Matthew Rose, an Opinion editorial director, hosted an online conversation with three economists about the future of the Federal Reserve, which meets this week, and how it should manage an economy that’s increasingly hard to read.
Matthew Rose: President Trump, depending on the day, seems to want to fire Jerome Powell, the chairman of the Federal Reserve. On other occasions, Trump is telling the Fed chairman how to do his job. The administration’s trade policies are pushing America into a slowdown, which would suggest a rate cut, and also raising prices, which would suggest the opposite, which is a real puzzler for anyone trying to set policy.
This might be one of the hardest jobs in Washington. Jason, how do you think the Fed chairman has handled these dilemmas, and what advice would you give him?
Jason Furman: Jay should keep doing what he’s doing. He has to take White House policy as a given in charting his course. He should talk about the consequences of that policy for the mandate he was given by Congress to achieve stable prices and maximum employment. He should continue not to render a judgment on the merits of those policies. And when asked questions like whether or not he would resign, he should stick to the answer he has already given: No.
Rebecca Patterson: The Fed has to focus on its mandate and communicate the logic behind its decisions as clearly as possible. I think that’s what Jerome Powell has done so far. He and the Fed are staying above the noise. Any sense that the Fed was acting for reasons not tied to its mandate — because of political pressure, for example — would be a disaster. It would raise expectations for higher inflation and increase longer-term borrowing costs. What we saw briefly in financial markets when Trump talked about firing Powell earlier this year would likely repeat, but in a much more powerful way. Weaker dollar, weaker stocks, weaker bond prices and higher yields.
Oren Cass: I suppose we’ll have a lot of consensus on the theme of “focus on its mandate.” With any administration, and the Trump administration especially, it’s important to distinguish the day-to-day rhetoric from serious policy conflicts. President Trump makes it known when he disagrees with anyone, whether it’s a congressional leader, a judge or the Fed chair. But now, in his second term in office, he has never actually attempted to curtail the Fed’s independence. It’s also important for the Fed, in focusing on price stability, to distinguish inflation from tariff-driven price changes. A price that rises as a result of a tax is not rising in a way that a central bank should be responding against.
Rose: Oren, you mentioned that the president hasn’t actually sought to curtail Fed independence. What are the dangers of the president hectoring from the sidelines — let alone firing Powell? Most recently Trump said, somewhat inaccurately, “Inflation is basically down and interest rates came down despite the fact that I have a Fed person who’s not really doing a good job.” And that’s among the nicer things he’s said.
Cass: The danger isn’t the hectoring. The danger is if investors decide they no longer have confidence that the Fed will act in the interests of price stability and full employment. Thus far, of all the things the markets have to be worrying about, this doesn’t seem high on the list. Frankly, there are a lot of other things the Fed has done over the past 15 years that should have given investors greater cause for concern.
Patterson: The National Bureau of Economic Research studied Trump’s Fed tweets from his first term. They found that his criticisms resulted in financial markets assuming more rate cuts. What the president says creates questions about independence, and it can set up financial markets to expect something that’s not necessarily aligned with what the Fed believes. That contradiction can add to market volatility that feeds into the economy over time.
Furman: You can debate the magnitude of the impact of Trump’s hectoring of the Fed, but there is no doubt about the sign: It is negative. The sharper his rhetoric, the more negative it is, and then when he tones it down much of that negativity reverses. But the volatility itself is a problem — it is a big part of the record uncertainty we’ve been experiencing, uncertainty that is leading many businesses to wait and see rather than investing and creating jobs.
Cass: I think it’s fair to ask: Have markets gotten this right? If they react as if they expect tweets to move interest rates and the tweets do not, investors need to make adjustments of their own. I don’t think a lot of businesses are holding off on investment out of concern for Fed independence.
Patterson: Oren, if investors are flip-flopping between signals from Trump and Fed officials, that’s more volatility they have to grapple with than otherwise. The degree of cost is debatable, but it is a cost.
Cass: But if investors are the ones flip-flopping, they are the ones creating the volatility they have to then grapple with. If they bought and sold every day based on what Trump had for breakfast, we wouldn’t say the problem was Trump having breakfast. After the past month, the 10-year yield is [checks notes] roughly where it was a month ago.
