Matthew Rose, an Opinion editorial director, hosted an online conversation with four economists to discuss Wednesday’s Federal Reserve meeting and the state of the economy.
Matthew Rose: The Federal Reserve met this week and the least interesting thing it did was cut interest rates. This may rank as one of the oddest meetings in recent memory. It’s the first since the president tried to fire a Fed governor, Lisa Cook. It featured the first appearance by a Trump-appointed governor, Stephen Miran. And it’s the latest test for the chairman, Jerome Powell, who is facing attacks from the president, an array of contradictory economic signals and a very public contest to succeed him.
Stepping way back, what is your one big takeaway?
Lawrence H. Summers: Sometimes markets do better than is deserved based on the quality of policy. Between tariffs, wholesale attacks on Fed independence, deficits and attacks on the rule of law, there is much basis for uncertainty about our economic future.
Rebecca Patterson: The Fed’s decision this week and Mr. Powell’s news conference highlighted a really important divergence in the U.S. economy. While overall economic growth has been fine, it is masking very different experiences for different parts of the population. High-income earners with homes and equities have rising levels of wealth and continue to spend. But young people just out of college, lower-income earners and retirees on fixed incomes are increasingly struggling, given high and still-rising prices, a stagnant job market and a lack of housing supply. The Fed is trying to thread this needle: manage risk to the job market without exacerbating inflation pressures.
Jason Furman: My strongest takeaway was a little bit of relief on our worst fears about the Federal Reserve losing its independence. I was really encouraged that two people President Trump appointed in his first term, Michelle Bowman and Christopher Waller, both voted with the committee rather than dissenting and calling for a larger cut. This despite the fact that they have every incentive to flatter Mr. Trump, who is considering them, among others, for Federal Reserve chair. As long as the two of them want to keep the Fed independent, and I have every reason to think they are both serious people who care about the institution, it will likely stay that way.
Oren Cass: Economists have done a very poor job updating their assumptions to a novel policy environment where the government is actively trying to raise some prices (via tariffs) and reduce job growth (via immigration enforcement). It is good to see the Fed finally make a rate cut, but it’s hard to interpret the action and Mr. Powell’s remarks as anything but a concession that they have not been getting it right and are still struggling to make sense of the economy and figure out how to respond.
Rose: It’s fair to say, though, that it’s hard to get a handle on the economy’s trajectory given big changes in policy, such as tariffs, and sometimes contradictory signals, such as consumer spending holding up just when the job market looks lousy. What’s your sense of where we are?
Cass: As Mr. Powell noted, the job market is not lousy. It looks lousy, because we are not accustomed to seeing downward pressure on the labor force from immigration enforcement. We are in a very uncertain period because policy changes are reshaping incentives and behaviors in the economy in ways that will have one set of short-term effects but a potentially very different set of long-term effects. It’s important that we have realistic expectations about these time horizons. If the unemployment rate remains low, if prices reflect anticipated additional costs from tariffs, if investment holds steady and then starts to pick up, we have cause for optimism. Number of jobs and percentage G.D.P. growth are not the right measures right now.
Furman: The unemployment rate is 4.3 percent. Once upon a time we would have thought that was pretty good. In fact it is not far from what the Federal Open Market Committee implicitly defines as full employment, which is a 4.2 percent unemployment rate. Most of the slowdown in jobs that we’ve seen, as I’ve written, is because we have fewer immigrants, so the labor force is not growing. The Fed was right to increase its worry about the job market but was also right not to panic or think it is any reason to think the problems are very severe.
Patterson: It’s hard for me not to look at the economy today without using an artificial intelligence lens. The capital these mammoth tech firms are injecting into the economy, in part to build data centers, has become a meaningful support for growth. Meanwhile, the run-up in tech stocks is creating confidence and wealth for those lucky enough to own them. It’s not a surprise to me that consumption is being driven by households more likely to own equities. If equities falter or these companies pull back even incrementally on these investments, we might see that underlying growth quickly weaken.
Summers: I think we may be at the foothills of stagflation. I don’t think tariff impacts have been fully felt or will be for some time, and confidence has more room to decline than to rise. I think inflation will surprise a bit on the high side. I suspect we are seeing unemployment and inflation forecasts both being revised up.
