Bloomberg Audio Studios, podcasts, radio News. We're coming here to Iceland, Draikivik, where we're delighted to be joined by Governor Adrianna Kugler. Governor Kugler, thank you for joining us. So there's been a lot of talk about central bank independence. Jay Powell under attack many times by Donald Trump saying, look that actually the Fed did not cut How do you think and how would you explain to the markets and maybe the president of why we're currently in a witnessy mode for the Fed.
Thank you, friend seein for having me here, and so let me tell you a little bit. Obviously, we held a steady at four point three percent, and I supported that because the way I think about it is that our policy rate is currently moderately restrictive, and I think it makes sense to keep it that way, and it makes to keep sense to keep it that way for a number of reasons. First of all, we have been seeing the progress on this inflation is low down a
little bit. We have also seen an increase in inflation expectations, and we want to keep long run inflation expectations very well anchored. So that's the second reason. Third, we see some risks upside rates to inflation from the tarts that are currently in place, and given that, it makes sense to make sure we keep again the federal funds rate moderately restricted. On the real side of the economy, on
the other hand, things have remained resilient. The employment rate is still high, and the unemployment rate is still currently at historically low rates. And by the same token, private activity is judged by PDFP, the private domestic final purchases numbers shows us that private activity grew at three percent. We saw some conflicting evidence between imports and inventory is but overall we see health is still in the real economy.
So that gives us time to make sure that we continue to make progress on inflation and we keep our inflation expectations very well anchoraged.
How problematic or the uncertainty actually of the tariffs. To look at scenarios for GDP inflation and rates. So do you look at scenarios or do you look at baseline projections?
Yeah, thank you for asking that we look at a broad range of scenarios, in fact, because it is particularly important during this time period of a lot of uncertainty. Uncertainty is the world of the day, Is you know, and so the way we see it is that we don't know which way this is going to go. We started at two point six percent effective tariferate at the
beginning of the year. It depends who you are, but it's somewhere between twenty and twenty seven percent according to many analysis and we do our own analysis but also look at private sector analysis on this issue. So it's still very high. It may still change. It could come down because there could be negotiations or exemptions. It could go up some if additional tips get put into place. So we're not sure even about the magnitude of the tips. We don't know which products are going to be affected
by the tips. At this point. We have a baseline case, as you said, as to the ones that already have been implemented, but we don't know if that's going to change in the next week, in the next months, in the in the next year. So we're keeping close attention to many different scenarios and paying attention as to how that may affect the economy. So obviously that that is the question of the day, how will it affect economy? Right?
First of all, what's your takeaway from from you know, first quarter GDP, and how you see you as consumers behaving right now.
Yeah, as I said, on the real side of the economy, what we've got is GDP for the first quarter, so it's backward looking, and that backward looking number is showing us exactly when one would have expected, which is a lot of from loading, so from loading of imports ahead of the targets, people trying to buy, both producers and consumers trying to get those products before the times get put into place. That showed been a huge increase in imports and some increase in inventories, but not as much.
So overall, the GDP numbers showed some witness to point three percent minus point three percent. But if you look at the private side, on the other hand, you see a very resilient economy with three percent growth in PDFB the private domestic final purchases part of the economy, which shows a resilient consumer and a resilient investors. Well, now if you look at some of the more real time data,
the picture could look a little different. We did see high retail sales, but if you ask the consumer what they think they're going to do ahead, there's a falling consumer confidence and people are thinking, well, maybe you won't hold back. Investors are thinking, well, investment may come down because we don't know what is coming ahead, and they're concerned about TIFFs.
And there's a lot of talk. Of course, unemployment will rise. You could also see terraffs actually putting inflation up. So at some point, if it happens in the third quarter or the fourth quarter, if you have this employment going up, but also inflation being pushed by terriffs, does a higher unemployment bring this inflation? Does it somehow make the job a little bit easier for the Fed?
So there are two effects, right, one upside race to inflation and upside riads to unemployment or the slow down in economic activity. You're right, I think. The way I think about it is we're already seen, especially from surveys of manufacturers, some indications about tarists putting upward pressure and prices in particular and the cause of materials. Those calls already been passed on to the consumer. That's already shown up in those surveys, whether it's sm surveys, the surveys
that are done by the regional FEDS. So that's definitely showing up in the data, and its showed up in goods prices and goods inflation going up as well. That's happening now down the road. You're right, there could be a slow down, and that's slow down partly because of uncertainty, but also because real disposable income is going to fall. Also because the real value of financial assets may fall, and that will decrease wealth, and so those two effects
are going to push down aggregate demands. In addition to that, I would point out that there could be reallocation of economic activity and a reduction in productivity, and that could come up. For example, new businesses or existing businesses start producing things that used to be produced by those abroad and then you're having lower productivity. That could put some potentially some downward pressure on prices coming up from the other side, but it's not clear whether they'll exactly counteract
each other. I would say one has to be cautious to think that that in itself is going to do the trick of getting prices back now.
Governor Jemakogle, thank you so much for joining us.