The president came in with an ambitious economic agenda. There were tariffs, immigration reform, big tax cuts. How did that affect your thinking inside the Fed about how you are going to steward the economy?
Well, we take whatever the president and Congress, whatever policies they adopt, and we put them into our analysis of the US economy as a whole, and then we try to figure out, does that mean that the economy is going to overheat or is it going to slow down too much? We are neutral as to what those policy choices are. They're simply inputs into how we analyze the economy. And they've made this last year very complicated in analyzing the economy because just the ones you said, big tariff changes, big immigration changes, big tax and regulatory policy changes. That's a lot of change happening at the same time. And that makes it complicated for us to understand what's happening under the surface of the US economy.
So for instance, the decision to hold rates steady, right, and not to continue to cut rates. How much of that is figuring in kind of understanding the effect of what President Trump and Congress are doing?
Well, a lot of that is informed by that because we know that monetary policy operates not instantly. It operates over months or quarters or even a year or two. So we have to look ahead and say where do we think the economy is going to be six months or a year from now and try to adjust monetary policy so we get to our dual mandate, our stable prices and maximum employment over that horizon. So we do have to look forward and policy choices of the administration and Congress really do affect that.
Now, I mean, from the administration's perspective, the Fed has sort of been seems to, you know, their critique in some ways seems to be that the Fed is gunshy, is afraid to somehow lower rates, to run the economy hotter. And there are those that would say that in some ways you're worried that considering the fact that inflation reached a 40-year high under your watch, a significant problem, that you guys might be gunshy to lower rates because of the errors that you made. What would you say to folks that say that the Fed has been gunshy and reluctant to lower rates in part to maintain credibility after having made such a mistake about letting inflation get to 40-year highs?
Well, inflation got to 40-year highs for a bunch of reasons, including, for example, Russia invading Ukraine, which sent oil and commodity prices up all around the world, and that affected us here at home. But we also had a role to play. Inflation is still too high. Like today we're meeting, inflation is still running at around a 3% rate. So it's still well above our target. When it's been above our target for 5 years, that should make any central banker cautious about lowering rates further until we're confident it's going to go all the way back down.
Liberation day when these tariffs were announced. How does that look from the view of the Federal Reserve?
Well, we know that tariffs raise prices because we're buying goods from abroad. And if those prices are going to go up, some of that is going to be borne by American consumers. We know that. Question is, how high is that inflation going to get? And then how much does that slow down economic growth? If everything that you want to buy or a lot of what you want to buy goes up in price, you're going to buy less of it. So, it's also going to create a drag on the economy. So, it forces us to go back and analyze, okay, what do we think this is going to do to inflation? How much is it going to push it up? How long is that inflationary boost going to last? And how much is it going to tamp down on economic activity? So, we would call that a stagflationary shock. Meaning, if it pushes up inflation, all else being equal, we would want to raise rates. But if it pushes down economic growth, all else being equal, we'd want to lower rates. So, how do we balance those two competing forces? And so, it forced us to go back to our models and try to analyze where is the US economy going? It's a big, we would call that a big shock to the US economy.
And so I mean at the time Chair Powell was saying that this he was worried that this would raise inflation. It was sort of a rationale to keep rates where they were. Then we start to see the president start to escalate. What from your vantage point kind of happened next? We heard for instance we heard the president attack the chairman saying we have a Federal Reserve chairman that's playing politics. This was after the tariffs were announced and he floated the idea of firing the Fed chair. Again, what's the reaction here inside the Fed?
Inside the Fed, it's focusing on our analysis, you know, are we missing something? When leaders outside say that we're getting something wrong, it forces me to step back and say, okay, am I missing something? For example, do I believe that tariffs raise prices of goods from abroad? I examine that. Yes, I still believe that. Even if somebody says I've got it wrong. Do I believe that higher prices will slow down the US economy? Yes, I believe that. So that is, you know, I think it forces us to go back and reexamine our assumptions. But then to me it said okay I think we're making the right call based on the shocks and the data that we're getting.
So if you put tariffs again, tariffs, big beautiful bill, the tax cuts, the immigration policy all in the same bucket. When we're talking about the conflict in some ways between the administration and the Federal Reserve, do you see all of that tied in together?
