Diane Swonk, chief economist and managing director at KPMG, has been following the Federal Reserve, analyzing its twists and turns, since she began her career with money-center bank First Chicago - and I came to New York to start following the Fed and the bond market in the mid-1980s. Those were the days when Paul Volcker had put the U.S. economy through a deep recession to break the back of inflation, an historic time for the Fed and the U.S. economy.
Fast forward to the release of the minutes of the last meeting overseen by Fed Chair Jay Powell, which Diane joins to discuss with me shortly after there release. They cover the April meeting, where no policy changes were made at a time when a new Fed chair was about to take over, and inflation has been running over its 2% target for five years, the world is facing an oil price shock, not only the Fed but central banks around the world are debating how to respond: hold rates steady to see how quickly the Iran war ends?, hike rates now to make sure inflation expectations don’t start rising?, and next to no one saying cut rates now in case all of this uncertainty causes companies to pull back on hiring?
Diane sees a growing minority on the Fed’s policy-making Federal Open Market Comittee leaning toward rate hikes. “The Hawks are flocking and that those people who are worried about not only inflation going into the crisis, the war in Iran, but that it was already getting sticky and that there was a more of a persistent inflation problem,” she says. “We saw this sort of building over the course of last year, and that past rate cut in December of 2025 was already contentious.”
Now, she sees the Fed still splintered “about what do we need to deal with more, the issue in the labor market or the issue in inflation?” Especially she says when inflation is moving up rapidly and, “all the reasons for inflation over the last five years were not the Fed’s fault.
”Yes they are late on the uptick, but that said they are the only institution that is really charged with derailing inflation,” Diane adds. “And I think what people often forget is that inflation itself is a labor market problem” as rising input costs costs and constrain profit margins for a lot of firms.Right now costs are rising for firms. She notes that “profit margins for many firms have narrowed and that is a labor market problem as well.”
Diane is critical of the notion that inflation will quickly subside if external shocks, such as the war in Iran, are resolved. She warns, “some of these supply chain issues will linger even after the straight opens, and you still have to make sure you have to ensure that people can traverse the strait... oil prices go up like a rocket. They come down like a feather.”
She stresses, like current and former Fed officials, that a “key risk is the entrenchment of inflation expectations: as “firms have a muscle memory to raising prices now and passing on those increases... inflation is inertial and higher about inflation tend to be get more inflation. It’s part of the vicious cycle nature.”
So dive in hear why Diane sees rate hikes by are coming as Warsh comes on as Fed chair. “And I actually do think the Fed is going to have raise rates in the back half of the year and that is a hard place to be.”
Spoiler alert: she says the rate hike could come as soon as July. “I think it’s going to be hard once you get into July to keep justifying not signalling a rate hike.”
Not the Fed’s fault…but no Fed action 00:02:41:04
That is becoming more of a minority, but still splintered within the Fed about what do we need to deal with more? The issue in the labor market or the issue in inflation? Inflation has now moved, it is moving up rapidly, and I think it should be on top of it. All of the reasons for inflation over the last five years were not the Fed’s fault.
Pressures grow 00:03:02:19
Yes, they were late on the uptick, but that said, they’re the only institution that is really charged with derailing inflation. And I think what people often forget is that inflation itself is a labor market problem. When input costs are going up, that’s constrained profit margins for a lot of firms. We see a very narrow group of firms carrying the S&P 500 related to the I trade.
Profit margins narrowed 00:03:29:02
But profit margins for many firms have narrowed. And that is a labor market problem as well. So you really cannot get out of the fact that we know that the research coming out of the pandemic said that in a world where you get more supply shocks and you have a high level of uncertainty, you get more persistent bouts of inflation.
Broad supply line damage 00:03:50:17
And the war in Iran is just one more of those. And it’s much more than an energy shock. I think people are really discounting how much this is something that is affecting production already. I was talking to, economists around the world in some recent meetings, and there’s plants already in the Philippines being idled that make, you know, the gloves that they wear at all hospitals are the PPE that we need.
