- Key insight: Kevin Hassett, director of the White House's National Economic Council, says monetary policy decision-makers should focus on the three-month trend in inflation, rather than 12-month data.
- Expert quote: "If you think that the last three months inflation is running around 2%, and you think that since [the early 19th century] interest rates were about the inflation rate plus two, then you would argue there's not a lot of room to go up from here." — National Economic Council Director Kevin Hassett
- Forward look: The August reading of the personal consumption expenditures index — the Federal Reserve's preferred measure of inflation — will be released on Wednesday.
NEW YORK — The White House's top economist said further rate hikes by the Federal Reserve could make monetary policy more restrictive than they mean it to.
Speaking at an event hosted by the Economic Club of New York, Kevin Hassett, director of the National Economic Council, argued that inflation has already likely returned to the Fed's 2% target if one looks at the three-month reading of the core consumer price index, or CPI. In light of that interpretation, he said, a further rate increase would risk upsetting a historical precedent.
"If you think that the last three months inflation is running around 2%, and you think that since [the early 19th century] interest rates were about the inflation rate plus two, then you would argue there's not a lot of room to go up from here," he said.
The Federal Open Market Committee voted unanimously to
Yet, Hassett — who was on the short-list of potential Fed chair appointees earlier this year — said market watchers and media reports have erred in their focus on headline inflation rates over a 12-month period, noting that not only are such measures skewed by recent shifts in things like energy prices, but they also capture months-old trends that are no longer relevant.
"A 12-month change will very often have momentum from 12 months ago that's completely different from what we're seeing," he said. "If you look at three-month annualized right now, then everything's right around the Fed's target, but if you do it another way, then it's not. And whether they should do it their way or I should do it my way is, you know, something for the seminar room."
The assertion from the head of the National Economic Council — who oversees the implementation of the president's economic agenda — is the latest effort by the administration to argue against higher interest rates.
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During the FOMC meeting earlier this month, 16 out of 18 committee members who contributed to the group's quarter economic forecast predicted at least one more quarter percentage point rate increase before the end of the year. In speeches, public speaking engagements and press interviews last week, several Fed officials said
"In my view, given changes to the economy, we were out of position, and we made an adjustment in the right direction," Fed Gov.
For his part, Hassett pushed back against those comments during an event at Georgetown University last year, noting that they were delivered by FOMC members who were not appointed by President Donald Trump — a fact, he said, that demonstrates ongoing issues with central bank independence.
"There is still some work to do to restore Fed independence. I think that is a high priority for [Fed Chair] Kevin [Warsh]," Hassett said. "If you think through the economics of it, in the end, two plus inflation has been a pretty good rule of thumb for interest rates."
Not all FOMC members see further rate hikes as a foregone conclusion. Fed Gov. Lisa Cook, in prepared remarks delivered at a technology conference in Oakland, California, Monday afternoon, said she was open to a range of potential paths for monetary policy.
"Looking ahead, I will consider what policy rate may be needed to continue to guide inflation down to our target," Cook said. "Of course, the number and magnitude of any future adjustments will be informed by observations of the economy's reaction to our policy actions thus far and the inflation and labor data over the coming months."
The Fed's preferred measure of inflation, the personal consumption expenditures, or PCE, index for August is set to be released on Wednesday.
AI, productivity and interest rates
Both Hassett and Cook noted that the inflation outlook is being heavily influenced — and, in some ways, clouded — by the expansion of artificial intelligence technology as well as the infrastructure to support its proliferation.
Cook said AI will likely reshape the economy in different ways over different time horizons. Eventually, she said, the technology will likely have a disinflationary effect over the long run, but for now a surge in demand for data centers and microchips as well as rising values of AI-related stocks — a development that is increasing household borrowing capacity — is driving prices up.
"Currently, I anticipate that productivity gains will provide modest disinflation within the next few years," she said. "However, I do not expect those effects to arrive in time to offset the broadening inflationary pressure later this year."
Hassett, on the other hand, framed AI developments as primarily impacting the supply side of the economy, increasing output at the firm and worker levels. He argued that economic models have not been adjusted to account for this increasing output, comparing the rapid improvement of AI models to improved computing capabilities during the 1990s, when he was a staff economist at the Fed under then-Chair Alan Greenspan.
At the time, Hassett argued if measures of gross domestic product accounted for the various improvements in model output and efficiency, they could materially increase observed economic growth.
"That's the way to think about AI," Hassett said. "The growth benefit of it is way bigger than you might think."
