Jason Furman has not given up on inflation continuing to inch closer to the Fed’s two percent target as 2025 gets underway, President Trump takes over at the White House, and the FOMC gets ready to debate if it’s finally time to pause on rate cuts after doing 100 bps worth in the final months of last year. But he’s not optimistic on inflation now after the December consumer price report contained good news in the form of “bumpy improvement” in core services while showing goods prices have started rising again.
This December CPI report “does not take away the basic story that there's really quite a high chance of…no landing on the inflation side, no landing…<of the progress> stalling out,” he says.
Let’s dive in to hear and see more of what this Harvard University economist and head of the Council of Economic Advisors under Barack Obama has to say.
CPI Below expectation- Mixed detail- 00:00:56:14 - 00:01:25:10
Kathleen: …<the> stock market seems to be loving this. Does Jason Furman love this inflation report? Jason: Look, relative to what I thought a day ago. I'm somewhat reassured relative to what I was hoping six months ago. This barely makes a dent in the stream of bad news we've gotten over the last six months. And when I say bad news, it's not terrible news, but it's inflation, disinflation stalling out…. The core print came in a little bit below expectation, but even there it was at a monthly pace that if this were sustained, we would not hit the Fed's 2% target. And over the last three months, six months or a year, core CPI is over 3%. When you start to look at the details part of what's happened is some things have gotten better.
Labor market wages more aligned with 3% inflation than 2% inflation 00:02:34:13 - 00:03:04:07
The labor market loosened quite a lot. A lot of the loosening was openings falling, only a little bit of that listening with the unemployment rate rising. But that loosening has basically stopped. Openings have been steady, maybe even risen a little bit. The unemployment rate has basically been steady, maybe even come down a little bit. And the pace of wage growth is more what you'd expect in an economy with 3% inflation than an economy with 2% inflation…. we definitely sort of open the door to the pause at the December meeting.
Rate cuts will be driven by the real side of economy- 00:04:49:14 - 00:05:26:22
…cuts will come in if they think that the labor market and the real side of the economy need it. So the unemployment rate goes up from 4.1% to 4.4% or job growth is double digits <below100K> for two or three months in a row. I think that's what you need for the next rate cut and no amount of reassuring inflation data will be good enough for them, in part because the real side of the economy has been taking care of itself and in part because of their increasing conviction on that, the neutral rate is higher than what they thought it was.
What it would take to generate a rate hike 00:06:05:03 - 00:06:31:22
Inflation staying stuck much closer to 3%, certainly inflation going above 3%. I think that's what you'd need to put another hike in play. I think that's a real possibility. So, you know, broadly, I think inflation is around 2.5%, but I wouldn't be surprised if it was around 2.8% or 2.9%. There <are> Trump's policies in terms of tariffs and fiscal expansion Ithink that could add a few tenths to inflation. So a few tenths is not a big difference. But if the few tenths take you from 2.6% to 2.9% , that's probably the difference between the Fed holding steady and the Fed raising rates.
Does not see recession; but will not deny potential 00:07:22:10 - 00:07:43:03
I don't see any reason to have anything other than your normal baseline risk of recession. Now, recessions, the you know, they all come from different places. Sometimes the Fed causes them. Sometimes it's a global event, maybe an oil markets, maybe financial. So absolutely anything could happen. I'm not saying there's no recession.
Is the worst risk the real risk? 00:08:54:20 - 00:09:14:24
<Trump’s policies are> potentially inflationary. How do you slice and dice that? Look, there are estimates out there… of what happens if you deport 10 million people, have 20% across the board tariffs, and <reduce> the independence of the Federal Reserve. If you did all three of those things, you would get a large and sustained increase in the inflation rate. I just don't think we're going to do all of those things. I expect a lot of mean tweets, especially if they raise rates. But I just don't know how much power the president has on a short time scale to change the Fed… On tariffs, I think we end up with something like an average tariff rate of 5%.
