The text below is a transcript of the audio from Episode 45 of Onward, "How tariffs will impact the economy, with Anna Wong, Chief US Economist at Bloomberg".
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Ben: My guest today is Anna Wong, chief US Economist at Bloomberg Economics. Previously, she was a principal economist at the Federal Reserve. In 2019 and 2020, she was ED to the White House Council of Economic Advisors. Prior to the Fed, she worked at US Treasury Department and the Peterson Institute. I can imagine few people in the world better suited to analyze and forecast the impact of the Trump tariffs on the economy.
Before we get started, I wanna remind you this podcast is not investment advice. It is intended for informational and entertainment purposes only.
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Ben: Anna Wong, welcome to Onward.
Anna: Happy to be here, Ben.
Ben: Yeah, I'm super excited because everything's happening in the world. I feel like you're the perfect person to be talking to.
But before we get started, I want to just give a little bit of your background as people understand how much of a rockstar you are. So do you want to just tell us a thumbnail of your career?
Anna: So I started off spending my formative years at the Peterson Institute for International Economics in early two thousands at the times of global imbalances.
The debate in Washington DC at that time was that trade deficit of the US was widening to an unsustainable pace and that the surplus countries of China and Europe. Are building up their reserves and IMF and Treasury gotta do something to stop this from continuing to happen. And that was also the period where Nan, he talk about the global saving plots.
And subsequently many academic literature had traced some of the roots of the global financial crisis in 2008 to those huge capital and flows going into the US economy in the early two thousands. I did my PhD at University of Chicago and I worked at US Treasury for four years covering the US external accounts, and I worked for another five years at the Federal Reserve.
Covering the Chinese economy for the Fed. And of one of those five years, I was seconded to the Council of Economic Advisors at the White House, and that was from 2019 to 2020. So I was there in the tail end of the first trade war and the work I did in the first half of my year at DEA. Was thinking about the effect of the tariffs from 2018 to 2019, and also I would say at CEA, we had played a key role in Trump taking the face.
One deal with China, deescalating the trade war. And then the pandemic hits. And I spent the rest of my time at CEA focusing on forecasting the collapse of the US GDP at a unprecedented time. And also thinking through about how much stimulus is needed and how the stimulus is feeding through US balance sheets and consumers and all that.
And then I've been at Bloomberg for almost four years now, covering the.
Ben: You were in the White House situation room when the first meeting on the coronavirus happened, so what was that like? Or did people appreciate how big it was gonna be?
Anna: No. So that first meeting happened in January, and the reason why I was in the room, because I was dealing with the trade war, I was supposed to be a macro person, a person focused on China.
The coronavirus was first thought to be a China problem, and it was supposed to be, at least from what I thought. And I was of course grossly mistaken. That was one of my largest forecast error in my whole career. I wrote a memo about the impact on US economy. That was in early January, purely on spillovers from China.
We're thinking that this weird disease will be just like SARS in 2003, which shave off China's growth by only two to four percentage point at most, and generating a one percentage point still over on US economy. Then at that time, the government was only really counting the number of cases one by one.
That's happening in the US and the things that was discussed as travel ban. All these countries are, should we impose travel bans? And Peter Navarro was very early and this, I have to give credit to Peter Navarro. Who a lot of people, including a lot of economists in the White House, then see him as this nefarious figure.
I would even say maybe a nickname would be Peter Nevarez. However, he was very early in saying that this virus could potentially be a really big thing, and he wrote memos very early on that there should be travel ban and that there should be export control in the US on these key ingredients that could factor into
producing a vaccine.
And that was a formative time for my maturity as an economist, right? Because I spent most of my professional life among mainstream economists. And to see that Navarro's view on what things should be done when he wrote it in January, February, March of 2020, because the national wide shutdown only happened in March, it was then that it became really obvious what's going on.
He was writing back in January. Another person who was really ahead of the curve is Matt Pottinger, who was the Deputy National Security Council advisor at the time. So it's a shock that in April, New York Times wrote a piece basically saying the punitive was right. And that spinning Peter Navarro as the person who was so correct in sounding the early alarm of the pandemic and things like that.
