Valuation, thank you for joining us. Let's get back to Davos. Annmarie Hordern is standing by.
Thank you so much, Caroline. We have his first interview since he arrived in Davos, Kevin Hassett. So excited to have you. There's such a debate here on corporate America, even CEOs around the world. How are the American economies doing? Everyone wants to invest there. But European leaders seem to feel that there is an existential threat. Are you worried about any pushback from European consumers, say, boycotting American products? The President mentioned this in his speech.
The President mentioned this in his speech. The U.S. economy is booming. GDP could be north of 4.5% when everything is said and done. At the same time, everyone said that tariffs would cause inflation in the U.S. and be especially bad for the companies that we make trade deals with. As you know, the places we have made deals with have had some of their best stock market years ever. The point is, the President is disrupting the order that needs to be disrupted, and the markets are celebrating because of it.
We got a whiff of Liberation Day this week because of what's going on with Greenland. Do you think that we are past the most peak moment of terror of uncertainty for financial markets, consumers, and other countries?
Tariffs have surprised a lot of mainstream economists. I was especially surprised.
Now you are a true believer.
The grad school models turned out not to be true. I think we have a strong understanding economically of why that is. Basically, if we have a trade deficit with China forever and ever, by definition they are basically dumping into the U.S. with an elastic supply, and so if we put a tariff on them, they bear the tariff. The same is true for Europe. If we have a big trade deficit with them for a long time, they basically cut their prices to maintain market share in the U.S. I think that the interesting question I have been puzzling over as I talk to my mainstream economist friends is why is this so positively disruptive? Why has the Trump agenda been so positively disruptive for Europe? I think that one of the things is he's made them lift their game in terms of restoring global order by increasing defense spending. And remember, it used to be that we were always talking about zombie companies in Europe. We have kind of stopped doing that, haven't we? The tariff uncertainty, I wonder if that hasn't been a shot in the arm for that economy.
A lot of people on Bloomberg have been talking about that, pushing European cities was good for them. Are you concerned about the unintended consequences? We saw Spain go to China last year. Mark Carney just went to China and then came to Davos to talk about how the world order that we know is dead, and if you are a middle country at the table, you will get eaten. Is there potentially this consequence where we push our allies closer to China, the biggest adversary in the U.S.?
I don't think that's happening at all. One reason we are here in Davos, to spread our news, is our analysis saying that the Trump plan is working for the U.S. economy and the global economy. People in the end, they look at their wallets, they see how it's going, and in the United States they will see a couple of quarters of 5% growth, booming markets, booming wages. And if they see it everywhere else, it will have a big political effect. The people that make the most noise attacking Trump are not necessarily speaking for their countries, they are speaking for liberal policies, and you've seen the President cussing them out in the last few days.
What about yield rising that we've seen?
There's a bit of wiggling, but in the end the bond yield depends on what's going on in the U.S. with the deficit, which we have reduced year-over-year, and we expect to be able to do more next year. We have done it with real stuff, not smoke and mirrors. Cutting government employment by 270,000 workers. I think the bond markets will feel pretty secure investing in U.S. debt. Secretary Bessent is really the best salesman I've ever seen.
And he's always focused on that 10-year yield that he wants at 3%, that we are not there yet. Tightening financial conditions, a lot of that talk in Davos has been about what's been going on with the Fed. One CEO told me it is counterproductive, if you have concerns over Fed independence, that we might get tighter conditions. Jay Powell was there, present at the hearing today in the Supreme Court. What do you make of this more assertive Fed chair?
As you recall, I was a young economist at the Fed a long time ago. I worked with Alan Greenspan. He was really careful about keeping the Fed out of politics, keeping the Fed focused on monetary policy and interest rates and the dual mandate. Even to the point, I wrote an academic paper that he refused to publish for over a year because it was about carbon taxes and BTU taxes. He didn't want the Fed to get involved in that fight with Al Gore and Bill Clinton while it was still going on. I really, regrettably, the bank presidents and Federal Reserve members seem to want to have an opinion about everything every day, not just monetary policy. For example, you could go in right after Trump took office and Austan Goolsbee gave a speech saying that economists all agree that a tariff won't have an effect on inflation, just the price level. But here's why you shouldn't think about it that way. I think that's actually going into a politically dangerous place for the Fed. Sure, talk about inflation, but precisely right when the President is setting his agenda, having the Fed criticize him vehemently? It's inconsistent.
Was it appropriate for Jay Powell to go through the Supreme Court?
