw new car prices fall. I just don't think that can last forever. So as we work off these inventories, as we work off some of the companies temporarily absorbing the tariffs, I expect that more of them will show up in consumer prices.

[Craig Horlebeck]

So if we're trying to enumerate all the reasons why the economy might not be as bad as some people feared back in March, we have just listing the reasons that we've already given. Number one, the economy is really, really big. And so even significant policies in the hundreds of billions of dollars might only affect the economy at the outer edges. Number two, a lot of the tariffs that were announced were canceled and then delayed or delayed and then canceled or canceled and then reannounced and Then delayed. And so the full suite of tariffs that we were afraid of in the middle of March haven't necessarily come to bite now. In July, Number three, a lot of companies in anticipation of tariffs, bought a lot of stuff from overseas in March and April. And so they have that stuff here domiciled in the US they're not paying tariffs on it. And there's been therefore maybe a little bit of a delay in terms of how the tariffs are going to affect the macro economy in the long run. And then you just mentioned a lot of companies have responded to the tariffs in the short term by just cutting prices. They don't want to pass the tax along to consumers in the short run. They're just hoping this whole thing goes away. And so they're cutting prices on things like cars, hoping to be able to make it through and muddle through the next few months. There's a few other things that I want to put on the table here, one of which is the Federal Reserve, I think, is responding to the tariffs by keeping interest rates high. In fact, Jerome Powell's June 2024 report to Congress, he said, quote, increases in tariffs this year are likely to push up prices and weigh on economic activity. Near term measures of inflation expectations have moved up in recent months. Respondents to surveys of consumers, businesses and professional forecasters point to tariffs as a driving factor, end quote. That is somewhat economiese for tariffs are going to raise prices, therefore we're going to keep interest rates high to constrain rising prices. Jason, do you think it's possible that one reason why we haven't seen tariffs drive up inflation even more is that Jerome Powell and the Federal Reserve have essentially acted as a kind of countervailing force against tariff pressures in order to keep prices a little bit moderated.

[Jason Furman]

So I think that is likely part of the story, but not a huge part of the story. And we have to understand, first of all, it is unusual that the Fed has kept interest rates this high. Other central banks in other countries have continued to cut them, have rates that are lower than the United States. The United States is now becoming a bit of an outlier among the advanced economies. I personally think that's for good reason and the Fed is making the right choice, but that's just a statement of fact. Now, you would think that would, through the normal channel, that higher interest rates reduce demand. That should help explain why you haven't seen a huge amount in inflation, but will deepen the puzzle as to why we haven't seen a huge amount in terms of unemployment rate and falling output and things like that. There is, though, a second channel by which the Fed operates, and that's inflation expectations. And there, I do think inflation expectations, while they've risen, are probably in a lot better shape because of both the language and the actions that the Fed has taken. And I think the belief that there will be institution protection for it to continue to be able to do that. So that inflation expectation channel can give you lower inflation without lower output. The other channel, though, helps explain one puzzle, but deepens the other.

[Craig Horlebeck]

Yeah, and what you're circling here, which I think is really important, is that policies can have these countervailing forces all the time, that maybe monetary policy is tight precisely because Donald Trump is president. And therefore, in a way, the tariffs are playing a role in keeping interest rates high. But tariffs might also be weakening the global economy by reducing overall trade. And that might have the effect of, let's say, lowering energy prices and lower energy prices are going to constrain inflation, all things equal. And so the economy is very complicated. And if you do something dramatic to one part of the machine all the way over here, another part of the machine all the way over there might respond to that action and then keep the overall system in a kind of equilibrium. Right. So it's conceivable that one reason that we haven't seen a more dramatic effect on the overall economy is that many things are changing in response in the short term, response to Trump's tariffs that are keeping the economy in a little bit more of an equilibrium than we otherwise might have expected.

[Jason Furman]

Yes, I think this is actually an important one. And let's give Donald Trump credit here. Prices are down 7% this year in the CPI, at least, which is seasonally adjusted. That has a lot to do with Donald Trump's policies, but it's because they've weakened the global economy in the same sense that the financial crisis also dramatically lowered gasoline prices and Covid dramatically lowered gasoline prices. So this is not what I would recommend anyone do to lower gasoline prices, but I think it has. By the way, gasoline prices happen to be very salient to consumers. So it's hard for consumers to be that upset and worried about inflation unless gas prices are rising. And by the way, last month that started to reverse, and after they had been falling, they started to rise. You see it in some other prices, too. Hotel prices are down 5% this year. That has a lot to do with fewer tourists coming to the United states. Airfares are down 13%. That's the combination of fewer tourists and lower gasoline prices. And so some of the same forces that are pushing some prices up really are pushing some other prices, including highly visible and salient ones like gasoline down.