Furman: I agree with Larry’s inflation concerns. Core inflation, excluding items like food and energy, has been running at a 3 percent rate. Some of that is tariffs and they might be transitory. But even without tariffs, inflation is still running about 2.5 percent. Before we all started focusing on tariffs, many people, including me, were worried about the last mile of inflation being the most difficult. It is increasingly looking like that is true.
Rose: I’m going to try something dangerous and see if I can summarize a consensus from all four of you. It would be something like the economy is … not terrible. Is it possible the economy is impervious to everything the White House is throwing at it? Jason, you wrote recently that economists who predicted something more calamitous were fogged by “tariff derangement syndrome.” Do you still feel the same?
Furman: Cass did love that line in my piece! I have no doubt that tariffs are adding to inflation. The evidence is also consistent with them slowing economic growth as well as job growth. Ultimately American families will suffer as a result of them. But I also do think it is fair to say that I (and many economists) get more worked up about them than we do about other policies. It’s a bit in our DNA to believe in the gains from trade and some of the amazing insights economists have had on this topic for nearly 250 years. But just because we’re more emotionally invested doesn’t mean we’re directionally wrong.
Cass: I’d encourage readers to go back and consult the conversation among the four of us from early April, which contrasts substantially in tone with the conversation we are having now. But even as probably the biggest optimist in the group, I’d say the economy has weathered disruption better than I would have expected — credit to markets for responding rapidly and effectively. I do think the Trump agenda creates various short-term economic headwinds. But I think it’s important to remember that these represent an investment in a better long-term trajectory. When Ronald Reagan came into office in 1981, the Fed induced a sharp recession to tame stagflation. Even at the time, certainly in hindsight, people recognized that the short-term numbers were not the right measure.
Patterson: I hear you, Oren. For me, the biggest surprise versus this past April is the speed and degree with which tariffs have been implemented. It has been a lot slower and less aggressive than expected. Countries like Canada and Mexico took steps to make sure more of their goods coming over our border were tariff free. The A.I. rocket to the moon has been a major support for broader growth and consumer confidence that I don’t think was widely expected. On tariffs, I don’t feel like we have clarity. Lingering uncertainty remains a drag on growth — companies are still having a harder time planning than they would like.
Furman: Oren, policy also contrasts markedly with what it was in April! Tariff rates on key countries have been cut by more than half from what we were discussing back then. And even with those sky-high tariff rates I was still betting against a recession. But yes, in some way this is a victory for economic models, which were predicting something more like a 0.5-percentage-point reduction in growth rates, compared with the economic intuition/prognostication/commentary, which often held out the prospect of much more severe consequences.
Cass: Rebecca, I definitely agree with you on the point about clarity. The biggest downside risk in my mind is that if we don’t get clarity and stability on the policy, we will see the short-term costs but not the long-term, investment-driven benefits.
Patterson: The investment point is one I think about a lot. The pledges of foreign direct investment are wonderful. But how much of that will arrive, especially if we aren’t treating foreign workers well when they are here? From companies I speak with, the tone I hear is still one of moving cautiously — there are a lot of question marks, from A.I. to geopolitics to institutional integrity.
Summers: If you drive drunk, you often get safely to your destination. It’s still a terrible mistake. Bad policy risks bad outcomes; it does not ensure them. I’m pretty confident the economy is weaker and prices are higher because of tariffs but there are many factors that drive the macro economy. It’s always a mistake to ignore shocks and treat economic outcomes as totally determined by policy.
I also think its important to recall that studies of populist economic policies, like those often pursued in Latin America and now being pursued by the administration, suggest there is often a honeymoon period of good results before problems set in.
Rose: Given all that, let’s play Washington’s favorite game, What Should the Fed Do. Mr. Powell has a gnarly job. Inflation remains stubborn, which calls for higher rates. The job market seems to have stalled, which calls for a lower one. And the president wants a dramatic cut to ease the country’s staggering debt burden. Mr. Powell, in a delightful piece of central bank euphemism, called this a “highly unusual” situation. What would you do if you were in his shoes?
Summers: I think he is in a reasonable place. I would put more emphasis on uncertainty and express more concern about inflation being allowed to get away from the 2 percent target than he is doing. And I’d be in less of a hurry to cut.
