Sebnem Kalemli-Ozcan is not worried about the U.S. economy or inflation, if left to their own devices. The Brown University professor of economics says the the Federal Reserve clearly nailed its soft landing by the end of last year. Inflation may not have precisely hit its 2% target yet but its clearly on a downtrend and the labor market has stabilized.
She says the problem for the Federal Reserve now as it heads into its first policy meeting of 2025 where it will decide to cut its key rate again or pause on its recent rate-hiking path is President Trump’s trade policy.
“So if we end up having large tariffs at the same time or (in) multiple countries, then this is going to be inflationary and it’s going to complicate the job of the Federal Reserve,” Sebnem says.
In fact, she says this will seal the deal for no rate cut this week. ”I think the Fed is going to pause. This is my view and I do think they should pause.”
Dive and hear, see what Sebnem also has to say about the impact of deportations and Trump’s “Drill Baby Drill”policy on inflation this year.
Outlook: Few cuts and maybe a rate hike in 2025 00:00:49:22 - 00:01:32:06
…when we talked Jackson <Hole> and afterwards I was in the camp that, yes, they're on the cutting path right now and they're going to cut. But I actually predict that not made that many. Right. I mean, in fact, this is what I predicted, all 2024. We are not going to have that many cuts. We are going to start cutting, but we are not going to have that many cuts. And that prediction turned out to be correct… And now in 2025, I think this is going to be, again, the same deal. I mean, even maybe an interest rate hike is a possibility in 2025.
The Fed reacts to weakness, then sees dynamism as it nails soft landing
00:02:23:06 - 00:02:46:03
<The Fed>…started like August and out there, large labor market slowing down. So let's start cutting. Okay? We started cutting and the labor market stabilized. So now in the new year, not only we are looking at a stabilized labor market, we are, you know, maybe again in an overheating labor market. You know, the American economy's great, doing great. There's a lot of dynamism, there's a lot of growth.And now with the upcoming new policy, the administration, there's going to be even more growth… I mean this is another way of saying soft landing is dumb nailed and all good.
Tariffs will be inflationary 00:03:09:07 - 00:03:53:05
…now we are in this position in which we don't have to worry about labor market… there is no recession or no slowing down… But… inflation? Right. And again, when this whole thing happening in the past six months when we are trying to make sure labor market stabilizes. So when <the Fed was> cutting inflation ,it was also, in fact, going down. But is it going to be you know, is it going to be all this back… to 2%?
And the tariffs <are the> answer to that, too….So if we end up having large tariffs at the same time or in multiple countries, then this is going to be inflationary and it's going to complicate the job of the federal Reserve.
Defense of the soft landing: the Fed DID IT Already! 00:05:09:04 - 00:05:27:15
So how do you respond to that view? Okay. So ‘we don't hit the soft landing yet’ is completely wrong because we did hit the soft landing. Soft landing: the definition of soft landing is you bring down inflation without creating recession. That's why I'm not even going to comment that we did it- we did it.
The stubborn denial...denies substantial progress 00:05:27:16 - 00:05:54:21
Now you if you say well my definition of soft landing is not just bring down inflation without causing a recession, but bring down inflation to 2% without causing a recession. That, of course we can. But from the start, they never defined <it as such>. I remember we came down from 9% inflation. So overall, the soft landing definition, all this to me and the way Fed defined it is like they are coming down from 9% without causing a recession.
Tariffs will boost production costs 00:06:46:04 - 00:07:20:01
Remember, this exact same thing happened during Covid with bottle neck and supply chain problems. These tariffs are going to be on several intermediate sectors where these goods work as inputs to production in the United States of America. ..these tariffs, the way they are proposed, it may not happen, but the way they have proposed, are increasing production costs. Increasing production cost is not just a one-time increase in the price level, but it is going to be an inflation because it is it is a… shock to production.
One word: UNCERTAINTY - 00:09:34:09 - 00:09:55:11
New Year, new president and, you know, same Fed. I think I would just put one word: uncertainty. I mean, because it's just there's a lot going on and things may not happen that be the way we think or they may happen exactly the way we think. But that's, you know, the definition. What I just said is uncertainty.
A complicated, ambitious, not wholly consistent policy- 00:11:11:11 - 00:11:34:13
But they are trying to do a lot. They are trying to do a lot in a short period of time. The point is, from an economic perspective, some of those policies are internally inconsistent with each other. Okay. So, you, at the same time, want to stimulate the economy. If you do it too much, you can overheat the economy while you are making some things costly.
Deportation? Labor shocks are inflationary- 00:14:40:00 - 00:15:15:19
…people go to work, they couldn't sometimes it's because of the lockdown, sometimes because they are sick, sometimes because of their fear. You know? So, the minute you, restrict labor in any sense, that is an inflation shock. And if you restrict labor, if there's a negative labor supply shock, and then you combine that with, very high demand, that's a demand supply imbalance that we have been talking about the last three years, which is inflationary and you have high demand, you have low supply, right
OverviewResearchBackgroundAffiliationsView AllCurriculum Vitae [PDF]
Sebnem Kalemli-Ozcan
Schreiber Family Professor of Economics
Overview
Şebnem Kalemli-Özcan is Schreiber Family Professor of Economics at Brown University and the Director of the Global Linkages Lab. She is a Research Associate at the National Bureau of Economic Research (NBER) and a Research Fellow at the Center for Economic Policy Research (CEPR). Currently, she is the co-editor of American Economic Journal: Macroeconomics. She also serves at the economic advisory panels of the NY Federal Reserve and the Bank of International Settlements.
She was the Duisenberg Fellow at the European Central Bank, held a position as Lead Economist/Adviser for the Middle East and North Africa Region, served as the Houblon-Norman Fellow of Bank of England and also CFR International Affairs Fellow. She was the Senior Policy Advisor and Assistant Director at the International Monetary Fund. She is the first Turkish social scientist who has received the Marie Curie IRG prize in 2008 for her research on European financial integration.
Her research focuses on global trade and financial linkages and economic fluctuations and growth.
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