Patterson: Greater volatility in markets supports broader uncertainty. If we did not have the president’s frequent comments raising doubts about policy, that would be a better world for investors, but also for companies making decisions on where they think the economy and borrowing costs will be headed. If I see a 10-year Treasury yield swing wildly, how can I be confident about what my borrowing costs will be?
Furman: The issue goes beyond Fed independence. When he talks about firing the Fed chief, everyone — rightly — increases the chances he will do a range of other things that are economically harmful. I wouldn’t lecture the bond market; I would listen to it more.
Rose: Let’s drill down a little into where the Fed might have erred, something Oren alluded to earlier. Kevin Warsh, who many believe is a possible candidate to succeed Powell, gave a speech recently to central bankers and other finance officials in which he argued the Fed had itself to blame for any political interference, because it had inserted itself into politics, in areas such as financial regulation and climate policy. What do you make of that critique?
Furman: I agreed with Warsh’s central argument: The Fed has to earn and maintain its independence by doing a good job and not going beyond that mandate into issues that are the purview of democratically elected officials. I also agree with Warsh that the Fed strayed on a number of these issues. But he does not give the Fed nearly enough credit for all that it has done, including catching up very quickly on inflation by raising rates even faster than most of their hawkish critics thought was possible. Moreover, while Powell and the Fed have protected their independence on monetary policy, they have been deferential to presidents on financial regulation, with a deregulatory posture under Trump 1 shifting to a more regulatory posture under President Joe Biden and now back again under Trump 2.
Cass: I was at a round table recently where someone said he wished we had a “Fed for immigration” that could impartially set the level of inflow based on the economy’s needs without interference from the political process. Stipulating the ridiculousness of that, it is helpful in underscoring the uniqueness of the Fed’s claim to independence and the importance of self-discipline in preserving that claim. I agree with Warsh’s critique that it has instead become an all-purpose tool of economic policy in ways that have been both politically unwise and substantively harmful.
Patterson: I think Warsh is right to underscore the need for the Fed to stay focused on the core mandate and execute that well to be credible — Jason and I are aligned there. I think some of the criticism is a bit blown out of proportion, though. While other central banks have explicitly incorporated new goals, such as climate, the Fed has not. It researched climate to understand how changes could affect the economy. If the Fed doesn’t research them actively, how can it successfully navigate their implications?
Rose: Do you think Warsh is likely the next Fed chair? Would you approve?
Patterson: I would approve, and hope that, if he is the next chair, that the current environment, with questions around Fed independence, doesn’t create an unnecessary burden. Even with all his experience, there is a risk that he, or whomever comes next, could face investor doubts about political influence
Furman: Kevin is a friend, and I would hate to doom his chances by expressing any enthusiasm for him. But yes, I would approve. (Sorry, Kevin!)
Cass: I don’t have any idea who might be next; my hope is that it is someone with a technical background whose past work indicates a determination to stay focused on a narrow and proper — and relatively nonpolitical — scope for the Fed’s activity.
Rose: People who worry about the Fed and monetary policy independence often invoke the ghost of Arthur Burns, the central banker strong-armed by Richard Nixon into lowering rates, which helped kick off runaway inflation. Are you confident the Fed will make it through this period with its independence intact and inflation under control?
Patterson: The number of unexpected policy decisions in the first 100 days of this administration makes it impossible to be confident of things that previously would seem unthinkable, like Fed independence. That said, I have to think it’s a very, very low probability. The White House has plenty of officials, including Treasury Secretary Scott Bessent, who seem to understand that a move to reduce Fed independence would have incredibly large, negative implications for the American economy, both immediately and longer term.
Cass: We are obviously in a period of rapid political and economic shifts, which has the potential to test our political arrangements and our economic policies. I see risks on both fronts, from both the administration and the Fed, but our confidence level should be similar to that in other such challenging periods, including in the mid-1970s and around the 2007-08 financial crisis.
