Former White House Chief Economist Glenn Hubbard Talks Fed Policy, Tax Bill

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While policymakers are expected to hold rates in June and maybe even July, there could be some signs about future cuts. Joining us now to discuss as Glenn Hubbard former chair of the Council of Economic Advisors. He is currently a professor of economics at Columbia Graduate School of Business. Glenn, always a pleasure to see you.

Thank you. Likewise, so there's widespread.

Consensus the FED will do nothing and keep rates unchanged. But do you see enough evidence in the data, particularly of late including this morning, that opens a door for policymakers to start cutting in the second half of the year.

You know, I think that door is certainly open. The challenge for the FED is if it preemptively cuts too soon long yields may go up and undo it. So I think that's the real risk. The data are weakening, though we saw the retail sales numbers. The job market is weakening, so I wouldn't be surprised to see a FED cut later in the year. The timing is somewhat uncertain, obviously, events and geopolitics other public policy events in the country make it hard for the FED.

To plan right now, what is our confidence that inflation has been solved or that this disinflation theme will persist, Because it surprised a lot of people that inflation hasn't, you know, maken this reappearance the way a lot of people anticipate because of the terrafs.

I don't think inflation has been solved, and I think that it will likely stay above the fed's target level, which complicates things. I don't think we've seen the effects of the tariffs much yet. Businesses first try to absorb in margins before passing on. So I think it's too early to say on inflation, and that's the risk for the FED. If it cuts too soon, then it looks like it's getting ahead of itself.

I'm curious, though, what would a cut do. I mean, I'm talking like one quarter point here and there. Does that have a material impact on economic activity?

It won't in and of itself, but it signals a change in direction that the FED is moving toward lower short rates, which will affect economic activity. But again, on the Fed's what is what's happening to that very important ten year yield? And if market participants are still worried about inflation, that's where its attention should be.

There's been a lot of discussion about how the FATH is also very concerned right now about mortgage rate, about the housing market, I should say overall, and obviously how mortgage rates feed into that. And I know that technically what they do on the short end of the curve doesn't have necessarily a direct impact or maybe it does onto a thirty year mortgage rate. But psychologically that can help to move mortgage rates down.

Couldn't it.

Yeah, I mean it helps him too. Is one if it affects the real economy that obviously affects housing. The other is to the extent that it does move the ten year yield, that does figure into mortgage rates.

Gotcha.

President Trump has been on a very public campaign to pressure Jpalett to lower interest rates. He's talked about it at various times in social media postings. He wants a one percentage point cut reduction. His latest explanation, his latest spin is that it's important to bring down the cost of servicing government debt. Is this something Palaus, even in a position to com Tono respond to. I mean, it's going to come up in that news conference from where I'm sure, well, I'm.

Sure it will, and I think Share Powell and his colleagues are trying to do the right thing as the FED sees it, which is to keep inflation under control. If the Fed does keep inflation under control, that will keep interest rates as under control as they can be. The question for federal debt rates, though, is high levels of deficits in government debt also put upward pressure on real interest rates that the Treasury has to pay.

So I guess the question is is it a reason to cut interest rates to reduce government spending on servicing the debt?

Is that reason enough? No? I mean, I think the reason to cut rates would be if you think you have solved the inflation problem and or there's a problem in the real economy that the FED wants to do. The lower interest rates definitely would help fiscal policy, but the government itself has a lot of role to play there.

I am curious about the bill that's working its way through Congress. It's to this tax bill, and I know that the way it's being pitched by the Republicans that it would actually provide some boostack and activity, irrespect of a lot of the concerns about the long term effects on debt servicing. Is there a sense that with the tax cuts, at least what we know publicly the tax cuts are preserved, with the new tax cuts in there, that that could be enough of a ballast for the economy.

Well, I'm going to give you the classic economists the answered yes to both of those. Yes, the tax cuts are beneficial for the economy, particularly the business tax cuts for investment, and certainly not passing a bill would be bad for the economy. That said, there are two issues. One is that the deficit is high as a result of this, and that may put upward pressure on interest rates. The Congressional Budget Office today just issue to report on that.

I mean, you've had a seat at the table for this process in the past, and I am curious how much of the focus is on the long term rather than just say, you know, the next year or two until the next election, making sure that we have, you know, basically something in the wind column to show to the American people. Or are they really thinking long term about what the ramifications of these policies will be on the economy five ten years down the road.

Well, I think the administration is thinking about the long term, and I hope that it will pivot to a more long term growth oriented agenda, which isn't just about taxes. It's about deregulation, it's about permitting reform, it's about how we deal with AI. I'd like to see that pivot. But yes, I think they do care about that.

What's the number one thing that you think investors are not paying enough attention to when it comes to the economy that they should be taking closer look at, should be maybe even slightly worried about.

Well, Asset prices seem to me to be still relatively richly valued, given that we've had to see change in tariff policy and geopolitical risks, and yet we have the stock market going back up to levels before a so called liberation day. I think that is a tail risk for the economy.

I mean, I don't want to put words in your mouth, but do you see evidence of a bubble and asset prices right now.

I wouldn't call it a bubble, but I would say that markets are pricing for perfection, as if all the tariffs will go away, the policy will revert to pre April second levels of everything. Maybe that's true, but I don't see the evidence for it.

So it's a case of investors treating all the uncertainty as kind of noise before they are counting on the President to go back to basically calling us bluff in many ways.

Well, that's one way to put it. I think that people could reasonably say, well, you know, these tariffs have gone up, they've gone down, maybe they'll go to zero. I don't think that's the plan. The administration has suggested revenue being raised over ten years, perfectly legitimate thing to claim, but that's saying the tariffs will be here to stay, and I don't think markets have priced that.

All right, Glenn, this is really illuminating conversation. Appreciate your question. Professor Glen Hubbard, former Council, former Chair of the Council of Economic Advisors,