Kevin Hassett

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0:32Kevin Hassett serves as the head of the National Economic Council, which coordinates economic policymaking at the White House. In the first Trump term, he serves as the head of the Council of Economic Advisors. I had a chance to sit down with Kevin recently to talk about the Federal Reserve economic policy and also his prospects for being next chair of the Federal Reserve Board. Let's dig right into it. The government shutdown, is it going to have any impact on the GDP or not? Oh, for sure it's going to have an impact on this quarter GDP. That our estimate of the White House is that each week that we were shut down is worth about$15 billion off of GDP.

1:11I think the Goldman guys have added all that up and guessed that it's between 1 % and 1.5 % reduction in the growth rate of GDP this quarter. So I was kind of feeling good about a 3 % quarter before the shutdown. So I guess that means that you think we'd be shooting in the sort of one and a half to two range now because of the shutdown. So GDP growth for the year you think will be between one and a half and two? Oh, no, I'm talking about the fourth quarter. The fourth quarter, what about for the year? Yeah, then we just have to average basically 10. Yeah, so it'll be two something. Now the inflation rate has been around 3%, 3.1 % or something like that.

1:48Do you see any chance that the Federal Reserve will get it down to its target rate of 2 % in the near future? Or is that unrealistic? What happened is that the Biden administration, it got very high, averaged 5%, was still in the high threes when we came in. And now, like if you look at the latest CPI, it surprised, you know, 48 of Bloomberg's people who forecast these things on the downside. If you adjust for a refinery that shut down, then you're kind of looking in the 0.2 range. And so I think that inflation isn't all the way to where you want it to be, but that the momentum is pretty directional.

2:23And so I think that if you add to that the basic idea that the policies that we're pursuing right now are increasing supply, they're supply-side policies, that you should expect that we could have growth like we're seeing without picking up Phillips' curve effects in inflation. So you may have noticed the president was calling on the chairman of the Federal Reserve to lower interest rates. And he did. Yes, he did. And he and interest rates have been lowered. The last time the Federal Reserve FLMC committee met, they lowered by 25 basis points. There's a wide expectation that the Federal Reserve board might lower again in December.

3:04Do you have a view on whether if the Fed does lower it should be 25 basis points or 50 basis points? as a president, or do you have a view on what might be better for the economy? Well, I first want to say that I have high regard for Jay Powell. I've known him for a long time, have had economic conversations with him many, many times during the last administration in this time, too. I think at times he and I have had policy disagreements. You think it's more likely to do 50 than 20? No, I think they're not likely to do 50. More likely to do 25? Would that satisfy the president, do you think? I think that the president thinks rates can be a lot lower, and I agree with him on that.

3:39You are one of five people that the Secretary of Treasury has on a short list to be the next Chairman of the Fed. Why would you want to be Chairman of the Fed? Right now, you get to work with the President every day, and he's not criticizing you at all. So, are you sure you want that job? You know, it's a thing that, first of all, I have to say that I, as you know, and feel like I'm the luckiest economist alive because I have the best job I think an economist could possibly have if you spent your life doing economic policy unless you're a monetary theorist. Being director of the National Economic Council is my dream job.

4:20And if the president asks me to be Fed chair, then I'll, of course, I'll do it. But if I'm not Fed chair, don't be disappointed for me because I love the job that I have right now. And I'm so honored to be able to work with the president every day. Do you have any view on when the president might make the decision or make it public? Would it be this year or next year? I don't have a view on when the optimal time for that is, and I've not discussed that with the president. I think that people in Washington will understand that a confirmation struggle for a position that's that significant can be quite difficult.

4:56And then if it goes on for a really long time, which, like, so we think Jay probably isn't leaving until May, then that just creates like a long period of you know confirmation struggles that can be pretty ugly and so and so i i don't know what the optimal time is but but i would guess that that as soon as you do it then the sort of confirmation turmoil will begin most presidents in the last 25 years or so have supported and secretaries of treasurer supported what's called a strong dollar policy which is to have the dollar be really strong and never support anything that would lower it Is it fair to say you do not have a strong dollar policy or are you happy where the dollar is now?

5:38If you look at the dollar chart, then, you know, it's stronger now than it was when Trump left office, but it's down a little bit from its peak. And I think that the strong dollar policy is a sound policy. And I think that, you know, basically, I'd almost say that if I were running any country anywhere, I would want the currency to be sound. because we know what happens to countries when the currency isn't sound. And so I think if you want to have, you know, inflation take care of your deficit, then you're on the road to financial crisis. And so I think that one of the ways that we can maintain fiscal discipline is to be really committed to a strong dollar.