[Craig Horlebeck]

Right. And maybe it's important to say here that you're suggesting in that answer that the tariffs really are having an important effect on the economy. It's just not the kind of effect that is easily seen by just glancing at GDP figures. Oil prices are down in part because of tariffs, and America's growth might be constrained in part because of tariffs. And maybe interest rates are higher in the US in part because of tariffs. And, of course, immigration to the US and hotel prices and airfare prices are down because of a different part of the Donald Trump suite of policies. But maybe it's important to say here that while the overall premise, or the overall driving question this episode is if Trump's policies are so bad, why isn't the economy doing worse? What you're saying is, well, the economy doing worse. That's an overall diagnosis. But if you look under the hood, many little things are changing in response to Donald Trump's policies, the tariffs and otherwise. I'd like to talk a little bit about the goal of Trump's neo mercantilism, the goal of these tariffs, and that to me, was manufacturing revitalization. The purpose of higher tariffs in the US economy, the highest tariffs since the early 1900s was to bring back the economy of the early 1900s. It was to bring back manufacturing. But when I look at manufacturing surveys coming out of regional Fed offices, those look quite negative. When I look at manufacturing employment declining year over year, that looks quite negative. When I look at manufacturing construction, which is a funny sort of officious term for total spending on factories, that's declined every month practically since the November election, and it's still falling. Jason, do you think it's possible that shifting from an evaluation of the overall economy to an evaluation of the purpose of the tariffs, manufacturing's comeback. Is it possible that Trump's tariff plan might be backfiring on the very manufacturing industry that he's trying to revive?

[Jason Furman]

So I want to first take on your every little thing part of that and then do the manufacturing part. I agree. If you look at lots of little things, you see the tariffs, you see them in appliance prices, you see them in toy prices, you see them in consumer prices. In fact, when you aggregate all of it up and look at core PCE inflation, which is de facto what the Fed targets, looks like in the first half of this year, it's going to be up at a 2.9% annual rate. Before this year, forecasters thought it would be up at a 2.25 annual rate. So you add up all those little things and inflation is about more than half a point above what forecasters thought it would be. That's not all the tariffs, some of that inflation surprise happened earlier in the year. But big picture, we did think inflation was going down to something like 2%. Instead, it's heading towards 3% and continuing to rise and likely to go above it. So you're seeing in tariffs and lots of little things, but you are seeing those little things add up. Now, to answer your question, yes, the stated goal of these tariffs, there's lots and lots of different goals, but one of the biggest stated goals is to revive American manufacturing. And I see no evidence whatsoever that that's happening. I completely agree with your factual summary. And it's not that surprising. You're raising input prices for manufacturing. You know, when steel goes up, it helps steel makers, but it hurts automakers. Equipment is being tariffed which manufacturers need. We're not seeing it yet, but when we see some of the retaliation that'll hurt hurt America's export businesses, some of the weakening of the global economy is already hurting it. So none of this seems like an exquisitely designed and targeted plan to revive American manufacturing. And by the way, I would refer you to the Mexican tomato tariffs that were just announced or the tariffs we already have on coffee and bananas. None of these things help American manufacturing. In fact, in some ways, they can indirectly end up hurting it through retaliation or other mechanisms. This episode is brought to you by Netflix says. Happy Giltmore 2 we're back. 30 years ago, he decided to give golf a try. Now he's ready for the happiest comeback of all time. Adam Sandler's beloved golf legend returns to the green for another swing at glory. Just remember, it's all in the hips. Also starring Ben Stiller. I like him. Julie Bowen like her and Benito Antonio Martinez Ocasio. Happy Gilmore 2 only on Netflix, July.

[Craig Horlebeck]

25 I want to move to talk about monetary policy. There's a very aggressive campaign underway for Donald Trump to fire Fed Chair Jerome Powell and install someone else as the head of US Monetary policy who will lower interest rates or lower the federal funds rate, I should say, and I think this decision is important enough and complex enough that it deserves its own chapter of our conversation. You mentioned earlier, Jason, that the US Is out of step with much of the Western industrialized world in that we have maintained the high interest rates that we set in the aftermath of the inflation spike. Do you think the Fed is making the right decision here?

