Episode summary
How Long Can the Fed Wait to Raise Rates?
Wall Street Week
· · 11 min · Hosts: Chrystia Freeland, David Westin · Guests: Jason Furman
Summary
Jason Furman argues the Fed’s biggest signal this week was not the unchanged rate decision but the dissents, which showed where a substantial part of the committee wants policy to go. He says Chair Warsh had a defensible case on tighter financial conditions and on the fact that today’s inflation is different from the wage-spiral inflation of the past, but he also says the Fed is still facing intolerably high inflation after five years above 2%.
Furman says the current inflation burst reflects specific shocks, especially tariffs and the Iran conflict, rather than a return to 1970s-style broad inflation dynamics. He estimates tariffs have added half a point to a percentage point to inflation, with Iran adding more to headline inflation and a few tenths to core PCE. The key risk, he says, is whether those price increases spread into expectations, wages, and economy-wide price setting.
On policy, Furman says the labor market is stable enough that the Fed can focus on inflation, not employment. He also says the jump in long-term yields reflects market belief that the Fed will eventually deliver hikes if needed, which he sees as a credibility check more than a warning sign. Still, he warns that the Fed cannot keep talking less unless it is willing to act more aggressively if inflation does not cool.
Key takeaways
- Jason Furman says the dissents were the most important signal from the Fed meeting because they revealed where many committee members want rates to go.
- Furman says tariffs may have added half a point to a percentage point to inflation, with the Iran conflict adding more to headline inflation and some to core PCE.
- Furman argues the main danger is inflation broadening into wages and economy-wide price setting, not just higher prices in a few sectors.
- Furman says the labor market is stable enough that the Fed can focus on its inflation mandate alone.
- Furman says the rise in long-term yields reflects market confidence that the Fed will eventually act, but weaker communication could force the Fed to move rates more aggressively.
Notable quotes
“-The dissents were the most important. It's very clear where a lot of members of this committee want rates to go going forward”
“Inflation is intolerably high. It's been intolerably high for 5 straight years now”
“I think in part that was tariffs, which probably have added half a point to a percentage point to the inflation rate”
“The big concern is if it gets built into expectations”
“the Fed really just needs to worry about the one side of its mandate right now, which is inflation”
How the episode opens
We start with the Federal Reserve decision this week addressing persistent inflation, rising borrowing costs, and a whole lot of uncertainty. Jason Furman is professor of economics at Harvard and served as the chair of President Obama's Council of Economic Advisors. So, Jason, we got 3 things out of the Federal Reserve this week, we got a decision not to do anything about rates.
We got a statement that didn't change a whole lot from what it had before. And then we got a news conference from Chair Warsh. Of the three, which was the most important?
-The dissents were the most important. It's very clear where a lot of members of this committee want rates to go going forward. Westin: And in the news conference, certainly Chair Warsh was asked about those dissents, why they dissented, why he disagreed with them.
I'm not sure we got a clear answer to that question. Do we have a sense from him, from the way he thinks about it, why he did not join with the dissents? -I don't think we got a clear sense from him.
I think he has two, Chair Warsh has two points which I agree with him on. One is you want to look at financial conditions and there's been a lot of tightening on the long end of the curve. Now, you need to be a little bit careful.
Some of that is in anticipation of what the Fed is going to do. And if the Fed ends up not doing that, some of that would end up unwinding. But so far, financial conditions, at least, on the rate side, have tightened.
And second, this really is a different type of inflation than what we had a couple of years ago. It's not the same type of labor market tightness, high wage growth, high price growth, high inflation expectations that we saw in the past.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- fed rate hikes
- inflation fight
- tariffs
- geopolitics
- federal reserve credibility
Watch the episode
Watch “How Long Can the Fed Wait to Raise Rates?” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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