6:22Right now, the budget deficit has generally been, for the last couple of years, about$2 trillion a year, more or less. more or less. We spend roughly$7 trillion a year. We take in roughly$5 trillion a year, and we generally have about$2 trillion deficit. Maybe it's coming down now. But we have about$38 trillion overall of debt. Do you see any way to reduce that indebtedness in the next couple years or so where realistically we're stuck with$38 trillion or rising a little bit over the next couple years? Right. Well, to reduce the debt, right, then you have to run a surplus. And so So the question is, do you reduce the debt relative to the target or not?

7:01And we clearly are doing that with the big reductions in the deficit right now. And so I think that those will continue. And I'm also extremely bullish about growth, but it's not just growth that's doing it. It's the fact that we have tariff revenue and we've got a lot more spending restraint than was here in the past. Now, on tariffs, in the President's tariff policy, it's really an important part of his economic revenue because a lot of the revenue coming into the treasury, the president said, is from tariffs. And if the Supreme Court were to rule that the president's policy using the 1977 trade legislation were not to be appropriate to raise this kind of revenue, what would the administration do?

7:43We're confident that we're going to win the case. What we're using is emergency authority. And so the first thing you want to say is, well, is it an emergency? And it's an emergency I could think of for two reasons. One is fentanyl and the hundreds of thousands of deaths from fentanyl. And two is, you know, my friend Angus Neaton wrote this book with his wife Ann Case about deaths of despair, about how the massive trade deficits we've had because China's dumping stuff everywhere and wiping out towns and shutting down factories. You know, the deaths of despair, there's like a whole bestselling book by Nobel Prize winner about that.

8:17And so I think the the case that both the sustained trade deficit because China and other countries have a policy to create jobs in their own country by selling stuff as cheap as possible to the U.S., that I think that the emergency case is really, really solid. And so then the question is, when the law says that we have the authority to regulate trade, then does that mean tariffs, since it says regulate trade, but it doesn't say the word tariff? And I think that that's a pretty dry case too, because if you're going to regulate tariff, for example, this came up in the oral arguments. Well, one thing you could do to regulate tariffs would be an embargo.

8:55And a tariff is less significant than an embargo. So if you could do an embargo, then surely you could do a tariff, but, or to make the economist argument that you could definitely do a quota, no one would challenge that. Now, most people in your profession, economics profession, would say that a tariff is a tax and it's somewhat inflationary. Is that your view that tariffs are inflationary? The first thing is that if there is a price effect, it's not inflationary, it's a level adjust effect. So you have a tariff, and then if it has a price effect, it changes the price. And whatever that price changes, that causes the inflation or deflation, whatever that happens because of the price effect of the tariff.

9:31And then the tariff, unless it changes, doesn't do that again. And so it's not an inflationary thing, it's a level adjust thing. And my intuition from the beginning has been that it wouldn't be inflationary because the reason we have the emergency that we're talking about is that we have inelastic supply of Chinese goods and other goods from all the countries that are dumping stuff into the U.S. And so by definition, if you put a tariff or a tax on inelastic supply, then the inelastic supplier bears the thing. The theory behind tariffs, I thought, was to even out the trade balance to some extent and maybe raise revenue.

10:10But the president has imposed tariffs on countries with which we have a surplus, like Brazil. So what's the theory behind imposing a surplus or a tariff onto something like Brazil? Tariff policy is very complicated, and there are a lot of things that we're studying carefully right now in this kind of space. Tariffs, if you want them to have an effect on the economy, you have to really, really look at how are we really collecting the tariff and how are we making sure that people aren't transshipping, people aren't funneling things through subsidiaries, and so on. And so I think that that's part of the overall.

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11:27Discover how Wells Fargo is helping Virginia Housing and other clients reach the next horizon at Bloomberg.com slash The Next Horizon. Calculus. If the president does not select you, are you going to stay in the administration in your current position? Yes. If he does. I mean, if he decides that that's the right choice. Okay, if he wants you to stay. But if he does select you, then you have to get ready for confirmation and you expect that would be political a bit? It probably would be political. I've been through it before. Not that I'm counting. I think I had 83 votes last time. I'm sure the president will get recommendations, but if you were to recommend a person for the job, in other words, if the president was watching right now, he might be, and you were to say, well, here's why you would be qualified to be chairman of the Fed, what would you say?

12:13I don't want to compare to others, but I would say that the reason why I could be ready to get to work right away is that I spent five years working at the Fed. I worked closely with Alan Greenspan at times and have seen what's good and bad about the way the Fed people think. And there's a lot of bad. And I think that somebody who can go in and basically my view is that the staff has a big effect on the decisions of the Fed. And this staff historically has been excessively influenced by two thoughts. One thought is that Keynes was right. Keynes had value, but you don't have to be a Keynesian, like a religious Keynesian.

