Talk about this economy in just a moment. I think we need to follow on from the Federal Reserve and the news conference with Chairman Powell just yesterday. Stepping aside as the Fed chair, but staying on as a governor. Kevin, was anyone in the administration given a heads up ahead of time before you heard that announcement?
You know, the Federal Reserve and the administration are still open when there are policy concerns, but I can't really discuss that. I can say that I'm disappointed in what Jay said, but I'm going to sort of stay out of it as we await just a couple weeks, Kevin Warsh's confirmation. I think when Kevin gets in there, it's gonna really be a sea change at the Fed that we're all looking forward to.
Kevin, in the meantime, the president has articulated his disappointment like you just have. Previously, the president suggested that if the chairman stayed on beyond his time, not sure what he meant specifically by beyond his time, that he would fire him. Is the president considering options to intervene?
You know, I think that in the end, our hope is that Chairman Powell understands that the Justice Department has stood down. They've just asked the Inspector General at the Fed to look into this, which is something the Inspector General is probably doing anyway. And so I think that it's time to deescalate and move on.
Kevin, do you think the president has sufficiently deescalated to allow him to move on?
Well, you know, he doesn't think so. And I think that in the end, he'll study the matter, and we hope he comes around.
The Treasury Secretary says it's an insult to the other Republican nominees on the board, the likes of Governor Waller, Mickey Bowman, people that you and I know fairly well. Do you believe it's also an insult, and does it complicate the way this particular institution will operate in the months and meetings to come?
Again, I don't wanna start getting too much into having the White House argue with the Fed right now while we're waiting, Kevin Warsh's confirmation, which looks like it's a lock to me. The bottom line is that Kevin Warsh is gonna go in there. He's gonna be new leadership. He's gonna be fresh leadership, and we fully expect that that's going to help everybody see how important the independence of the Fed is. Now, as a logical matter, if you just sort of say, hey, we'd like the IG to look into something, the IG is the Federal Reserve's Inspector General, and so it's completely respectful of the independence of the Fed. We do respect independence of the Fed, and I think that the best way to show that it's not a partisan organization is to move on.
There has been a pretty aggressive push to reduce interest rates. At the same time, this Federal Reserve is shifting towards articulating a more symmetrical reaction function. Not there yet, but getting closer to it, Kevin. Supporting that is the economic data from earlier on this morning. Do you think there is space just to wait to see to work out how things turn out before thinking about reducing interest rates?
Right. Well, first of all, let's talk about the economic data for a second because it was just kind of a whole bunch of blockbuster numbers. The 2% number actually, you know, for me being a capital spending guy, I used to be the capital spending guy at the Fed when I was a young economist, the thing that was amazing, as you know, is and you highlighted the capital spending boom. And one of the things that sort of dragged it down from a really high number was that the quality of the imports has skyrocketed. And so almost half of the imports were capital goods, which were coming in to build factories in the US. Typically, in the past, you know, our imports are things like consumer goods that are perishable. And so the bottom line is that it's really strong data. We got initial claims, the lowest they've been since the 1960s. We got government employment, the lowest it's been since the Second World War. We've had all these positive movements in terms of fiscal responsibility and economic growth moving forward. And so then but we do have this temporary disruption with energy markets, which is very serious. As you mentioned, the energy prices are high. Gasoline prices are high. But, you know, my read of the academic literature on what you do when you have an oil shock like this is not that you raise rates into it, especially given how I think we're highly confident that this is gonna be a temporary disruption. Futures markets agree with that as well. And so I think it would be a policy error for, you know, this ECB or the Fed to hike rates into a temporary spike in energy prices. And their own, you know, economic studies sort of suggest this is true because if you look at it, what they wanna do is make sure that future inflation goes back towards the target. The best forecast of future inflation is not top line inflation, but core inflation. And core inflation in the last CPI number was fine. The PCE's kinda crept up a little bit, but it doesn't tell the story of the top line. And the top line is the kind of thing that I think someone could overreact to.
It might not be appropriate, Kevin, to have a rate hike at this point, but do you agree with your colleague, Treasury Secretary Scott Bessent, who came out and said it might be appropriate to stay on hold for a while as this progresses and works itself out?
Again, I am highly confident that the productivity boom is going to keep core prices under control. And you know, my old friend Greenspan in the 90s saw that because the computer revolution that we could have high growth and there wasn't a Phillips curve kind of thing that you needed to respond to as he let us have four or five of the best economic years that we've seen in my lifetime. And I think that we have that opportunity again, and it would be a shame if we squandered it.
