Last Friday, Kevin Hassett, a researcher at Stanford University, former economist of the Federal Reserve, and former chairman of the Economic Advisers Committee of the Trump administration, expressed his views on inflation in an interview.

Q: In the early stage of this round of the Fed cycle, you mentioned that the Fed was lagging behind the situation. How do you evaluate their performance so far, especially the 50 basis point rate cut?

Hassett: We have to go back to the fiscal policy surge at the beginning of the Biden administration and realize that the Fed, in some kind of economic illiteracy, separated fiscal policy from inflation forecasts and kept telling us that the soaring inflation was temporary. In helping to offset fiscal policy shocks, the Fed really lagged behind the curve, and fiscal policy shocks caused or facilitated inflation. They really missed something they shouldn't have missed. Every macroeconomics textbook says that fiscal policy shocks can lead to inflation.

You might say, maybe because of the central bank's independence, officials might be thinking that if fiscal policy wants to take action, and if we use a more stringent monetary policy to offset it, we are meddling in politics. I don't know what they were thinking when they decided to wait, but they let inflation get out of control.

I attended the Jackson Hole meeting a year and a half later, and everyone understood there were many areas to catch up on. I think if you look back at their rate hikes, by certain standards, they have been the most aggressive ever. Like all economic policies, Fed policies also make mistakes. They acknowledged a mistake and actively responded. So, I would give them a low grade because they started too late, but in learning from mistakes and actively responding, I would give them a higher score.

Based on the data, recent moves to lower interest rates make sense. We have just crossed or approached the edge of the Taylor Rule. However, suddenly, the data has been surpassing everyone's expectations. So looking back, this may be a mistake, but I wouldn't call it a mistake because I think based on the data available at the time, it seemed like a sharp slowdown was happening. The sentiment set data for this meeting was the poor job data we received in the summer. Historically, this would be seen as a mistake, but I think when you grade economic policymakers, you need to understand the circumstances when they made the decision. For me, I wouldn't give them a low grade for the September move, even though in hindsight, it seems they might wish they didn't do it.

Q: Until April of this year, you mentioned that we might be heading towards a stagflation-like situation. Do you still think this is a risk?

Hassett: The economic data from the past month or so has really surprised me. Looking at the GDPNow data, considering how much the unemployment rate has increased, this is an almost unprecedented data series.

I have two thoughts. The first is that the employment data seems more noisy than before. This may be related to how people respond to surveys. It may also be related to a significant increase in the number of illegal immigrants in the workforce who may not want to participate in surveys. I do not know the specific reasons.

On the other hand, my intuition about GDP growth is related to the great work done by my colleague Erik Brynjolfsson at Stanford University on the impact of ai on productivity. In the late 1990s, when the internet suddenly became important, we went through a period of very high returns on equity, with income and growth exceeding expectations. Productivity indicators at that time struggled to keep up with what was happening. It may be that ai is starting to impact data to a degree that no one had anticipated.

Q: What impact might Trump's proposed tariff policy have on inflation?

Hassett: If you look at the Republican agenda, the first item listed is the 'Reciprocal Trade Act', which would raise US tariffs to the level imposed by our trading partners on us. If we were to adopt a policy where the US says 'no matter what tariffs you impose on us, we will impose the same tariffs on you', this would trigger a potential game theory response.

Editor/Rocky