[Jason Furman]

I think they're making the right decision here, but there is a totally legitimate debate. Chris Waller, who's one of the governors of the Federal Reserve, has been much more open to rate cuts. He's been arguing that tariffs will cause higher prices, but that they won't cause sustained higher inflation rate. It'll just be a one time jump up, inflation won't go up and that the Fed should ignore that. I think that's a totally reasonable way to see the world. I though support what the Fed is doing because with inflation expectations up, with us still not having been fully out of the inflation that we were in, and with nothing in terms of the unemployment rate screaming out and begging that it needs a rate cut, I would stand pat. But totally legitimate, open question and difficult one as to what should be done.

[Craig Horlebeck]

Economists are definitely quite heated and economic commentators very heated about the fact that Donald Trump seems quite eager to erase the independence of the Federal Reserve, to fire Jerome Powell because Powell won't do what he what Trump wants him to do and put someone in the office who will do Trump's bidding. Before we get to the mechanics of exactly how firing Jerome Powell would work and what its effects might be, why don't you set the table with an explanation of why Fed independence is important in the first place?

[Jason Furman]

Yeah, so first of all, I think it's better if presidents don't comment on the Fed. And that was a policy adopted by Clinton, kept by Bush, kept by Obama. Trump has broken it. He's gone out and talked about a 1% interest rate. That's ludicrous. There isn't a good argument for a dramatic emergency, massive rate reduction of the type that he's calling for. But I don't know if it's important whether or not the White House comments on monetary policy. I would advise against it cuz it creates some noise, it creates some static and has no upside. But still it probably isn't that consequential by itself. What is much more serious is if you try to actually dictate what the Fed does and to dictate it, you could fire the chair, you could fire several governors, you could try to have some interpretation of the law under which they had delegated authority that you could take away from them and you could set those interest rates. Once you start doing that, you're in territory that economists are very confident is terrible because there has been decades and decades of research and experience There are an enormous number of papers that have studied countries that give more independence to their central banks and find they get lower inflation and more stable inflation without any compromise or loss in terms of output or unemployment. There's some stark examples of countries like Turkey that have fired their central bankers and ended up with high double digit or even triple digit inflation rates. And then on the other side, there's examples of a lot of countries that have adopted independent central banks. It's been the trend around the world for decades, and we actually have seen, outside of places like Turkey and Argentina, more macroeconomic stability as a result. So it's a simple idea that you insulate your central bank from political pressure. You don't let them succumb to the short run temptation to pump up the economy or to lower interest rates to make the debt more affordable. And as a result, you have more credibility and better outcomes. And that's something that would be a terrible thing for the United States to give up.

[Craig Horlebeck]

I'm not going to debate the idea that independent central banks produce better outcomes for advanced rich democracies. But from a constitutional democracy standpoint, what is the case for keeping a central bank insulated from democratic pressures while we have fiscal policy that is directly responsive to democracy? Taxes and spending are set by democratically elected congressmen, congresswomen and senators, and they're signed by democratically elected presidents. That's on the fiscal side, the taxing and the spending side. On the interest rate side. However, I was born in the 1980s, so what, 70 years after the creation of the Federal Reserve or something like that. So I've only known a world where central banks in the US Are independent. But what is the philosophical argument for keeping this part of economic policy unmolested by the democratic process?

[Jason Furman]

So I would say there are two important philosophical arguments that distinguish it from a lot of other areas of policymaking, including fiscal policy, and probably including financial regulation as well. The first is that there just is not a deep ideological difference between the two parties when it comes to monetary policy. They both want low and stable inflation. They both want maximum employment. Maybe they differ a little bit in the weight they have on those two objectives, but not a whole lot. And then for the most part at least, economists associated with both parties have roughly the same macroeconomic theories as to when you raise interest rates, you lower output and you lower inflation, and you have a Phillips Curve and things like that. So there just is not the same ideological debates here that there is in other areas. And then the second part of the philosophical argument is what economists call time consistency, that it is always for both parties tempting to do something that is great in the current moment and is bad over the long term. And so you want to tie your hands so that you don't do that. And once you have fiat currency where you can just print whatever amount of money you have, it's this incredible blessing because you can very flexibly respond to crises. You can print more money when you really, really need it, which is something we did, for example, in Covid, maybe overdid in Covid, but that's a separate debate. So it's this wonderful blessing. But unless you have some limit on the amount of money you make, that money will have very little value and you'll end up with high interest rates, high inflation instability. And so how do you limit the amount of money? Well, you can use gold. That's one way to do it. You can use some other country's currency. That's what you see places like Ecuador and Panama do. Argentina's tried that at various times. Or you can have an independent central bank and an inflation target. And so it's this present versus future debate that almost both parties would agree to tie their hands. That I think is the second philosophical argument here.