Fiscal boom pushed economy ahead 00:05:07:19
And yet there’s something. I was talking about this recently with a group of economists, and I use the term resilience, but, recklessness underneath of how the economy is behaving. And we know that inequality, we know that the smaller group of both consumers and households and firms through the EI boom are carrying the economy. There is some spread because we had a lot of fiscal stimulus.
Lots of fiscal push 00:05:31:14
People forget that we had about 150 billion of fiscal statements in the first quarter between expansions to tax cuts that resulted in higher tax refunds, about equally split and then also higher tax cuts for higher income households and more tax cuts, 100% expensing for manufacturers and any companies out there. And they start to take advantage of that. And that stimulus is showing up in the economy. It’s not showing up as much in the employment picture. And there are still some undercurrents in the labor market that I’m worried about. But I don’t think and we’ve talked about this before, Kathleen, is the undercurrent in what’s under the hood of, you know, the underemployed in the labor market that interest rate cuts alone can’t cure what ails the labor market.
AI Boom boosts inflation 00:06:57:01
The AI boom itself is adding to inflation right now because there’s a sequencing problem here. Right. And we don’t know how it’s going to disseminate in terms the broader economy. And these are important issues because these are all adding on to the compounding problem that consumers are feeling.
Consumers feel the loss of spending power 00:07:18:03
They don’t think of inflation like you and I do. You know, we’ve been talking about this for markets. And you know, for years, Kathleen, where you and I think about inflation is the rate of prices changing, right. And prices consumers are experiencing inflation much like people experience or who are wealthy, experienced or. Well, it is compounded over the course of five years and the level of prices is out of reach relative to their income from what it used to be. We’re on the flip side of it. For the majority of Americans, that’s the case. The same compounding is happened in the stock market, which has driven a wedge in the US economy. And that’s why I think you’re seeing people assessing the economy as if it’s in a recession, because they really feel like they’re losing purchasing power, even if they’re employed.
Inflation many contributions 00:08:01:02
You know, if you look at the minutes, which you obviously have, a lot of FOMC members were saying, oh, it’s this the price pressures are here. It’s tariffs, it’s oil prices disrupted supply lines. And you know, you kind of wonder can above target inflation for so long. If the war ends is that going to be neutralized.
Disruption is real and lasting 00:08:40:23
You know, it’s it’s a really tough situation because what most people aren’t understanding is it’s not just the strait and it’s not just the futures prices. It’s the, the fact that we don’t know if the Iraqi oil that has been idled is going to be able to be restarted because you lose pressure in an oil well, it takes even longer to bring it back up.
Not just chip disruption 00:09:02:05
And e know that some of in Qatar that the natural gas has actually been destroyed on that infrastructure. That’s helium as well, not getting out of the strait at all, not getting to chip plant in Korea. Now Taiwan recycles their helium. So they hit a tipping point later. But we have a major strike in the chip industry as of today as well.
The international supply chain is an international supply chain 00:09:23:23
47,000 workers in Korea are out of work right now. These are all things that affect the supply chain. And they are pushing up prices on consumer goods already. I mean, the cost of not high memory chips before the crisis was very large. It went 200%. And it was showing up in the PC, in producer prices, in the CPI, in consumer electronics and smartphones.
What about expectations? 00:11:47:10
I, you know, I, I, I think there is some reevaluation. And I think there is a reality. No one in the Fed will publicly say that they think inflation expectations are coming on anchored. But there is a real realization that firms have a muscle memory to raising prices now and passing on those increases. And I hear that within the Fed system and within very high ranking officials talking about it very thoughtfully, and that I find encouraging, because that’s what I’m worried about, is that we’re getting to, you know, inflation is inertial and higher about inflation tend to be get more inflation. It’s part of the vicious cycle nature of once inflation expectations in some way become unanchored even a little bit.