The biggest difference I have with the Fed is that I think their view that the neutral interest rate — the magic number at which the economy has both full employment and stable inflation — in the long run is only 3 percent is very unlikely to be right and crazy to give as guidance to markets. They thought it was 2.5 just before Covid. Since then inflation and inflation expectations are well up, budget deficits and the national debt have soared, a huge attack has been launched on trade deficits and capital inflows, and an A.I. capital spending boom has commenced. How can it possibly be that the neutral rate has remained so constant with so much more investment demand and so much less saving supply?
Patterson: Mr. Powell talked about risk management. I think that’s where I’d be as well. The Fed should watch the data, as well as keep collecting feedback from Main Street, and act in accordance with which risk looks more problematic, not in the moment, but quarters ahead. The good news is that if something dramatic happens, the Fed has room to move in bigger steps quickly.
Furman: I agree with Larry and Rebecca. Powell got it right by cutting by a quarter of a point. He also got it right by not setting a particularly strong expectation that we are on autopilot for more cuts. Personally, I would cut more only if the labor market weakens further. There is nothing about inflation that could reassure me enough to think we don’t need continued restraint. It may be that we are at something like a 4 percent federal funds rate indefinitely. It was only 25 years ago we would have thought of that as already a low interest rate.
Cass: The Fed should have cut by half a point today, because it is essentially acknowledging it should have cut last time, and if it had cut last time it would surely still have cut today. Back in June, Mr. Powell said, “All forecasters are expecting pretty soon that some significant inflation will show up from tariffs.” Now he is revising that concern down. And of course the Fed is indicating it expects to continue cutting. For all the talk of resisting politicization, it seems to me that the politics of not wanting to appear politicized is leading to less action than the actual analysis would support.
Patterson: Oren, cutting more now, with equities at record highs, financial conditions loose, growth holding up — doesn’t that just create more inflation risk?
Cass: I suppose by definition, at any interest rate and inflation level, cutting more creates more inflation risk. I think rather than assess every action as a discrete judgment made on a particular date, it is helpful to step back and look at the trajectory over time. Particularly with the enormous Bureau of Labor Statistics revisions for the prior year, and the reasonable concern about short-term economic headwinds, the bias should have been toward lowering rates further over the course of this year. Knowing everything we know now, and taking the Tariff Derangement Syndrome out, the trajectory of rates this year would be lower than it has in fact been.
Furman: It’s not clear that the B.L.S. revisions mean you should cut more. First, they actually show the job market slowing less this year than we had thought, because it was already slower last year than we realized. Second, as you and I have both said, we mostly learned that lower immigration means lower job growth.
Rose: You’ve all touched on the impact of tariffs, so let’s dive into that more deeply. Mr. Powell gave the Fed equivalent of a shrug emoji. He said they could lead to a one-time only price jump, but also may lead to inflation worsening over the longer term. What’s your best guess about the impact? Oren, do you still see this as one and done?
Cass: Yes. And I believe Mr. Powell has said the same. I find it frustrating that tariff opponents try to have it both ways, acknowledging that any inflation effect from tariffs is indeed transitory, and then returning right back to expressing serious concern about the inflationary effects of tariffs.
Furman: Oren, every economist I know has consistently said that tariff-induced inflation is likely to be transitory. The Fed has also said the same before. The danger, as Powell reiterated today, is that we are genuinely not sure, and when inflation has been above target for four straight years what might raise inflation expectations?
Patterson: We don’t know exactly where tariffs will go. Will the emergency reciprocal tariffs be deemed illegal by the Supreme Court? What new tariffs might be used then and at what rate? That said, every company survey I see, and most corporate guidance during the latest quarterly earnings season, suggest that prices are biased higher. Companies can absorb some of it, but some is going to the consumer. I haven’t seen evidence yet that price hikes are one and done.
Summers: It could go either way. I think there are more reasons to doubt the anchoring of inflation expectations now than there were in the recent past. And some measures of consumer inflation expectations have risen, so I think the risks of setting off an inflationary cycle are very real. Hence the need for caution.
Furman: My best guess is that tariffs will mean permanently higher prices but only temporarily higher inflation. But we are conducting an unprecedented policy experiment so no one should be very confident about their view on this question. Which is why Mr. Powell should focus disproportionately on the bad case where people start to believe we are now in a 3 percent inflation world and raise prices and wages accordingly, making that a self-fulfilling belief.
