Coming out of the last two years, the focus seemed to be on the unemployment rate, on the labor market, and cutting rates to get ahead of a problem with the labor market. But listening to you this morning, it sounds like you're more concerned about inflation, that inflation may have become the primary risk.
Yeah, I would say that in my head in '23 and '24, since I've been on the Fed, inflation's been and that has never gone away as a central focus. When the labor market is deteriorating, it comes back in a major way. But I'm a little more concerned about inflation right now because I think the job market is pretty steady. I think growth is pretty steady. I think there's some promising stuff in the inflation reports, but there's also some warning signs. So as I say, I'm not hawkish about rates. I'm pretty optimistic that we can get rates down further, multiple cuts in 2026 as long as we see the progress on inflation that forecasters have been forecasting that it's supposed to start coming down. And I just want us to see some progress on that front and not get ahead of ourselves.
Well, you talked about that a little bit, and it's a question I asked Jay Powell once. It seems like every time you put out a summary of economic projections, the economic outlook by the various members of the Open Market Committee, the 2% target gets hit two years from now. The next one is two years from now. Exactly. So what goes wrong?
That's a lot of things can go wrong in this case. What I want to make sure is not going wrong is that we need inflation not to be persistent. When the part of inflation that has come from tariffs is supposed to go away, is supposed to be transitory. And when you see things like the forecast say inflation is going to peak out and then start falling by the end of 2025, and then that moves that goalpost, well, maybe it'll be the first quarter of '26. And now they're saying, well, maybe it will be the second quarter of '26. That's not a great sign. We need to see, we should see, especially on the good side, if the tariff inflation is transitory, it's supposed to start going away. And as soon as we start getting some evidence that we're back on the path to 2%, as I say, I think rates can still keep going down. And if you look at the CPI dot plot, a large group of the committee thinks that where rates will eventually settle is still well below where we are today. It's just we must get inflation down from this 3% level that we've been stalled out for now a year or more.
Well, now you've got this whole new tariff uncertainty from the Supreme Court president's going to impose. We started today a 10% tariff universally brings down the tariff rate some, but they say they're going to use other means to get the tariffs rates back up to about where they were. So now you'll have this dip perhaps in inflation and then it could go back out again. So you said you want to see inflation going down. Does that get pushed out? Does it become later in this year when you could even think about it?
I think when I'm out in this seventh district in the Midwest talking to folks, they talk a lot about uncertainty, policy uncertainties, geopolitical uncertainties. The thing to remember about the tariffs, even if the tariffs stay exactly as they were just in a different form, the inflation impact is supposed to go away. So if the rates are lower than what they were before, that should make it even more true that we should see the inflation going down. I think that the policy uncertainty we're seeing more on the labor side. I think the low hiring, low firing environment is what you would expect when there's a lot of uncertainty. That's not really what the beginning of a recession looks like. Low hiring with high layoffs, that's what the beginning of a recession looks like. For both of those to be low is a bit of a weird duck and I think is explained by a lot of we want to wait and see what's going to happen. And so if you have question marks coming from the Supreme Court, coming from other policy responses, I think you're likely to see a continuation of that low hiring, low firing environment.
Well, what are CEOs telling you they want to see before they would be willing to hire again?
What they tend to say is we want to know what the rules of the road are going to be. And right now, we don't know what the rules of the road are going to be. And there could be very significant changes. And look, I'm sympathetic with that. The rules are moving around. If you're in a business like the auto industry, the Chicago Fed District has by far the most auto production in the United States. It's a global supply chain for the auto industries. They're very amped up about what will be the treatment of parts, components, supplies that they use to make the cars. So far, they were pleasantly surprised that anything you as a compliant was kind of exempted. Now, if the rumors are to be true that whatever they might renegotiate the USMCA or would Canada be in the USMCA? Of course, that's what they're going to express uncertainty about, things like that, and it's going to affect their decisions in the short run over the long run. As I say, I still think the American consumer has been pretty solid. We've got a steady job market. If we make progress on inflation, I think rates are trending down well.
We've seen productivity rise a little bit in the last couple of months. When you look at what the companies are telling you, are they saying maybe we don't need to hire as many people because we're getting this job done, we're keeping up with orders this summer?
I mean, the economy is extremely diverse. And the answer to the question of what are the labor market prospects and do they need to hire depends very much on the industry. If you talk to software companies, a lot of them are saying, hey, the AI technologies, there's some uncertainty, but the only uncertainty is should we not hire or should we actually let people go? But if you look in the health care sector, it's a booming sector. Employment continues to expand in that sector. And you don't hear some of those. So the answer to that depends a lot on who you're talking to.
Well, productivity is going to be a big issue for the Fed coming up with a new chairman coming in, Kevin Warsh, who's pretty much wedded to the idea that AI is going to create a lot of additional productivity, which will bring inflation down. Now, having talked to you, I know that you're not as sure about that.
Yeah, look, I will, I hope that that is what happens. Let's remember, productivity growth is the thing that makes us rich. So if we get high productivity growth, incomes are going to go up. There are a balance of things that happen when productivity goes up, though, that we should remember. It can be deflationary. At the same time, it can be, and you have seen it, it can stimulate a lot of investment. And in the short run, people counting on future productivity growth can overheat the economy just in the near term. And as you go around the country, you hear a lot of discussion about data center investment demand using up all the HVAC people buying up all the electrical equipment, using up computer chips and in a way making prices higher for the rest of the economy. We just got to think about some of those issues. What are the implications of high productivity growth? But overall, if that is Kevin Warsh's position, I've known him a long time. I respect him a great deal. I mostly agree with him.
