NEC's Hassett Sees Fed Acting If October Inflation Data High

[00:00:00] Speaker 1: Director Hassett, always a pleasure to see you. Let's talk about the data because PCE did come in 0.5% in September, the most in six months. We had a Fed chair yesterday who said inflation remains elevated. It's still too high. I know 10 days ago, you characterized the inflation that we've been seeing as just a blip. Do you want to adjust that statement given the numbers that we continue to see, especially ahead of midterms where affordability is on the ballot? No, [00:00:26] Speaker 2: absolutely not. Recall that before the September number, we had three months in a row that if analyzed then ended up getting us to write about the Fed's target. And then we had a big increase in September, of course, partly driven by the energy prices. If you look at the Cleveland Fed now cast October, and the October now cast has October looking like the three previous months. And so if that ends up being true, then yeah, we are pretty much thinking that we had a little bit of a blip. And another way to see it is that the blockbuster GDP number that you mentioned with capital spending absolutely through the roof, when you get a big increase in supply, you could have lots of growth without creating Phillips curve. The problem with that, Kevin, is that we're getting [00:01:08] Speaker 1: supply coming online because there is so much demand. And any of the AI hyperscalers would tell you that demand is outstripping it. But I just wonder if this is the right conversation to be having a week away from midterms. You've said before just a few days ago that affordability is a myth. Dr. Hazlitt, isn't this the exact mistake that the Biden administration made in their election, that they really brushed off concerns of affordability when the voters are feeling it? [00:01:33] Speaker 2: Right. So first of all, if you look at what's happened to inflation-adjusted consumption, so real consumption since President Trump took office, it's a trillion dollars higher. That's $5,000 per family. And so, sure, there are places, there are pockets before it was beef, but beef prices have been coming down, gasoline. There are pockets where prices are going up. But in the aggregate, if you're an economist and you're honest about the data, you look at the things, like what's the bottom line, what's happening to aggregate consumption, it's up a trillion dollars since President Trump took office. And that's after adjusting for inflation. Now, you say, aren't you doing the same thing that Biden did? No. Let's make it clear. Biden did something that was dishonest and illogical. He was saying the economy is great. When we had 20% inflation, real incomes were dropping about $3,000 per family. He was saying the economy is great, and the economy wasn't. We're saying that the economy is great, and the economy is. It's a big [00:02:25] Speaker 3: difference. What is your response, though, Director Hassett, to the Fed chair saying that inflation is elevated, but then a lot of people, you said so yourself, that it's just a blip. How do you square [00:02:35] Speaker 2: those two? Because it's not just a blip. Well, we'll see. We'll see. So again, if the October number comes in at the Cleveland Fed's forecast, then we'll have August and July and June and October all running with inflation at about 2%. And if that's true, then the September number will be viewed as a blip. But if October comes out really high, then I think the Fed would probably [00:03:00] Speaker 1: appropriately add. Director Hassett, again, you know, this sort of idea that inflation isn't a problem. You've seen sentiment survey after sentiment survey of consumers really feeling it and being [00:03:11] Speaker 2: concerned that, yes, inflation has slowed. You're misrepresenting what I said. I'm not saying that inflation isn't a problem. Okay, well, if it's not, if it still is a problem. Incomes are growing faster faster than inflation. Real consumption is up. Real consumption cannot be up if people aren't better off. Director Hassett, though, we have seen personal income growth. So you're looking only at one part of the equation. You're looking at just the prices. What about the income? Let's talk about it, then. [00:03:33] Speaker 1: Personal income growth, wages and salary are slowing. They're currently below the rate of inflation right now. Consumer spending hold up in those circumstances. For the last couple of months. For the last couple of months. [00:03:43] Speaker 2: Okay, so that is a blip, too. It was actually the October. No, I mean, again, where does consumption come from? Consumption comes from confidence that people aren't going to lose their jobs. We've got initial claims, the lowest they've ever been. It comes from salary increases that people get. We've got, you know, we just got the updated Steve Moore numbers on what's going to happen with census and the census data when we get the census and they're going to say that real incomes are up about $2,500 by the end of this year. That's consistent with the consumption data. So banks are telling us that people are not running runaway debt, that they're consuming optimistically. And again, with real consumption and the GDP number up a trillion dollars, then that's like the whole picture. You're just talking about the price picture, but there's the [00:04:29] Speaker 1: income and the confidence picture as well. Director Hassett, what is it, then, that's contributing to a short-term inflation blip? And what gives you the confidence that it will fade away? [00:04:36] Speaker 2: Energy prices, of course. Energy prices have been up because President Trump took bold action to not let the Iranians have a nuclear weapon. And, you know, I shudder to think what would have happened if they had. And the threats that they were making to our negotiators before this action began were really chilling. And so the president had to take action. And I think that really any patriotic president would have taken the same action if given the intel that he had. [00:05:02] Speaker 1: The reports do suggest that potentially post-election that this is a president who will continue to take action and take action in Iran. Should we anticipate, then, that this blip does continue for some time if, again, reports suggest that more action and potentially an increase in the warfare there in the Middle East might continue post-midterms? Director Hassett? [00:05:23] Speaker 2: Yeah. You know, I can't forecast what's going to happen to the war. I'm just a dichotomist. But what I can say is that the U.S. Navy has done a fantastic job at helping ships get through the