Patterson: Bingo, Jason, on “No one should be very confident.” Lack of confidence also gets reflected in companies moving cautiously.
Cass: Well, I guess I’ll take low confidence as progress over the prior very high confidence that tariffs would cause inflation necessitating rate hikes.
Furman: Oren, it is simply not true. I, like almost everyone I knew, repeatedly said there is a risk that tariffs raise inflation expectations. But I don’t know anyone who made permanently higher inflation their central case. Moreover, I didn’t hear anything different from the Fed on this question today either.
Cass: This is what Jason wrote in April: “The higher inflation we’re going to get calls for a rate hike.”
Furman: And that is still my view! We all agree we are getting higher inflation this year because of tariffs. And I would hope we all agree there is some risk that it lasts even longer, because it becomes a self-fulfilling expectation. Maybe you’re less worried than me, Oren, but it seems odd to be certain about it.
Cass: So you think the Fed should be raising rates? To be clear, I’m not certain that tariffs won’t lead to self-fulfilling higher inflation expectations. I am certain that it is irresponsible for economists to warn everyone loudly that tariffs are inflationary and that we should be raising interest rates in response, when they have no certainty that is the case and such messaging seems itself the likeliest vector of self-fulfillment.
Furman: It’s not that hard. The Fed has two mandates that are pushing it in different directions. A higher unemployment rate means rate cuts, as I wrote in April. Higher inflation means rate hikes. But magnitudes matter. We are now 0.1 percentage point above the Fed’s unemployment target but about 0.9 percentage point above their de facto inflation target. The only reason I supported a rate cut was precisely because I’m less worried about that inflation overshoot than I would normally be because some of it is probably transitory tariffs. But I’m still worried, because not all of the inflation overshot is tariffs and tariffs themselves are not definitely transitory.
Rose: The specter hanging over this feast is Mr. Trump’s campaign to bring the Fed under his direct control. As the former Fed chairs Janet Yellen and Ben Bernanke wrote in a recent Times Opinion essay: “Once Fed credibility is lost, it can be costly to regain.” Based on what you saw yesterday do we still have an independent Fed? Jason, you expressed some mild optimism earlier.
Furman: Fed independence is facing its greatest challenge in at least half a century. But it has four things in its favor. One, there are 19 Fed officials with staggered terms and different appointment processes and almost all of them appear to take independence very seriously. Two, so far the courts have protected that independence. Three, senators at least say they care about independence, and four, ultimately the market will inflict very quick and severe punishment on anyone that tries to take it away. None of these are perfect but collectively they are holding up decently well.
Cass: I think it’s important to distinguish the Fed’s de jure independence from its de facto sensitivity to the political context in which it operates. Treasury Secretary Scott Bessent had a very interesting essay recently detailing the many ways the institution has gone beyond its mandate and into unwarranted policymaking since the financial crisis. It seems to me that it was operating with unwarranted impunity and a lack of useful accountability, and what we are seeing is a return to a healthier equilibrium in which markets trust that the decision making has some insulation from day-to-day politics, but the board of governors is more cognizant that it is ultimately subject to our democratic system and its concerns.
Summers: These things are not binary. There are certainly more grounds for fearing the politicization of money than there were a year ago. On the other hand, markets will rapidly punish irresponsible policies and that should be a source of restraint. I believe we are falling into Latin American habits that will over time have pernicious consequences. When we put all kinds of risk on the dollar, Americans pay more for imports and so are poorer.
Patterson: I think the Fed stepped back from the credibility cliff this week, with Ms. Cook allowed to stay in her seat and the Trump-appointed governors Mr. Waller and Ms. Bowman voting in line with the consensus. That said, I do not think we are out of the woods. Mr. Trump has publicly stated his desire for a majority on the Fed to get monetary policy aligned with his goals. More noise around Fed independence, at the margin, makes longer-term borrowing costs for households and businesses more expensive. It’s also a factor leading investors to reduce their U.S. dollar exposure.
Rose: Related to all that, let’s focus on Stephen Miran for a moment. He’s the newest Fed governor but hasn’t quit his job in the White House as chair of the Council of Economic Advisers, a highly unusual arrangement. Yesterday, he would have followed Oren’s advice and cut rates by twice as much as his colleagues decided. How should we think about his role on the board?
