The Federal Reserve's minutes from its May FOMC meeting indicate that US central bank officials are growing concerned about the long-term inflation effects of President Trump's tariff policies.
University of Chicago Professor of Economics Randall Kroszner discusses the policy uncertainty that Fed officials are still waiting for clarity on from the Trump administration, while also commenting on trends around inflation data, prices, and economic forecasts.
Kroszner previously served on the Federal Reserve Board of Governors between 2006 and 2009, during the George W. Bush administration.
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Well, we've been hearing a lot from Federal Reserve officials this week with a lot more commentary coming us tomorrow. And that's in addition of course, to the minutes that Jennifer just told us about. Joining us from more Randall Kroszner, professor of economics at the University of Chicago, and former Federal Reserve Governor. Randy, it's great to see you. Um, and you know, we just heard about the minutes as well. We heard, we've been hearing what federal Reserve officials have been saying and it seems like the bottom line is, let's just wait to see what the data is going to show. What data should we be looking at and when can we expect that it might show something?
Sure. So I think, um, they're totally in a wait and see mode. That's, uh, Jay must have said that Jay Paul, the Fed chair must have said that 20 times in the uh, in the press conference. And I think it's been repeated probably 40 times by, uh, all of his, uh, his colleagues who've spoken, uh, spoken since the, uh, since the meeting. So a lot of uncertainty about policy, a lot of uncertainty about where the economy's going. They feel that, you know, the job market is in a reasonable place, although it might be weakening a bit. They feel that, um, uh, there might be some inflation pressures coming on the tariff side, exactly along the lines of that discussion. Some people think, yeah, it's not going to be very much. Other people think, well, this could be lead to a trade war and be be more persistent. And so they're in this hold mode. The things that they're going to be looking for are what's happening with inflation, what's happening with inflation expectations, and what's happening with the labor market.
With inflation rate, we are waiting for that PCE report. You know, you look at the recent inflation reports though, Randy, they've been relatively benign. So I'm just curious how how you try to think about the trajectory of inflation from here.
And that's exactly why they're, um, in this wait and see mode because they had projected that inflation would gradually, although very, very gradually, come down over the next year or so and finally get to, to their, uh, their 2% target sometime by the end of, uh, by the end of next year or by 2027. With tariffs and the potential for, um, price increases that could be involved in that, that could disrupt that process. The key to it though, is it just, is it temporary disruption so? Yeah, you know, you impose the tariffs, prices go up for a little, you know, they they adjust, but the inflation process doesn't change. The inflation rate can continue to move down, or does it lead to more and more price increases and in particular, people becoming worried that gosh, they told us last time that prices weren't go up and they did. And so maybe we can't trust them this time. So that's why they're very much looking at the inflation expectations.
Randy, it's interesting. I've been starting to hear certainly anecdotal reports about price increases. Some of them explicitly tied to tariffs, um, by the retailers or manufacturing uh companies that are that are making these price increases. When people start to see evidence, even if it's not widespread, does that then tend to feed into those inflation expectations?
Well, we really don't know exactly what what drives the inflation expectations. One thing we do know that it's affected a lot by gasoline prices. And those have been relatively um, um, you know, relatively low compared with where they they had been before. Uh, but if you look at survey measures of inflation expectations and they mention this in the, in the minutes, those are up quite substantially. So people are clearly worried about that. And the concern is that this becomes self-fulfilling. If people are worried about it, then they'll be more willing to tolerate those price increases. They'll be more more demanding in in asking for higher wage increases, increasing costs, and it just kind of fulfills itself. I don't see any evidence of that yet, but that's a legitimate concern.
How Randy would you characterize the American consumer right now? How healthy, how resilient? Now we did hear from a number of retailers today, Randy, they reported results. I think broadly, investors seem to, to like what they heard, but I'm curious to get your take.
Yeah, so we saw uh, consumer sentiment plunge over the last few months, uh, with all the concerns about tariffs and trade wars. And then the most recent number that just came out from the conference board, a spike back up, not all the way to where it was, but a big spike back up. We'll get some more information, I think on Friday from uh, from the Michigan Consumer Confidence Survey. Um, so, but um, as people sometimes joke, a recession is everywhere except in the hard data. So people say they're in recession, people say that they're very concerned and they're not doing anything. But if you look at the data, whether it's the, you know, specific company specific things, or more broadly, you know, retail sales seem to be there. So I think, I think people got a bit rattled, but um, my guess is they're going to kind of power through it.
And so it seems like we could be looking at a slowing economic trajectory, but not one that is grinding to a halt or even contracting when all is said and done.
Yeah, I mean, who knows what shocks may come? And who knows how our policy will uh, will develop? And that's exactly why the Fed is talking about uncertainty and in this wait and see mode. But it seems like things have calmed down a bit, both on the policy side and on the um, uh, and the way the markets are interpreting it. So that suggests just sort of a gradual slowing and then even though inflation measured inflation may go up slightly for uh, uh, for a few months, it probably will be on a trajectory back down to their 2% goal, but that's going to take time.
Randy Kroszner, thank you so much. It's always great to chat with you.