So to see a person who embodies the unconventional way of economic thinking and the old person who is like the bad guy and New York Times acknowledge he is right. That makes me think a lot. And on hindsight, I also thought about the policies that we pushed for in those first couple of months, travel bans.
The traditional economic literature would say travel bans have no use, no point, and that the only ways that travel bans could ever work is if it's imposed in a remote island like New Zealand. But on hindsight, I would think that has the travel ban on Europe happened earlier? Then it actually happened
'cause the policies were actually discussed on imposing a travel ban on Europe earlier.
Had it been earlier than New York would probably not be as hard hit. There's time to prepare because I think what I read is that the covid strain in New York came from Europe. So I just think that there's a lesson from that period of my life is that sometimes unconventional policies. Crazy times and in crazy times like that, you have to be very open-minded and be very practical, most of all, and not hang on to your models too religiously.
Ben: Well, that's a great way to tee up the current conversation. And again, Peter Navarro is in the headlines. I think he's instrumental in some of these trade policies today.
Anna: Yes, very much so.
Ben: So today's April 4th Liberation Day was 48 hours ago. I'm gonna try to set the stage. US has raised tariffs across, I think it's higher than they've been a hundred years approximately.
And China just retaliated with matching our US tariffs 34%. And then I think Vietnam talking about dropping their tariffs. So that's where the state of the game is today. As we game plan the future, people have to understand they'll probably listen to this podcast Monday, and I'm sure there'll be a lot more information we'll have at that point.
So. I would like to do something we call scenario planning, which is a structured way of trying to think about the future. The typical way that we do it is you do a scenario that's a good scenario, which is usually a linear extrapolation of the president to the future. In this case, that would be the bad scenario, so a good scenario, a bad scenario, and then a surprise scenario.
Those would be the three scenarios. I'd love for you to walk me through. So if you start with a good scenario, which is where the Trump Administration's plan succeed, I would love for you to sketch out the short-term success and then a long-term success. And then just flip that around and do the opposite.
Okay, catastrophe. What does a really bad scenario look like? And then the third will be something new, something different. If you wanted to do your baseline scenario, that'd be fine too.
Anna: I think the surprise scenario would be very fun.
Ben: Yeah, surprising. I thought about this more than you probably, so I have some ones I could throw at you that I think would be fun.
Maybe not so fun, but interesting surprises.
Anna: I have some really fun ones too. Crazy ones.
Ben: Oh good. Oh, then I'm really excited for that. So let's do the good thing, 'cause I think everybody's pretty negative at the moment in the press. So let's just start with what does success look like? Maybe success in your view and the Trump administration's view.
How does this play out? Well.
Anna: I think this good scenario would be basically how the Trump administration's thinking about it. So it's basically explaining Trump's perspective, this good scenario. So in this good scenario, Trump perceived that the state of the world that he's been living in in the past 20 years.
Is a suboptimal equilibrium in a prisoner's dilemma where the US is engaged with the rest of the world in a free trade mode, whereas the rest of the world is not in a free trade mode with the us. He thinks that US has been suckered in the free trade and it's decimated. Our industrial towns are manufacturing capacity.
So these tariffs, what he wanted to do is that IT manufacturing capacity. Increase the steel capacity. And also I think for him, his formative experience in the first White House is that both the trade war and Covid taught him that supply chain resiliency in the US is a number one national security priority.
So. With these tariffs, he thinks well on one hand now with the tariffs at 22% on track to be 28%. After you add on the pharmaceutical and things that he's gonna add in the next few weeks, it could raise about 790 billion to even 900 billion in tariffs, assuming that they stay in place for the whole year.
So to him, he is like. You got more revenues and at the same time, you could encourage more domestic production. But the best thing for him is if he gets other foreign countries to invest domestically in the US to invest in the domestic manufacturing capability of the us. A prime example would be the other day, TSMC announced that they're gonna be doing a joint venture with Intel.
And to him, that is the outcome he wanna see. He wanna see this type of joint venture or whatever the term you call this, to be in all the sector. And also, why does he wanna secure Greenland? Why does he want to secure this country, which sparsely populated is because he wanna secure rare minerals. And you just mentioned that China retaliated by raising their tariff on US exports.