[Craig Horlebeck]

And I suppose that a third philosophical argument could be that the same way that the Supreme Court can act as a part of a system of checks and balances against the legislature and the executive branch. So you have at the level of law setting and law creating this balance of representatives who are democratically elected and those who are simply nominated by those who are democratically elected. Maybe it's useful to think of economic policy existing in a similar check and balance between people who are elected directly into office where they can raise taxes and raise spending, and then those who are merely nominated by those we elect to office, who can exist in sort of in an independent sphere and check these sort of short term democratic instincts of the public. I can see how in both the realm of economic policy and the realm of just jurisprudence and legislation, that it's useful to have a balance of democratically responsive and democratically less responsive. That is kind of interesting to me.

[Jason Furman]

Yeah, I agree with all that. But you asked philosophical. There's also a legal question and the Supreme Court recently had a ruling that basically said the president can control everything and every independent agency except monetary policy at the Fed didn't really offer any strong legal reason. So I'm open to this whole thing being a little bit legally dubious, But I do think there is a good philosophical principle underlying it. There's 100 years of history underlying it. And then there are, I'm a consequentialist. There are better outcomes for the American people as a result of it.

[Craig Horlebeck]

Jason, let's assume the people listening to this podcast woke up to the news that but this morning, Donald Trump fired Jay Powell and announced that he was going to put his own man or his own woman at the chair of the Federal Reserve at this moment today, what does Donald Trump, through his proxy at the Federal Reserve control and what does he not yet control in the realm of interest rates and economic policy?

[Jason Furman]

So there are lots and lots of different interest rates, but let's just simplify them down to two. One is the fed funds rate. That is what banks borrow and lend from each other overnight. They don't do a whole lot of it anymore, but that's what the Fed controls. There's no one listening to this podcast that has ever borrowed anything at the fed funds rate. So let's talk about a second interest rate, which is the mortgage interest rate. Probably a lot of people listening to this have borrowed at the mortgage interest rate or will in the future. And the mortgage interest rate isn't directly related to the fed funds rate because the fed funds rate is what you pay if you're borrowing overnight. Mortgage rate might be what you pay if you borrow over 10 years or 30 years. And so that mortgage rate depends on what interest rates are now and in the future. It also depends on what inflation is expected to be in the future. It also depends on how much risk there is overall in the economy. So what was the point of this? If this managed to lower the fed funds rate, there's no reason to believe it would lower the mortgage interest rate. In fact, all of the other things that go into the mortgage rate are things like inflation and risk. Risk. And they would go the other way. Moreover, even the fed funds rate is set by the vote of a 12 person committee. The chair is only one person in that committee. They're very, very influential. But if they showed up and said Jay Powell was just fired, Donald Trump sent me here and told me to cut rates to 1%. There's not another person on the committee that's going to give them the time of day and vote with them on that rate cut.

[Craig Horlebeck]

So there are mechanical and legal barriers to Trump getting the interest rate that he wants, even if he did fire Jerome Powell. That said, again, for the purposes of just understanding the mechanics of monetary policy here, let's say Trump did manage to cut the federal funds rate all the way to 1%, which it hasn't been since, I believe, 20, maybe parts of 2020. I asked you at the top of this episode to be a human. Now I'm asking you to be a machine. Tell me, as Jason Furman, macroeconomic machine, what you would expect to happen to the US Economy if the Fed funds rate was cut by however many hundreds of basis points, all the way down to 1%. As Trump has said, he wanted an.

[Jason Furman]

Interest rate cut that big. The primary effect would be to send signals about what the United States was like. One signal is that we're not reliably on top of inflation. That would make people more reluctant to lend us money. And so treasury interest rates for borrowing, at least on terms of 5, 10, 20 years, would go up. Mortgage rates, which are tied to those rates, would also go up. There would be an increased perception of risk in the US Economy, which would make people want to move their money out of the United States. So I'd expect the stock market to go down and the dollar to weaken as well. And so by moving that dramatically, the Fed would not do what your normal model would predict, which is interest rates go down, you stimulate the economy and you get more inflation. Instead, here, interest rates go down would cause very if they went down by that much in that circumstance, they just caused these enormous financial changes, the likes of which we haven't seen before, many of which would undo that stated goal.