straits. The Gulf countries are building backup pipelines to go around so that the Iranians continue to cause trouble, that it will matter less and less. U.S. refineries are trying to increase capacity. We have plenty of crude, not enough refined product. And the Europeans, we just did a negotiation, the Europeans are releasing some of their strategic reserves of refined products. And so we're doing everything we can to minimize the disruption. And I think that the new infrastructure that's being built in the Middle East is going to make it hard for the Iranians to hold the world hostage again [00:06:07] Speaker 3: anytime soon. Director Hassett, let's go to the Fed because yesterday the Federal Reserve held rate steady. And among those who dissented in favor of a hike is Governor Lisa Cook. So she directly opposed the administration's preferred direction for monetary policy. In your view, how can the White House defend [00:06:22] Speaker 2: the Fed's independence while pursuing the removal of Coke? Well, as you know, I'm part of a commission that has been carefully crafted after with reference to the Supreme Court ruling that is providing a report to the president on this matter. And so therefore, at this time, I'm not able to comment on it. [00:06:38] Speaker 1: I do just wonder if you can't comment on that specifically, if sort of the approach has changed, though, if we could talk about overall approach, because I know you and I have talked before, Director Hassett, about this being a matter for law enforcement. Just the existence of this very council, does that mean that the White House and how they're viewing this matter has slightly changed? [00:07:00] Speaker 2: What the White House is doing is that he's -- the president has asked a small set of his people to run a completely fair process that puts all the information on the table. And then the president will make it aside on next steps. And I think that we in the White House, the White House council has worked very collegially with Governor Cook's people. I think that they've agreed to date -- agreed to a date in December to meet together and talk these things through. And so I think the process is moving forward in a collegial manner. And really, according to, you know, carefully scrutinized [00:07:35] Speaker 1: instructions, really, of how to do it right. Understood. I just want to, you know, just want to clarify that this is not necessarily just a law enforcement matter, as you've said before, that this is bigger and should necessarily involve the White House then. Yes, I think the president has decided it will involve the White House. All right, Director Hassett. On that specifically, as well, we had, as Isabel mentioned, Governor Cook dissenting as well. We also had President Hammond also dissenting. You've said before that you fear that this is an FOMC that is political. Do you view those two actions of its dissenters equally as political then in the past, yesterday's FOMC meeting? [00:08:13] Speaker 2: No, I think that Chairman Warsh has done a good job of allowing, you know, normal dissent and driving a consensus. And I think that, you know, his committee has made a decision that looks very data-driven to us. And so I don't have a concern about the committee right now. And sticking with the [00:08:32] Speaker 3: Fed. So the Fed says economy is good and they're holding rates steady. But if inflation is still running about three percent and inflation is high, why isn't the case for a hike clear? [00:08:43] Speaker 2: Again, the question is, do you believe the numbers that we saw in the summer? Do we believe the GDP deflator, which came in really low today, has meaning, you know, we've got to make data decisions based on what data we have. And September was way above expectation. And if that's a new trajectory, [00:09:02] Speaker 1: that, of course, the Fed will have to act. This is a Fed, though, that does seem to still be committed to something that might look like future hikes. I wonder what you think about that, Director Hassett. You said earlier this morning you think that there's room to let inflation essentially cool off. Will it be your contention, the White House's contention, that they will be making a mistake if they hike in December? And will that be, in your view, not a data-driven [00:09:23] Speaker 2: decision, but rather a politically driven decision? No, I respect that Chairman Warsh is going to do the right thing. He's going to have the same data that you and I will talk about when we get the next CPI and PCE data for October. And at that point, I think it will be clear what the Fed should do. [00:09:42] Speaker 3: What is your response, Director Hassett, to those who say that if the President wants to appeal to consumers, then Fed rate hikes to bring down inflation are his best bet? [00:09:51] Speaker 2: Could you say that again? I'm sorry. I didn't understand your question. [00:09:53] Speaker 3: There are some people who say that if the Fed raises rates to bring down inflation, that's his best bet to appeal to consumers ahead of the midterm elections. [00:10:02] Speaker 2: I think that if inflation goes down between now and the next election because of some Fed action, then that's not the Fed policy response that I'm used to seeing, having worked at the Fed for many years. It's a very, very slow-moving process. If you look at the 30-year tip, the inflation-protected Treasury, it's expecting the Fed to get long-term inflation at around 2.1%. And that's the kind of long-term view that Fed governors need to have is to make sure that markets are reassured that they're going to hit their target. They're going to hit their target. But short-run responses are difficult to predict. [00:10:40] Speaker 1: Director Hassett, I would love to finish on this message, this one of reassurance, and just bring it back to the three-person committee on Lisa Cook. Understood you can't tell us where you are in that investigation. But I wonder if you could leave this market with some reassurance. What reassurance can you give that this will be a fair view into Governor Cook and what she was doing, that the White House panel will be fair, given continued statements from the president to suggest that he is unhappy with the job Lisa Cook is doing and that she should no longer be there? [00:11:10] Speaker 2: Look, the people on the committee are people of honor who are charged with looking at the evidence and correctly characterizing it in a way that people will be able to observe and criticize if they like. That nobody is telling any of us what we have to say. People can dissent if they want. It's a completely fair process.