According to a recent poll from the National Association for Business Economics, 21% of economists are starting to consider the current monetary policy set by the Federal Reserve as too restrictive, which is the highest level in more than a decade. The debate over how the Fed has the economy under control continues to rage on.
Tomas J. Philipson, Former Acting Chair of the White House Council of Economic Advisers in the Trump administration, joins Yahoo Finance to discuss how he thinks the Fed is operating under current economic circumstances and why he believes the central bank is not on the money with their policies.
Philipson comments: "I've been arguing a long time that they have the wrong framework. It's not just me. A lot of people have argued, this Phillips curve framework where they have to kill the economy to kill inflation. A lot of economists don't believe in that framework, even though it is the sort of book... instruction manual in DC. If you just take the two last years, in '22, we had very slow growth. We had rapid inflation. In '23, we had pretty strong growth, but inflation coming down. That's just an example of this Phillip curve relationship where inflation is not driven or you don't have to kill the economy to kill inflation, essentially. "
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- A recent poll shows 21% of economists are starting to consider current monetary policy, quote, too restrictive, that's the most in over a decade according to the National Association for Business Economics. This comes ahead of the January read on inflation, which the Fed is watching to help guide the path for rate cuts. Here to discuss this and more, we've got Tomas Phillison-- Philipson, who is the White House Council of Economic Advisors, former acting chairman during the Trump administration.
Thanks for taking the time here with us today. So from your estimation, even if this print comes out still in trend with what we've seen of inflation over the past couple readings here, what does that trigger the Fed to do if anything?
TOMAS PHILIPSON: Yeah, I think everyone is expecting sort of no change relative to the last month and the month-to-month numbers, but since that's replacing a bigger number in the past, the year-to-year is going to fall quite a bit. It's sort of the expectation. I think the future of CPI is so driven by housing. As you know, it's 40% of the core.
And housing has responded kind of strangely to the rate hikes. So the rate hikes are supposed to dampen demand in credit sensitive industries, housing being the primary one, but what has happened is that supply has gone down because people are sitting on their houses. They don't want to switch mortgages from COVID low rate mortgages.
So prices in the housing obviously has gone up with these rate hikes. It's kind of counter to what we want them to do. It's been price inflation for 40% of the core due to the rate hikes. So I think how that's going to trickle down the next year is going to be very, very important for both how the CPI reacts, but also as a consequence how the Fed reacts.
- And to that point, Tomas, how were you expecting the Fed to react? What do they need to see to really dig their heels in and believe that they have inflation under control?
TOMAS PHILIPSON: Well, I mean, I've been arguing a long time that they have the wrong framework. It's not just me. A lot of people have argued, this Phillips curve framework where they have to kill the economy to kill inflation. A lot of economists don't believe in that framework, even though it is the sort of book, instruction manual in DC in some sense.
If you just take the two last years, in '22, we had very slow growth. We had rapid inflation. In '23, we had pretty strong growth, but inflation coming down. That's just an example of this Phillip curve relationship, where inflation is not driven or you don't have to kill the economy to kill inflation, essentially.
I think most economists think that this enormous monetization of the debt with a 40% money supply is the cause of this inflation and it's going to win off over time, essentially. But the Fed will react in a very predictable way, given that they have this, in my view, inaccurate framework that they're based on.
- So do you believe that the Fed is going to be able to adequately stave off a recession, perhaps even any of the hard landing talk? And ultimately, what does that mean? I mean, I hate to continue, as many of us using this airplane analogy of a soft landing or a no landing. What is the reality look like, and is that becoming more clear from your perspective?
TOMAS PHILIPSON: Well, I think their framework is the wrong one. So if they're lucky, it's kind of the-- if we have a soft landing, it's not due to them engineering it. Certainly, they're the one who caused it. Everyone believes that the monetization of the debt is the cause of the inflation, essentially. And the question is, can they with this, in my view, inaccurate framework, be lucky enough to have a landing that takes place in a way that doesn't damage the economy?
I think people are concerned, myself, that this growth is so leveraged. Both on the public sector level, obviously, we have a deficit that's at the highest in a noncrisis economy, meaning outside COVID crisis and a financial crisis and wars, this is the deficits we've never seen in a successful economy. But also, on the private side, people are taking out $1.3 trillion in credit card debt, et cetera. So it's a very leveraged growth, and that's what worrying a lot of people I think.