Summers: The Miran situation is bizarre and embarrassing. He should not have been willing to take on his dual role. And if he did take it on, he should have been a silent consensus follower at the meeting, not a loud exponent of his boss’s views. Certainly I could not in good conscience have remained in an administration that so overtly politicized financial policy. I do not think all views should be in evidence around the Fed table — I would have objected loudly if a Democratic president had tried to appoint a modern monetary theorist, and Mr. Miran is at least as much an outlier in his own way.
Furman: I had Steve Miran’s job and I never, ever, ever would have for a moment considered allowing someone to simultaneously make me a governor of the Federal Reserve while keeping my position as chair of the Council of Economic Advisers. The two are completely incompatible. Focusing on the good side, the more the rest of the committee perceives that he is just advocating the president’s wishes, the less seriously they will take him. That is the wisdom of the committee structure with staggered terms. The biggest threat to the Fed’s independence is a sustained attempt to remake that committee which would likely take more than one presidential term to accomplish.
Patterson: Mr. Miran is an economist and brings a different perspective to the Fed. In and of itself, that’s a good thing. We should all want educated debates around decisions that have such a big impact. His challenge is everything he says or does will be viewed politically; it hurts him as well as the institution. I wish someone had insisted that he make a clean break from his role at the Council of Economic Advisers before taking this seat. That might have helped this perception.
Cass: I think it is very constructive for the feasibility of continued Fed independence that a democratically elected administration like this one can place a thoughtful and serious policymaker with its preferred perspective on economics on to the board of governors. I think it is very destructive for the prospect of continued independence to have other highly credentialed economists declare the presence of even one such member with different views beyond the pale.
Furman: Mr. Miran is a terrific economist and comes at issues from a creative and original perspective; having less groupthink on the Fed is welcome. The president also absolutely can and should appoint people who share his general understanding of the economy. But once they are there they must base their decisions on their own economic judgments, not follow the orders of the president. The problem is, I genuinely do not know if Mr. Miran’s dissent reflected his views or the orders of the president. He could reduce that concern, which is much more than appearance, by resigning as chair of the C.E.A.
Cass: I’m just not sure on what basis it is more reasonable to question Mr. Miran’s motives or thinking than any other appointee chosen by a president who presumably expects the appointee to reflect his point of view. President Obama nominated Lael Brainard after she had served in both the Clinton and Obama administrations, and then she then went on to serve in the Biden administration.
Furman: Because he has two jobs simultaneously. One is a direct report to the president in a political job. And simultaneously he is on the Fed. And then add to that, President Trump has said the Fed should do what he wants and Mr. Miran has previously written that the Fed should do more of what the president wants. So it would be negligent not to wonder. This one is not a close call.
Cass: If Mr. Miran had resigned, people could (and would!) have asked the exact same questions. If our standard is “negligent not to wonder,” we could spend all day every day worried about every relationship in Washington.
Furman: As I wrote, he could “reduce” that concern by resigning as C.E.A. Chair. But you are right, people would still ask the question. They would just be asking it less.
Rose: Last question for you all. What’s one small but telling thing that happened this week?
Summers: The best thing that has happened this week has been the court’s actions to allow Lisa Cook to remain in her seat. That is encouraging about the judiciary as a restraint on authoritarianism and makes a complete putsch at the Fed less likely.
Patterson: Financial markets heard Mr. Powell loud and clear that the quarter-point cut is not necessarily the start of a sustained easing cycle.
Cass: I thought it was notable how much emphasis Mr. Powell put on immigration policy as driving the economic data. There have been some very in-the-weeds statistical debates on the reliability of the government’s data on immigrants departing the labor force, and whether that explains what we’re seeing in the broader labor market data. Powell clearly thinks the answer is yes.
Furman: In the small category, on Tuesday the government reported a larger than expected increase in retail sales for August. The American consumer kept the economy out of recession in the face of enormous rate hikes in 2022 and 2023. Earlier this year it looked like the consumer was giving up. But Americans don’t seem to ever give up.
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. Oren Cass 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. Lawrence H. Summers, a contributing Opinion writer, is a former president of Harvard University, where he is currently a professor. He was Treasury secretary under President Bill Clinton.
Source photographs by Chip Somodevilla and Jim Watson via Getty Images.
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