All politicians make promises; look at history 00:09:34:07 - 00:09:57:09
…with Obama, we scaled back his campaign promises when he came into office, said we couldn't afford it. Bill Clinton did that. And I think Donald Trump is going to do that, too. So you add it all together and some of the crazier, more noticeable inflation scenarios I think are just premised on pretty implausible, unlikely policy changes.
Long Section: Jason on rules Vs discretion 00:09:57:11 - 00:17:51:23
To underpin this section See his December 25th WSJ Op-Ed Here: https://www.wsj.com/opinion/a-new-years-resolution-for-the-fed-monetary-policy-inflation-d9a2ff8c)
Jason admits he used to see discretion as better than rules 00:11:34:04 - 00:11:56:07
And my view is there's just so many different contingencies that are out there. You can't build them all into the rule and that the Fed is just enormously expert. They have all these people with PhDs, they have nonpolitical chair. They do things in a very technocratic way. Let them use their judgment. It'll work out a lot better if that's what happened.
But, then there was this… 00:11:56:09 - 00:12:13:19
And over the last couple of years, I guess I have, you know, a tiny bit less respect for their judgment insofar as they differ from what a rule would say.
Sometimes their judgment was right sometimes it was wrong 00:12:33:02 - 00:12:56:09
….their judgment was wrong… I look over this past year, a year ago, they penciled in two rate cuts based on an inflation and growth forecast. We ended up with higher inflation than they expected, higher growth than they expected, a higher neutral rate than they expected. And somehow we cut rates more rather than cutting them less.
How Jason envisions rules 00:13:18:07 - 00:13:34:17
...a rule doesn't say you have to… do it. And I think for the Fed, it might help their communications because people are always asking them, how many times are you going to cut rates? And they say, well, it depends what happens in the economy. A rule is a way to basically formalize that…. not <that> you have to follow the rule. It's every meeting with your FOMC statement you publish. Here's what the rule would have said we should do. Here's why we chose not to do that. And so it just places a little bit more pressure <on> defaults <i.e. deviations from rules.
There’s a lot more Jason had to say on big topics like the fiscal side of Fed policy, and risks to central bank independence, as well why he’s not as worried as others about the impact of Trump tariffs on inflation - all topics that came up in the recent AEA conference where he moderated a very high-powered session with Ben Bernanke, John Cochrane, and Christina Romer.
For those looking for a wide ranging discussion on economics, about what we know about inflation and about the Fed's policymaking in a framework featuring economists with different views and backgrounds, see this link below. All told it runs about 2 hours, but it is well worth it.
Here’s the link: https://www.aeaweb.org/webcasts/2025/inflation-macroeconomy. Enjoy!
Jason Furman is the Aetna Professor of the Practice of Economic Policy jointly at Harvard Kennedy School (HKS) and the Department of Economics at Harvard University. He is also nonresident senior fellow at the Peterson Institute for International Economics. Furman engages in public policy through research, writing and teaching in a wide range of areas including U.S. and international macroeconomics, fiscal policy, labor markets and competition policy. He co-teaches Ec10 “Principles of Economics,” the largest course at Harvard University.
Previously Furman served eight years as a top economic adviser to President Obama, including serving as the 28th Chairman of the Council of Economic Advisers from August 2013 to January 2017, acting as both President Obama’s chief economist and a member of the cabinet. During this time Furman played a major role in most of the major economic policies of the Obama Administration. Furman also served under President Clinton.
Furman is a member of numerous organizations including the Council on Foreign Relations, the Group of Thirty and the Economic Strategy Group. He also serves as a Trustee of the Russell Sage Foundation and on the advisory boards for the Brookings Papers on Economic Activity, the Bund Summit, the Hamilton Project and the Washington Center for Equitable Growth.
In addition to articles in scholarly journals and periodicals, Furman is a regular contributor to the Wall Street Journal and Project Syndicate and the editor of two books on economic policy. Furman holds a Ph.D. in economics from Harvard University.
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