[Craig Horlebeck]

Right at the top of the show, I talked about how the US Economy reminds me of Rasputin. That Rasputin, according to at least some reports, was famously poisoned with cake and then poisoned with three cups of tea and then shot, and then got back up and got shot two times and was still alive and finally needed to be, like, drowned and shot in the head for him to finally be killed. And the US Economy right now seems sort of similarly unkillable. That we had this bout of inflation followed by the fastest ever increase in the federal funds rate. And many economists, including Larry Summers, predicted that the only way this could possibly end the situation of low unemployment and rapidly rising interest rates, the only way this could end was a recession. We didn't have a recession. And then we muddle our way through the final Biden years. And then Trump comes into office and he announces this unprecedented set of tariff plans which shock the stock market and shock a lot of people around the world. He wobbles back and forth in these tariff plans. We're currently still taxing copper and tomatoes and coffee and everything, bananas, everything that you said. And yet the US Economy still continues to be growing, but it seems like what you're saying is if Trump fired Jay Powell and got the interest rate cut or forced through the interest rate cut that he's been talking about, that would be the drowning of Rasputin. That would be sort of the final measure that would likely send the US into some kind of chaotic spiral that would likely dip us into a recession. Is that a fair summary?

[Jason Furman]

Yes. And let me say, I think the Rasputin thing, there's a lot to it, but it's not like an economy is alive or dead. There's a lot of different growth rates that you could have. And our growth rate is maybe half a point lower than it otherwise would have been. Our inflation rate is half a point higher. And at least on inflation, I think that's going to get worse over time. But, yeah, the Fed, and we got a preview of this when the president was floating, firing Jay Powell a couple months ago, the market really, really viciously tanked. And it was only when he basically reversed himself that the market recovered. So that would be quite a bad thing. Even there, though, by the way, I don't want to at all defend firing Jay Powell. I think it would be a horrible thing to do. I do think there'd be all these reactions even there. The Supreme Court might step in and say, you can't do it, or the other 11 voters on the committee might make a statement basically saying, we're not going to go along with what this new person said says. And so the system has some protections and antibodies. I think the more realistic downside scenario is if he did this and put in a hack, and then he gets another opening two years ago, now puts in another hack, then the next president has several more openings and puts in more hacks, then six years from now, we wake up with a central bank that's very different from the one we have now. I think doing it overnight, even with maximal pressure from Trump, will be very, very hard to do.

[Craig Horlebeck]

I really like that word that you used, and I think I want to close here because I think it's an important one. It's antibodies that when Donald Trump or any president really announces an economic policy, what's very visible to economists and economic commentators and podcasters is the thing that's been announced. And so we can evaluate the policy and pretend sometimes to evaluate it in a vacuum. But no policy does exist in a vacuum. Every policy change has, as you said, these antibodies, these feedback loops, these responses. And so the tariff announcements might have been damaging to the US Economy. But they also triggered a pulling forward of inventories, which made it harder to see the effect of the tariffs in the first few months. And it also encouraged maybe Jay Powell to keep interest rates high. And it also had feedback loops in terms of reducing global trade, which reduces energy prices, which pulls down overall inflation, rather than raise the overall price level. One of the hardest things, I think, to wrap our brains around is the idea that because the U.S. economy is this big, enormously complex organism, dramatic changes, just like a virus entering the body, produce dramatic antibody responses. And it's so hard to predict what all those little tiny feedback loops are going to look like, because ultimately they're what helped to determine the long term impact of these economic policies. Any final statement that you want to make about just Trump's policies and the general level of uncertainty and humility that maybe people should have when predicting the future of the economy?

[Jason Furman]

Yeah. So I'd say three things. One, I completely agree with everything you just said on antibodies. Two, those antibodies might prevent you from dying, but they won't necessarily protect you from getting a bit under the weather, maybe even being a bit sick. And that is the state that we're entering now. And then finally, just humility about all of this. As I said, the biggest thing I'm uncertain about is actually uncertainty itself and what the consequences and magnitude of those consequences of the uncertainty will be.

[Craig Horlebeck]

Jason Furman, thank you very much, as always.

[Jason Furman]

Thank you, Sam.