UChicago's Rajan: Chance of One Fed Cut in 2026

Bloomberg

Watch UChicago's Rajan: Chance of One Fed Cut in 2026 - Bloomberg on Dailymotion

Transcript

00:00I do want to start off with the potential tariff decision by the Supreme Court and put it in the

00:05context of 2025, because we did see, I think, somewhat surprising growth globally. And that

00:12seemed to be tied to the idea that the tariff impact was less than what a lot of people had

00:17anticipated. Does a ruling against Trump's use of these tariffs maybe actually provide additional

00:24boost to economic activity? It could well provide additional boost. Now, remember that what

00:31happened since Liberation Day in April 2025 is, first, the actual negotiated tariffs came in much

00:39lower than were initially announced. Second, the implementation of the tariffs when they actually

00:45hit was much more moderate than initially felt. And finally, I think there was a lot of

00:54transshipment also. I mean, China enjoyed one of its biggest net surpluses on trade last

01:00year. But, you know, with all the tariffs that were imposed, it didn't export directly to the

01:06U.S. as much, but it sent it through other routes. So essentially, the system has adapted to the

01:12tariffs. Now, of course, the big question is, does the Supreme Court declare a large portion

01:18of those tariffs illegal because they were set under IEPA? And the Supreme Court believes that

01:25the administration doesn't have the authority to do it under that act? If that is the case,

01:31there are two questions that arise. One, when will the tariffs be reset under different acts? And the

01:39administration has that capability. The question is, when, how quickly? And does the administration even

01:46postpone implementing those tariffs because of, you know, concerns about affordability and so on? People are

01:55seeing some of the impact of higher prices in their daily budgets. The second question is, do establishments get a

02:03refund for the tariffs they've already paid, which will be a kind of fiscal stimulus? So both in terms of perhaps the

02:12expected tariffs and duration of when they will be implemented may be a little lower than currently

02:20underway. And second, that there will be some refunds, which will be a kind of fiscal stimulus. Both

02:27these will be somewhat positive for growth. The negative, of course, is any uncertainty this creates about when,

02:34where and to whom. Yeah, we've spoken with some some sellers and wholesalers to say that the uncertainty

02:39part is more their concern rather than the actual dollar value or level of those tariffs. I am curious,

02:44though, about where you see the state of the global economy right now. I mean, here in the U.S.,

02:48we got a couple of data points today that seem to suggest the labor market is OK. Productivity is

02:53accelerating for a variety of reasons. Are you relatively optimistic for economic growth here in the U.S. and abroad?

03:00Well, one has to be optimistic, right? Given what was thrown against the global economy policy-wise last

03:10year, the fact that the last two quarters have been pretty spectacular in the United States, but also very

03:16good in Europe. And even China is saying, you know, despite all the deep problems in its economy, it's going to hit

03:23that five percent. What that means is a little unclear. But, you know, all said and done, the economy has

03:30has done pretty well given the kind of policy concerns that were there through the whole of last year.

03:39That means we have good momentum coming into this year. First, we are going to see more tax cuts coming

03:45from the big, beautiful bill in the early part of the year. You're going to see, you know, individuals

03:53have lower withholdings. You're going to see some refunds coming in from the tax cuts hitting last

03:59into last year's income. And then you're going to have corporations having lower taxes also.

04:06The net stimulus is going to be pretty substantial. Add to that the fact that the Fed has been cutting

04:12175 basis points since September 2024. Right. Add to that the possibility that the tremendous

04:20investment that's going on in AI continues and is a boost to overall growth. And finally, the fact

04:28that the stock market is still holding up is a boost to upper middle class, you know, propensities

04:34to spend. Right. So all this is good news. The weakness, of course, is the labor market so far.

04:41Maybe we get better news tomorrow on that. But it's hard to imagine that corporations with all this,

04:48you know, growth momentum will not shift around and move from the no hiring, no firing equilibrium

04:55to actually maybe hiring a little more. Well, tomorrow's jobs report, certainly exciting,

05:00since it will actually be on time. We're finally working through some of the shutdown delays here.

05:05But you think about how the Fed might handle that, of course. And you think about this conversation

05:10in the context of Fed independence, because taking a look specifically at the U.S. economy,

05:15wouldn't exactly argue for the 150 basis points of cuts that Stephen Myron, in particular,

05:21has advocated for. So as we get to May, when we're going to see that Fed leadership turn over,

05:28how are you thinking about the question of Fed independence?

05:33I think it's a matter of what the committee, the FOMC as a whole decides. Right. And yes,

05:39there will be one or two places that will turn over by May. But much of the committee remains

05:48the same. I think the Fed has been somewhat dovish, given the data it has had so far. And, you know,

05:57I have no doubt that many members of the FOMC will resist a 150 basis point, you know, cut, given if the

06:07data continues and even strengthens. But there is still, you know, some possibility of one cut over the

06:15year. I don't think you will see a dramatic shift in the Fed's behavior even after May, even after a new

06:24chair takes over. The new chair has to persuade the rest of the committee. And many members of the

06:30committee have expressed some concern about whether enough has been done and whether they're going too

06:37far in cutting more. So my guess is the Fed is about balanced at this at this current level, maybe a cut

06:43more. It certainly is the case that it's going to be hard to see the Fed turn hawkish. And, you know, it may

06:51well, given the growth projections that, you know, are in place, it may well need to be a little more hawkish to bring

07:00inflation down. Of course, productivity is helping because that allows for growth without inflation.

07:07Right. But if productivity falters, the Fed may have to, in fact, raise interest rates at some point.

Category

Transcript

Be the first to comment

Recommended