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 is Glenn Hubbard, former chair of the Council of Economic Advisers. 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 OPEC

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 in geopolitics, other public policy events in the country make it hard for the Fed to plan right now. What is your 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, making this reappearance the way a lot of people anticipated because of the tariffs.

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,

that 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 watch list is what's happening to that very important 10-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 Fed is also very concerned right now about mortgage rates, 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 30-year mortgage rate. But psychologically, that can help to move mortgage rates down, couldn't it? Yeah, I mean, it helps in two ways. One, if it affects the real economy, that obviously affects housing. The other is to the extent that it does move the 10-year yield, that does figure into mortgage rates. Gotcha.

President Trump has been on a very public campaign to pressure Jay Powell to lower interest rates. He's talked about it 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 Powell is even in a position to comment on or respond to? I mean, it's going to come up in the news conference tomorrow, I'm sure.

Well, I'm sure it will. And I think Chair 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 inflation?

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, this tax bill. And I know that the way it's being pitched by the Republicans is that it would actually provide some boost to economic activity, irrespective 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? Or do we have to worry about the drag from, I guess, the fact that these aren't being paid for?

Well, I'm going to give you the classic economist answer of 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 issued a report on that. The other is we could get the pro-growth elements of this tax bill with a much lower deficit. It would be a different bill. So Congress could go back and work on that. But yes, we need the tax bill. 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 win 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, 10 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 a 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 a sea change in tariff policy, in geopolitical risks, and yet we have the stock market going back up to levels before 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 in 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 2nd 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 his 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 10 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 was a really illuminating conversation. Appreciate you coming in. Professor Glenn Hubbard, former counsel.

former chair of the Council of Economic Advisors.

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