Hoarding behavior 00:12:41:04
And I think that is important. We’re also seeing hoarding behavior. If you go to a lot of places, you can’t get oil to change your car because they’ve cleared out the shelves already, because refining capacity is limited and all the excess capacity is still locked in the street and still has to be reopened once that street opens. So you know, there’s a there is a lag on the Strait of Hormuz.
What price stability really is 00:13:47:02
And what is price stability really mean? It means that consumers no longer are thinking about it in their daily behavior, and there’s no question that consumers are thinking about it in their daily behavior.
The great Warsh mystery 00:13:59:24
So, what, what do you view? And we don’t know. We don’t know. What Kevin Warsh is thinking. We know he’s talked about over time, reducing the balance sheet. We’ve many people, or just quite convinced, that, oh, he promised Trump he’s going to cut rates so he will, and nobody knows really what Kevin Warsh is.
Jay and Kevin 00:14:54:21
I know Kevin, I know Jay. Jay still going to be on the board. Jay will be wallpaper. He will not be you know, you will not want to undermine Kevin. You want to support him. And he’s not going to be making big policy talks, you know, on the board. So that’s important to remember. First of all, Jay’s been aboard a governor before and he doesn’t want to be out there contradicting a new chairman. And he’s going to be helping out supporting him. And I think, you know, people don’t understand when you enter the institution of the Fed, there is that institution and all institutions need revisions. And I know Kevin comes with ideas about revisions, but I also think what he’s walking into is a situation where he is going to, you know, how much the rest of the committee, given how nervous they’re getting about inflation being stickier. They got to pull that easing bias out, and they can punt in June and say it’s still wait and see.
Shifting views on the FOMC 00:15:55:17
Pull out the easing bias because they need optionality. It’s a credibility issue and that doesn’t change. You know they can still not do anything at the June meeting and say they’re sort of wait and seen. But I do think that you’re really starting to see a much larger, which was a minority moving into getting closer to a majority of people thinking we might have to raise rates.
Fed will have to raise rates 00:16:23:18
And I actually do think the Fed is going to have to raise rates in the back half of the year, and that is a hard place to be. But on the other side of it, you know, once you’re in that position and you’re in the institution of the fed and we’ve gone five, the context is we’ve gone five years and we’ve got inflation in places that aren’t related to all this other noise, and then we’ve got this on top of it.
The Fed’s dual mandate is a handicap 00:16:49:24
And we know that in the context of this kind of environment, the risk of it sticking and being even higher and a more vicious bout of inflation is greater. Now that I as a fed think, okay, my issue is no longer just the labor market. When inflation becomes a labor market problem, it’s inflation. And ultimately the reason all other major central banks do not have a dual mandate is that you cannot attain nor sustain full employment unless you tame inflation, full stop.
The real Job-One is inflation 00:17:22:01
And, you know, so at the end of the day, it really is about inflation. And, you know, that is what he’s going to be walking into. He will get the evidence from the Fed itself, and he can take it in whatever stride you want. But, you know, there’s a lot of research within the fed that is also showing us over time, the AI boom may neutralize some of these costs.
Sequencing problem 00:17:44:13
But there’s a sequencing problem. And right now it’s actually increasing inflation. And that’s just not from the Fed. There’s independent research now saying that it’s adding to the inflationary, process. And that’s something the Fed is recognizing as well. And I think that’s a hard thing as sequencing and timing things, you know, you can have be really close to Silicon Valley and see where they’re thinking.
Fed policy timeline and tilt 00:18:27:02
Probably I think they’re edging towards neutral and wait and see. And there are some considering hikes. And I think there’s a strong argument for a hike after probably cutting too far last year.
