Join us now with his reaction to the Fed's decision and Chairman Powell's comments. National Economic Council Director Kevin Hassett, you're okay, right? You were enjoying things. You're getting your thoughts together. Hopefully the guy with the lawnmower is not coming out today. Kevin, that was funny last week. Unbelievable. 25 basis points. It's a start. How do you view that?
You know, my old friend Alan Greenspan used to say that monetary policy steering is kind of like steering the Queen Mary. I don't know if the Queen Mary still exists, but the bottom line is that moving kind of slow and steady and heading towards a target, watching the data come in, that's what prudent policy is. I know that my colleague Stephen wanted to go to 50, but I think 25 is a pretty broad consensus. I think that's a good first step in the right direction of much lower rates.
Kevin, do you want the job still? I mean, would you temper anything you're saying right now based on the possibility of you being the next Fed chair?
The only thing I could probably say, Joe, is that I do my job here as director of the National Economic Council as best as I can every day. When you and I are interviewed, I'm not thinking ahead to some future job or anything. I'm thinking about as director of the National Economic Council, what could I do to communicate to the American people the best about what we're working on today?
Do you acknowledge there's some crosscurrents or at least some puzzling things in trying to gauge the current economy or the environment we're in right now? I asked Leeman tongue in cheek whether Powell said, 'Oh, by the way, we've moved the inflation target to 3%,' because that's where we are. If you're cutting and we're at 2.9, if you're cutting, I don't see... I know labor in that picture has gotten a little bit cloudy, but we are 50% above the 2% target for inflation.
Right, well, it depends on whether you look at the two or three month or seven month trends. We've gone from about 3.9 to about 2.5 over seven month averages, and we've done worse than that over the last three months. At the same time, when we're looking at the economic data, it's through the roof. We've had 3.3% growth for the second quarter. GDP now is north of three. The way to think about the upside risks, Joe, is that we just got these retail sales data. Year-over-year nominal retail sales in the control group, which is what matters for GDP, was up 6%. Depending on what you think inflation is, that means you're looking at close to 4% GDP growth. The crosscurrent would be that it looks like we're having a boom like we did in the first term, with really high economic growth and not out of control inflation. The way that happens in my mind is that when the growth comes from supply side factors, if there's a big increase in supply, then you could have more growth without inflation. It looks like that's beginning to happen.
The Fed raised the growth forecast and the inflation forecast. If there was a Taylor rule or something, it just seems like there are no rules. It's almost like flying by the seat of the pants all the time, or intuition. It's not rules-based, is it?
Well, the bottom line is that it could be rules-based if your rules make sense. For example, the Phillips Curve rule doesn't really work for monetary policy because you could have high or low unemployment for supply side reasons or demand side reasons. If you've got low unemployment for demand side reasons, you're going to have inflation. If you have low unemployment for supply side reasons, then you won't. I think it's much more prudent for the Fed to be looking at all the models, to have a diversity of opinions, and to decide what we're going to do in this economy that really looks to be taking off with inflation that's decelerating but higher than target. I think they split the baby in this decision, and that's probably a pretty prudent call.
Kevin, you mentioned your colleague Steven Myron is presumed to have wanted a 50 basis point cut yesterday. It's also assumed that he's the low dot out there, wanting more than one percentage point of further cuts this year, getting it below 3% by December. Is that something you'd agree with given the growth outlook you just laid out?
Right. I've seen Steven's analysis. I think it's heartfelt. It's not dependent on any partisan influence from the White House. He's going to go out there and do his job well. He's going to be an independent Fed governor. I think exactly what the correct interest rate is and how the Fed should react is a work in progress. The Fed needs to watch the data come in. Are the inflation numbers that are not as low as we would like going to get worse? Is the growth number going to get better but be all supply side? Having data dependent decisions is the history of the Fed when it's at its best, and it looks like that's what they did today. I think that's what anyone trying to do the job well should be doing.
There's a piece in the Journal, 'Divergent Economy Gets Even More Divided,' and it's a headline about the divided fortunes of the rich and the poor in the US. It might sound like an old story, but in recent years it started widening again after some low income growth in the president's first term. But it's a real concern, is it not? The low-end consumer right now seems to be... it seems like only the very wealthy are flush, or the somewhat wealthy. But what can we do? We grow the pie, but we can't guarantee it's going to reach everyone.
Right. Don't forget, Joe, that when you and I were talking about this last time when I was in front of the White House, we were talking about how income growth was the highest for people at the bottom. We had this thing called the Gini coefficient, which is a measure of income inequality. Income inequality was declining sharply under President Trump. The reason was that because he was creating all these jobs, he was getting everybody to invest so much in new factories, then he was bidding up the demand for labor. I don't know about you, but I don't go to work every day holding a machine tool. When there's a big capital investment boom, it's the guys who have the tools who see the wage increases the most. Literally, the bottom 10% had the highest growth. That's what we expect is going to happen again. A metric of that is that we've got this nominal 6% year-over-year retail sales growth over the last 12 months. Consumption is not nearly as maldistributed as income. The fact that consumption is booming is a sign that people in the bottom half of the income distribution are super optimistic about the effect of our policies.