Furman: The nightmare scenario is that the Supreme Court grants the president the ability to fire everyone on the Fed. If that happened, the president could take complete control. The more plausible bad scenario is that the president departs from the tradition of picking nonpartisan experts and instead appoints political hacks with fealty to him. By itself, that wouldn’t change policy much — the majority of the Federal Open Market Committee that sets interest rates will likely not change over — but over time it could erode the institution if other presidents follow suit. I think it is terrific that Ronald Reagan reappointed Jimmy Carter’s Fed chair and Clinton, Obama and Biden all reappointed their Republican predecessors’ picks. If that comes to an end and the Fed becomes another hackish partisan institution, I would be seriously worried.
Rose: Let’s move on to the Fed’s actual job. It’s meeting on Tuesday and Wednesday and has to decide what to do with interest rates. To do that, it needs to figure out where the economy is heading. Let’s pretend we’ve created a new committee comprising you three. What do you see in the data about where we are heading? I found it notable that a bellwether like McDonald’s had its worst sales since the pandemic.
Cass: If one evaluated markets in a snapshot each month, one might not know anything had even happened in the past 30 days. The S&P 500 closed on May 2 above where it closed on April 2, when President Trump headed into the Rose Garden with his poster boards. Treasury yields are about where they were then, as well. The market’s response is not a good measure of whether an economic policy is good or bad for the nation, but it should tell us something about the macroeconomic state of play. I have trouble being as sanguine as the markets seem to be — the trends in business and consumer confidence and the potential supply chain disruptions from China seem like they must have some effect. But the labor market data on Friday morning looked OK, too. For now, I would be watching and waiting.
Patterson: Given the messiness of the quantitative data as tariffs start to work their way through the system, the Fed needs to rely relatively more on qualitative information. The Fed’s Beige Book, which is the aggregation of many interviews with companies and organizations around the country, noted uncertainty around trade was “pervasive,” but that for now, economic activity has only moderated a touch. Given the still resilient labor market and inflation that is moderating but still above the Fed’s target, there is no reason for the Fed to change policy now.
Furman: The best thing for the Fed over the next few months is to be behind the curve, because the alternative is to risk being ahead of the wrong curve. The data we have still mostly tells us about the pre-tariff past. Over the next few months we’re likely to see more inflation and more unemployment. We just don’t know which we’ll get more of and when. So they have no choice but to wait for more data. At most, they could give us hints about how they would react to the different contingencies, but mostly they should just do nothing this meeting while being humble about their ability to predict and act.
Cass: I’m curious, Jason and Rebecca, whether your answers now are different than they would have been when we were having a similar discussion near the market’s lows. Are things playing out differently than you would have expected, or does everything we’re seeing still qualify as too-soon-to-tell noise?
Patterson: I am confident the economy will slow. But how quickly and how much? It’s too soon to tell. Coming into this year we had record household wealth, a strong labor market and relatively low consumer and business debt. Now we have really high uncertainty and a potential large hit to consumers and businesses from tariffs. But we don’t know how long tariffs will last, how high the eventual tariff rate will be and what kind of fiscal stimulus might come later this year. We can see things like shipping coming down, corporate guidance getting very unsettled and, as you said, markets very volatile. But we don’t have clarity yet as to how it will translate into broader growth and inflation trends.
Furman: I would distinguish between the market, which is forward-looking, and the macro data, which is backward-looking. I am surprised by how completely the market has recovered from the huge tariffs — when only a portion of them were pulled back. And then there is the macro data, which is mostly through March, plus the April jobs number. With those data I’m not surprised, because I didn’t expect we would see anything very soon.
Rose: You’ve mentioned something I’d like to dive into a little deeper, which is the messiness of the data, especially the lag created by tariffs, just to put a fine point on the dilemma the Fed is facing. Many people seem to think the impact will come in some months, because companies did a pretty good job stocking up before the tariffs hit, and because it takes weeks for cargo ships to arrive from China.
Two data points that struck me: The executive director of the Port of Los Angeles said recently that “essentially all shipments out of China for major retailers and manufacturers have ceased.” And then the president himself mentioned offhand that maybe children will get only two dolls this year, instead of 30.