Trigger for action…or not yet? 00:19:00:17
It’s a, you know, unless you’re in a situation where you’ve absolutely like we were in March of 2022, you don’t have to drop anything first. But we’re still unsure about the timeline of the war. And, you know, so there will be a there will still be a strong group. And also, you know, some there is there it will be interesting to see the ministers meeting, but, you know, they’re not going to want to put Kevin in the position of saying we have a tightening bias at the first meeting. That would be a very hard political position to be in. And it’s not that the Fed takes all of that into account, but they have to think about the context in which they’re operating as well. And so, knowing where, you know, this is an institution that moves quickly when it has to, but often times that’s after the fact.
Pressure to signal hikes possible or coming 00:19:58:18
And right now, I think what we’ll see is more of a wait and see, but more optionality coming out of that meeting. And you’re going to see more people talking about rate hikes now, you know, when do we actually get to that? Do do they feel the necessity? I think it’s going to be hard once you get into July to keep justifying not signaling a rate hike.
Waiting on Jackson Hole 00:20:21:21
And, you know, do they wait for Kevin’s first, you know, Jackson Hole address to frame things? They may end up doing that. We know that Kevin has voiced, you know, a desire to reduce the balance sheet. In theory, that’s great. But that would be additional tightening. And also there’s some issues with the balance sheet itself in terms of how quickly you could do that without disrupting the Treasury bond market.
Public nature of Warsh’s desires & politics cause difficulties 00:20:47:12
And like it or not, it’s part of the liquidity in the functioning of that market. So this is going to be a hard situation to manage. Given the backdrop of how he came in. But I also think financial markets, because of the way the politics have bit presidents, never want higher rates, but because of the way that this has been so public, I think Kevin will have a hard time.
Seen as major shift at the top and in focus 00:21:16:04
He’ll have to convince financial markets he truly is. You know, his inflation fighting resolve is there and that he’s open to those hawks on the committee because I think financial markets <may see> this as the biggest shift in a Fed chairman since Alan Greenspan became Fed chair in 1987. And back then they thought Alan Greenspan would be very dovish and they were wrong and they tested him and we ended up with a really bad market crash.
Are the bond market vigilantes back? 00:21:47:13
In October of 1987, October 19th, Bloody Monday. That wasn’t just Greenspan, but there there was a test and I think I think, it that’s something the bond vigilantes are showing some resurrection, something that, you know, goes back so far that as long as we’ve known each other. He thought there was going to be inflation back then and he was wrong. And you know, we’ve all been wrong. And it was, not untrain transitory which neither was I. And, you know, he was right.
Bad hand to play; volatility 00:23:36:13
We’ve got to deal with what we’re dealing with. I mean, there’s the courage you’ve been dealt and sadly for Kevin Warsh, these are very hard cards to be dealt a Fed chairman at this point in time. And, you know, he’s got to deal with that. And it’s at a time when we’ve seen some cracks in the bond market. One day it’s okay. One day it’s not. But that volatility is in itself. I think concerning. And this you know, inflation is a real problem. And at the end of the day, you know, there is nothing that’s a bigger tax or a regressive tax on the economy than inflation. And all the talk about the Fed creating inequality, actually a lot of things created the inequality.
Inflation is like cancer; it spreads and its dangerous 00:24:20:03
But there’s nothing that’s more corrosive than inflation in terms of a tax on a regressive tax on the economy. And if you really care a lot about people’s lives and livelihoods, you need to bring inflation down. It’s a very corrosive. I liken it, you know, it’s personal for me, Kathleen. I liken it to you don’t want it to metastasize because it’s a disease like cancer. And I’m a cancer survivor. So I choose my words carefully. But we are getting to that point where I’m really worried and these are, like I said, people’s lives and livelihoods. And, you know, the fed is concerned about that. And that’s ultimately what their job is. They’re the one institution that is challenged to derail inflation, no matter what the causes are. And it’s been five years now and that’s not good.