I mean, I don't see them all. I mean, obviously the administration has expressed concern about our monetary policy, but it's their job. They were elected by the American people. The president was elected. It's their job in the Congress to make these kind of policy choices on behalf of the American people. It's not our job. Our job is to take their decisions as an input and then understand what do we need to do with monetary policy to achieve the goals of stable prices and maximum employment.
Now I know you're saying that you know you're here you're trying to basically ignore the noise the political noise on the outside but I'd have to imagine that it was concerning when you start to hear the president of the United States saying that he's contemplating firing Chair Powell. Of course and I know that in America in the 110 or so year history of the Federal Reserve that has never been done. And lawyers were saying, 'Hey, it's legally not possible. But ultimately would end up going to the courts and be tested.' And we obviously have seen that. And I feel comforted by the fact that the Supreme Court so far has indicated that they believe that Federal Reserve independence is important and that the laws protect the Fed, protect our ability to make these kind of dispassionate decisions.
You know, I'm curious to those who don't really know why Fed independence is important, how would you describe it? You have some extraordinarily powerful tools at the Federal Reserve, probably the most powerful tools in the global economy. Why is it so important for the Fed to be independent?
One of the things we've learned over the last five years is that the American people hate inflation. Inflation is a tax on everybody that you cannot escape. And so we experienced that because of coming out of COVID, a confluence event, Russia invading Ukraine. If Fed independence and central bank independence is lost, how will the American people feel it? They will feel it in higher inflation year in year out. One of the remarkable achievements of the Fed from around 1980 until this COVID pandemic period was we had declining and low and stable inflation so that the American people didn't have to worry about it, didn't have to think about it. That's our jobs to put inflation, keep it low enough so the American people can focus on things that really matter to them, their families, their careers, etc. Once central bank independence is lost, it shows up in higher inflation that affects everybody. And that's what's dangerous about it.
What do you say to those who would say that independence in some way shields the Federal Reserve from accountability?
Yeah, I fundamentally disagree because Congress created the Federal Reserve and we are ultimately accountable to Congress. The chairman of the Fed, Jerome Powell, and the chairman before him go and testify regularly before the Congress, the Senate and the House on what decisions we've been making and why and hearing their feedback. They also send letters in requesting information that we then comply with and provide to them. There are many layers of accountability, but ultimately we were created by Congress. We are accountable to Congress. We take that very seriously. Every time I go to Washington, I meet with elected leaders from my district, from the ninth Federal Reserve district that I am charged to represent. I meet with Republicans and Democrats alike on an equal calendar to share with them what we're looking at, what decisions we're making, and why, and to get their feedback.
I think I understand what you're saying but there is some sense that in the past few years, for instance inflation has been above your targets for 5 years now right? So we've heard it from various people if there were a CEO that were missing his or her targets for 5 years running someone would get fired right? There'd be some real accountability for that mistake. That's a problem. So again, where is the accountability for the fact? I mean, I understand that you're talking to Congress. I understand you're accountable to Congress in some ways, but where is the demonstration of accountability for having missed your targets for 5 years?
Well, one of the demonstrations of accountability is the fact that the governors in Washington are appointed by the president of the United States subject to Senate confirmation. They are appointed on staggered terms. This is Congress's design to create a slow-moving accountability, meaning over time the board of governors will change. President Trump has already made a number of appointments. Jerome Powell's term as chair of the board comes to a conclusion in mid-May when his four-year term concludes. That's another moment of accountability when Congress will get to express their view, the Senate on the president's new appointment.
So to someone who would say that some heads should have rolled, right? That someone should have been fired for such a massive kind of missing the inflation, calling it transitory, then five years of elevated inflation. And that's your main job at the Fed. So, what do you say to someone who would say that heads should have rolled for this?
Well, I understand that perspective. If you look around the world, every advanced economy in the world basically suffered the same inflation. And it's not because we made different choices than they made. It's because the global events that hit all of us, whether it's COVID, the supply chain disruptions were global, Russia invading Ukraine sent a commodity shock wave all around the world. That happened to virtually all advanced economies in very similar methods. And so I do own, I mean I do believe we own some role in this. But I think people give us both too much credit and too much blame because a lot of times forces outside of all of our controls lead to these kind of outcomes.