What’s your sense of when we will feel any impact and what it could look like?
Furman: We don’t have any comparable policy changes of this magnitude to give us any confidence, but based on what we’ve seen in the past, I would expect prices to rise more quickly and then the jobs market effects to come somewhat later. So expect higher prices in May and June and the hit to jobs after.
Patterson: The past month showed us that the White House has a pain threshold, so if we get to late summer and families are struggling to find or afford back-to-school items, that will hit the president’s approval ratings and, I would expect, elicit a reaction to get imports going again. That doesn’t mean this all just goes away. It certainly seems Washington wants to keep the 10 percent universal tariff to help pay for tax cuts, and some higher level of tariff on China. So even if the White House pulls back, I expect we’ll still settle in a world with meaningfully higher tariffs. More expensive dolls at a minimum — it’s a hit to the consumer.
Cass: The shipping data are so hard to interpret right now because of that front-running effect of people stocking up pre-tariff. Bloomberg had an excellent story on this recently, which showed that while shipments from China seemed to be plunging, that was only relative to the previous surge. I think what we’re probably about to learn is where we are truly dependent on China and where there are other supplies or substitutes available. Inevitably, some spikes have to occur, some businesses are really going to suffer. But in most cases you don’t go from 30 dolls to two dolls; you go from 30 dolls made in China to 30 dolls made in Vietnam or, if only China makes dolls, to 30 stuffed animals made in Vietnam. Or maybe 28. We shouldn’t pretend there’s no cost, but we should recognize how markets really are quite good at solving in dynamic ways for what looks like catastrophe in a static analysis.
Rose: I think I’m getting a sense of your Christmas list.
Cass: Also, yes, who buys 30 dolls?!
Rose: Was there anything to learn from the first-quarter G.D.P. figure, which showed the U.S. economy shrinking a little, mostly from a gigantic surge in imports as companies stocked up? Any notable clues under the hood?
Furman: I don’t want anyone to take this the wrong way, but the more I looked at the data, the more I thought it was likely a lot of it was simply wrong. That is not an insult to the outstanding nonpartisan statisticians who are trying to do the impossible work of tracking an economy with a massive pulling forward of imports. But we’ll get many revisions in the months and years ahead as they collect more data, and I would expect we’ll look back and see something quite different than we see right now. That said, the more reliable parts of the numbers, like consumer spending, were consistent with a continued robust economy. But they are also in the past.
Patterson: This is definitely a moment in time, whether G.D.P. or payrolls, where we need to expect revisions — I echo Jason’s sentiment there. And it is reassuring that consumers were holding up pretty well in these latest reports.
Cass: I would agree, as well. More broadly, I’d say the most important data points in assessing how all this is playing out will be capital investment, unemployment and prices.
Patterson: Companies seem to be pausing — slowing down hiring beyond what is immediately needed, moderating investment intentions — rather than pulling back. The economy is holding a collective breath, so to speak, to see what is ahead, which unfortunately feels like it changes by the day.
Cass: One of my main criticisms of the Liberation Day policies is the way that the abruptness and uncertainty led to declining confidence when the entire goal is to encourage investment, which requires a clear sense of where policy is going to be in a few years, let alone a few weeks. I think we’ve begun to see a course correction and the policy has been relatively stable since Week 2. Whether this all “works” or not will depend on where capital investment (particularly in the manufacturing sector) is a year from now.
Rose: You’ve all noted that the Fed has to worry about both inflation and unemployment, both of which might be getting worse at the same time. To state the obvious, any change in interest rates will address only one of those, and would probably make the other worse. Which do you think the Fed should be focused on? Asked another way, which is the more pressing problem?
Furman: Coming into this year, the unemployment rate was exactly where the Fed wanted it to be, while core inflation, which is a good predictor of future inflation, was 2.8 percent, uncomfortably above the Fed’s 2 percent target. So we hadn’t quite achieved the soft landing. That plus the huge inflation experience we went through means the Fed needs to be especially vigilant about the inflation side of its mandate.