Hope the Fed is not forced into a rate move… 00:25:35:03
I mean, there’s not going to be you’re not going to be alive in June. I mean, there had to be something emergency happening for a move in June. And, you know, I would hope that we don’t have some kind of a crisis that we needed a move one direction or the other. In June. And so they will buy some time.
Market is ahead of the Fed; doing some of its work 00:25:53:04
The run up in Treasury bond yields is doing some of the work for them, but that is also predicated on an expectation that they now about a 70% chance that they’ll raise rates by the end of the year. So you got to deliver on that so that the market, you don’t want the market doing all the work for you, because that is a very, very painful situation. And there’s a lot of other things that can go wrong if you let that that try to be the that happening. But I think, you know, so there is some time because there’s been a recent tightening of financial conditions. But it is we also had fiscal stimulus. People forget we had all that fiscal stimulus. We could get another round over the they’re expecting another bump in defense spending over the summer.
A defense spending bump? 00:26:41:14
That could be quite consequential, because you’ve got to rebuild a lot of stuff and build new store. And you know, whatever you want to think about that. That’s another resilience aspect of the aggregate economy. But it could also help support inflation at a time when we don’t want inflation. So and those are important things to remember.
Economy impact unclear but inflation will be sticky 00:27:23:12
If we get, you know, a combination of continued gains in employment on the payroll side of the household survey is a little weaker. And I’m worried about that. But, I think the inflation numbers on the, the PCE, we know what it’s going to be. It’s going to be sticky. It will, you know, you’re in your comps in the core will make it look a little bit, maybe a little bit better or about the same. But the bottom line is we’ve got an inflation problem. It’s not going to go away quickly. And you know that by you start getting into July. And if the labor market still looks like even though it’s uncomfortable it’s holding up.
Labor market weakness in 2025 was shut-down related 00:28:08:16
Clearly the hedge is inflation. And frankly, I’m telling you I don’t think that, you know, I the rate cuts to deal with the labor market. I think the weakness we saw in the back part of 2025 were in part due to the six week government shutdown, and you saw a lot of that unwind and there was collateral damage. We never had anything that large, and people really underestimated the collateral damage of that to communities. And that is unwound now. But there is yes. It’s not that the labor market is great, but if if inflation is affecting the labor market as well, that’s a problem. And I think that’s okay.
Diane Swonk
Chief Economist, KPMG US
Diane Swonk is one of the most respected macroeconomists, who maintains a unique perspective on the inner workings of Main Street as well as Wall Street. She is an expert on the economics of the labor market, monetary policy and structural changes that are distinct from economic cycles.
Diane began her career with money-center bank First Chicago. She climbed from entry-level to Director of Research and Chief Economist at Bank One, the merged bank. She spent more than a decade as Senior Managing Director and Chief Economist at the financial services firm, Mesirow Financial. Before joining KPMG, Diane had her own economics consulting firm and worked at Grant Thornton. Diane now heads up the growing economics team at KPMG to serve partners and clients, and to engage with the media to help showcase the firm’s achievements.
She has served as an advisor to the National Economic Council (NEC) on a nonpartisan basis. She regularly briefs the regional Federal Reserve banks and the Board of Governors in Washington, DC. She has provided Congressional testimony on income inequality and how to preserve and bolster the quality of government economic statistics. She is on the Advisory Board for the Bureau of Economic Analysis, of the Census Department.
She was honored by her peers as Fellow of the National Association for Business Economics (NABE) for outstanding contributions to the field. She serves on the NABE statistics committee to advocate for better information on the economy. Diane serves on the board of the Posse Foundation in Chicago, an organization dedicated to increasing access to higher education. She is active in supporting scholarships and programs to diversify the ranks of economists with more women and underrepresented minorities with her alumni groups and work on the NABE Foundation. She is a member of many business groups, including the Economic Advisory Board of the US Chamber of Commerce, the Council on Foreign Relations, The Economic Club of Chicago and the Chicago Network, the oldest networking group for women executives in the country.