12:55But the second thing is that there's been a lack of willingness that really started with Greenspan to show deference and respect to the corner of the macro literature that I think is really important, which is conditional expectations, time series analysis, the stock and Watson type stuff for the economists here. And so if you're running the Fed, then having the best forecasters of the world who are really building nonlinear time series models and so on would be a good investment. Does the president know that you work for Mitt Romney, John McCain, and George W. Bush earlier in your career? Does he ever?

13:32He's seen my whole resume, yeah, for sure. Okay, so he didn't hold that against you, obviously. Yeah, I guess that there have been a lot of people that have come into government with worse backgrounds than that. You grew up in Massachusetts. You went to Swarthmore. How did you pick Swarthmore? I grew up in a small town and I didn't want to go to a big university. Were you always conservative as a youth? Were you a liberal then? You know, my mom was a kindergarten teacher in my hometown who was on the Republican State Committee in Massachusetts. And so she was like the little old lady that made apple pies that everybody knew in Massachusetts.

14:04And my dad was very much a Democrat who disagreed with my mom on everything. And so I got the dinner table was really fun. And I tend to decide with my mom. Did they ever say what happened when you turned out this way? Or they never said? No. No, they didn't say that. So you went to Swarthmore. Swarthmore is, I would say, maybe left of center compared to some other schools. So did you stand out there as a conservative? The rumor is Nixon called it the Kremlin on the crumb. I think that that actually is true. but no Swarthmore especially then was a place that had legitimate diversity of thought and yeah I was one of the conservatives there but I didn't feel like I was attacked for it and then you went to get your PhD at the University of Pennsylvania and did you know then that you wanted to be an academic PhD economist your whole life?

14:56Is that what you wanted to do when you went to Penn? Yeah I thought that's what I was really enjoying doing research. And then my first job was at Columbia University. And I did a lot of research. When I was at the Fed, I did a lot of research. I'm still doing research. No attraction to business, private equity, hedge funds, nothing like that? You weren't interested? Yeah. The problem with private equity guys is they buy something, then they got to wait five years and just watch it until they get their carry, right? I mean. We can sell it sooner, but okay. Okay. So you haven't been tempted to go to Wall Street, right?

15:28No. Let's talk about how economic policy is made in this administration. So does the president want to have his advisors come together and you hash out things in the Oval Office? How do you actually make policy? It depends on the gravity of the policy. There are things that happen every day that get resolved by cabinet secretaries. And every now and then the cabinet secretary will want to know, well, what do you think the president would think about this? and then maybe I'll say, oh, I'm pretty sure he already talked to me about this six months ago. He's fine if you do it this way. And so there's a lot of smaller things that, because they have a ginormous government, that have to be resolved by the cabinet secretaries, often in consultation with the chief of staff's office and us in the domestic policy council and so on.

16:18The bigger things that require presidential decisions, they very often what happens is we'll have a meeting often in the Roosevelt Room where the principals will say well here are the options we think we should give the president and then we will sort of usually draft the people who are for and against each of the things and then go into the Oval and discuss them with him but he always wants to have the people who support the thing that he's being advised to do with the people who don't unless obviously there's some things that everybody supports so much that you just can't do that. But he really likes to have lively debate in the Oval.

16:55And if you're not giving him enough debate, he'll work it out and make sure you get debating. Well, when you go in there and when you debate with him, does he ever say, let me think about it overnight? Or does he say, he makes a decision right then and there? He does say that. He does definitely says, I need to think about it. That happens. Yeah. And then afterwards, people go whisper in his ear after everybody else is gone, here's what you should do. Does that ever happen? It's a thing that really, you know, I commend Susie Wiles especially, that there is a risk that the most convincing person in any administration is the person who talked to the president last.

17:33And then that creates, you know, kind of like a, you know, a competition to like check his, you know, sleeping schedule and decide that, you know, Who's the one who's going to call him right before he goes to sleep? And that's something that every president has to deal with. And I think that this administration has dealt really well with compared to previous administrations. You're one of the few people working in the White House now who work in the first term as well. So when people asked me if I was going to come back, I had a joke about it. I said that I was Trump season one. And I think I'll probably be the Christmas special for your season two.

18:11The big, beautiful bill did have everything the president pretty much wanted in the legislative arena. Is there any legislative bill that the president wants the remainder of this term? For sure, we're going to be using future reconciliations to improve the American economy with better policy. We got a lot of the things we wanted done then, but there are a lot of other things to do. One of the things that we're spending a lot of time on is thinking about the state of housing in America. And the fact that first-time homebuyers have seen their age go up over the last five years from like 30 to 40.