Patterson: I agree with Jason — the Fed will be mindful that missing any rise in inflation from tariffs after the unfortunate “transitory” call a few years ago could really hurt the institution’s credibility. As long as the labor market is strong, as we saw last week, there is little reason for Fed officials to be pre-emptive to support growth.
Cass: I would hope that the Fed would err on the side of focusing on full employment. The express objective of the administration’s policy is to accept some increases in prices in the short run in return for incentives for aggressive capital investment. In that environment, responding to a price increase that might not even be inflationary (in the monetary sense) with higher interest rates intended to slow investment would be rather counterproductive. All of which I suppose brings us back to where we started, on the question of whether there can be such a thing as Federal Reserve monetary policy independent of political context.
Furman: Ultimately, caring about inflation versus caring about workers is a false dichotomy. Workers care a lot about inflation. And if inflation stays well above the Fed’s target, the inevitable consequence is even more job loss in the future, either because the Fed raises rates to bring it down or just does not react as quickly to the next recession. Underlying inflation was well above 2 percent even before the tariffs, the tariffs have raised expected inflation, the Fed just cannot ignore this under its statutory mandate.
Patterson: Oren, given that inflation expectations have been rising since the election, there is material risk that a pre-emptive rate cut to support growth while the unemployment rate is still a very low 4.2 percent would push up inflation expectations more and feed into inflation.
Cass: It’s an interesting question whether the data allows for a disaggregation of tariff-related price increases and inflation. If we actually are seeing higher inflation and a potential spiral, the Fed obviously needs to step in. But it would be a huge failure of policy by the Fed (and communication by economists!) if one-time price level changes from tariffs get interpreted as inflation or drive inflation expectations, triggering a push to higher interest rates.
Furman: Part of my view on what the Fed should do is that I’m a bit less pessimistic than others about recession. In our last discussion, I said that if the tariffs weren’t changed then it was a 45 percent chance. Since then the tariffs have come down a bit, and the president has said they will come down further. I have no doubt we’ll get lower G.D.P. and higher unemployment because of this, but I’m genuinely unsure how much.
Rose: To test your remaining wits, here’s a quick-fire round. How would you grade Powell’s performance this year?
Furman: He actually hasn’t done anything of note. Which is exactly right. So an A — admittedly, an easy A.
Patterson: B+. I think he made appropriate policy decisions so far this year and had clear communication about how the Fed is thinking through tariffs. I’ll take a point off, as I’m somewhat sympathetic to Warsh’s criticism about Fed communication broadly. There are so many current and former Fed officials speaking in public that it can create noise and, for people not in the monetary policy weeds, potential confusion. I’d love to see better guidance for public speaking.
Cass: I’d say he has navigated well in a moment when many other actors charged with maintaining self-discipline and political neutrality have struggled. If Jason is giving an easy A, I will give an A on the curve.
Rose: If you were on the Fed board, what would you do at this meeting?
Furman: Nothing. Well, contingency planning, start to make plans for how to react to what types of data — and how to communicate the massive amount of uncertainty.
Patterson: No policy change, minimal statement changes, and a reassuring news conference explaining that the staff members are working hard to understand what different scenarios could mean for the mandate.
Cass: To the point about inflation expectations, I would love to see some communication about how they will interpret tariff-related price increases.
Rose: What do you think the Fed will actually do? We’ll find out on Wednesday.
Furman: There is no chance the Fed will change interest rates. Jay Powell may try to communicate his future plans, but given that he himself doesn’t know what will happen and how the Fed will react, he will hopefully just be honest about the uncertainty.
Patterson: Same as above.
Cass: As little as possible.
Oren Cass, a contributing Opinion writer, is the chief economist at American Compass, a conservative economic think tank, and writes the newsletter Understanding America. Jason Furman, a contributing Opinion writer, is a professor of the practice of economic policy at Harvard University and was chairman of the White House Council of Economic Advisers from 2013 to 2017. Rebecca Patterson is an economist and senior fellow at the Council on Foreign Relations who has held senior roles at JPMorgan Chase and Bridgewater Associates.
Source photographs by Anadolu, Andrew Harnik, Smith Collection/Gado and Win McNamee, via Getty Images
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