18:47And so you've got to be 40 years old before you can buy your first house now because mortgage rates went up so much over the last few years that the typical monthly payment about doubled and nobody could buy a house. The president the other day said maybe he would support a 50-year mortgage. Is that going to be the policy of the administration? I don't know if the president's decided that he wants to do that. I do know that we've been having meetings with principals in the White House to talk about what we can do about housing. And there's a whole list of possible things that haven't been fully vetted.

19:19But a 50-year mortgage, you could argue in favor of it that it could reduce the monthly payment, which would make it easier for people to get into a home. And then the flip side is that the equity that people would acquire over time would be spread out over a longer time period. What would you say the president would say or you would say is his greatest economic accomplishment to date? And what would you say is their greatest economic challenge for the remainder of the term? I would say that he cares most about like how well Americans are doing. And in the first term, like we've only been here for half a year or a little more.

19:59But in the first term that I can remember when we were talking about the Tax Cuts and Jobs Act, that I went in and I had a simulation of what I thought it would do for the economy, how much GDP would go up. And we had a simulation that GDP growth could get back up around three, which was controversial at the time because everybody believed in the new normal and we were only stuck in the once. And then he kind of looked at me and he said, I don't want to talk about GDP. Come back and tell me what it means for ordinary people. And so then the next day we came in and I had reviewed a large labor literature on what happens to wages when we have big corporate tax reductions.

20:38And I told him that, well, if we pass the bill, then people's wages will go up between$4 ,000 and$8 ,000 was the range of estimates in the literature. And then he said, well, I'm going to promise four. I want to underpromise. But that's going to be our message. If you go back and look,$4 ,000 increase in wages was the main storyline of TICCHA as we were trying to get it passed. I haven't asked him this. The thing, one, he would say is that I was able to deliver for the American people wage increases that hadn't really happened for the previous 20 years. The second thing that I think he would want to say, I know you said pick one, but I do think that he has believed in tariffs his whole life.

21:19and a lot of people thought that the tariffs would come in and cause a recession and cause inflation and his intuition was that they wouldn't and they haven't and I think that we've learned a lot about like how tariffs fit into an optimal fiscal policy because of him and I would say that that would be a great accomplishment as well. The tariff policy is it complete now? In other words, has he finished negotiating the major deals with the countries he wants to negotiate them with or is it still an ongoing process? It's an ongoing process. It's an ongoing process. I think that one of the things that people have been talking about just the last few days is, you know, thinking about changing tariffs for foodstuffs and things.

22:01So I think that there are going to be more changes. And there have been really big changes. And then one of the things that people forget about, like prudent policymaking, I'm sure that President Carter would have agreed with this point, is that you do what you think is right and then you watch what happens. And then when you see things that you need to adjust, you adjust them. Are you worried that there's a bubble in the AI valuations of certain companies and that this could come down to haunt us? Or do you think there's no bubble in the AI valuations of companies or consistent with what they should be?

22:33So if you think about what AI is doing right now is that it's increasing the productivity of workers and firms or capital and labor. And it's doing so at a remarkable rate. and the firms that are helping other firms use AI are making a lot of money because they're helping ordinary businesses make lots of money. And so if you looked at the earning season, it was the earning season with the most positive surprises ever. So what that means, I think, is that the AI revolution is creating a huge amount of value. And now who captures the value and so on, markets will work it out. But if you compare this to the computer revolution, started in 94, 95, maybe when Navigator came out was the place you really start the clock, then economists were all like, oh, well, the computer is everywhere but in the statistics.

23:31And the thing about AI is that it's so powerful that it's already in the statistics, but that the valuation could be really, really high because it is increasing productivity and profitability so much. And in that, the fact that it's visible already, that's quite a bit different than the computer situation in the 90s. If the president asked you to serve in a third Trump term, would you do that? I don't think there's going to be a season three. Oh, okay. You don't think he'd ask you. Okay. So final question for you. On the whole, are you pleased with where the administration's economic policy is right now?

24:11How would you make it better or do something different? We're going to have more policy proposals that will, like, improve policy. I think that we're focused on communicating better. So we want policy to be better and communication to be better. But I think that in the end, what matters, and this goes back to a great literature started by Ray Fair at Yale University, is that in the end, you can communicate all you want. people are going to look at their wallets. People are going to go to the grocery store. And in the end, I think that that means that we've got to get policy right and focus on communication.

24:43But communication is more of a political thing. In the end, if we put more money in people's pockets, then they'll celebrate our policies. And if we fail to do that, then they'll rightly condemn them. Thanks for listening. To hear more of my interviews, you can subscribe and download my podcast on Spotify, Apple, or wherever you listen.