But us mainly export soybeans to China to feed the pigs. Chinese consumers love pork and US soybeans is what goes towards feeding those porks. But the size of us export to China is so small, it's only about 160 billion. The more effective retaliation that China has been practicing are export controls.
And already we are seeing in these US ISM manufacturing surveys that people are complaining about the germanium mineral that they were unable to access.
And that's because China has access to a lot of rare minerals in the world. And these rare minerals goes to our production with semiconductors. So the raise to be the winner of AI will be the global leader in the future.
So from Trump's perspective, expanding the US territory to include Greenland, tariffs are all going towards the goal of securing supply chain resiliency. And the second part of his optimistic view of his policy is fiscal. So as a byproduct of these, as we have seen this week, the treasury yields have plunged, 10 year yields are at a three handle.
And we have seen that both Scott Cent, the Treasury Secretary and Trump himself, has made, uh, 10 year yields as one of the metric of success. They want the 10 year yield to fall. This year, just so far, we have already seen 10 year yields fall by close to, I think, 80 BIP from when he was elected. And the fiscal debt of the US is on an unsustainable path, and what makes it particularly scary is that there's, I believe, seven to 9 trillion that are set to be refinanced in the third quarter of this year from a previously very low interest rate, I believe two-ish, because they were issued during the qe during the 20 20, 20 21.
What interest rate were really low? Treasury not declined. Then they'll be rolling over to 4.5, 4.2 from two. This is why the interest rate payments on us debt is on track to exceed how much we spent on defense in 2027. That's why 2027 is a key date. That's why you hear people like Ray Dalio who said that a sovereign crisis is awaiting us in three years time because that's when the net interest payment is about to explode because of these.
Ongoing refinancing, these debts are rolling over from low interest rate to high interest rate. So from the Trump administration point of view, getting the 10 year yields rates to come down immediately is actually quite urgent. 'cause you have this 9 trillion rolling over. So if the 10 year yields can go down to 3%, and from their perspective, they're hoping that it'll be a mild recession.
I'm not saying they hope for a recession, nobody hoped for a recession, but if their worst case scenario is a mild recession, but the cost of that mild recession is the benefit of the 10 year yields falling to 3.0, and that immediately lower the trajectory of the net interest payment in the next couple of years.
I think that is a cost they're prepared to pay. To them, that would be a good scenario. The ideal scenario is there's no recession and that growth would just slow to between zero and 1%. Stabler unemployment rate, hover at max 4.6% and 10 year yield go down to 3.0 and inflation just goes to 2.4% to them.
That would be a great scenario because on top of that, then they can use those tariff revenues. As I mentioned, that's 600 to 900 billion of tariff revenues to pay for the extension of their tax cut, which probably the full extension of the tax cut, which will be in the reconciliation bill, which will likely be passed during the summer.
So for them, all of this could make sense because the pain is front loaded in the first three months of the administration. Then after the tax bill comes, then the sentiment will improve 'cause there will be full extension protection. On top of
that, some other additional quirks on tax cuts. So by the time next November, 2026 comes along, the economy would be on the full swing upwards.
That's probably the best case scenario.
Ben: Okay, but let me just try to flesh that out a little bit more so that I can try to get my mind around believing it. 'cause I feel like if I can believe it, that I can imagine it and I can prepare for it.
Anna: You don't need to believe it. It's a good case scenario.
Ben: But the best way to prepare for something is really imagine it happening and then think about what you'd be doing in that situation.
So, okay. Don't they need to deal with China is the best case scenario is the tariffs stay in place or they negotiate.
Anna: Oh yeah, I forgot to mention this part. Yes. Part of the best case scenario is that many of these tariffs will be negotiated down over the next three to six months, but not the Chinese one.
Likely. I don't think the Chinese one will be negotiated down, but the other ones would be. So while currently the effective tariff is 22% on track to be 28%, I know a couple weeks after the negotiation, which will lead to more investment from foreign firms and US manufacturing capability. So that's implied in my statement that there will be increased foreign participation in US manufacturing in exchange for lower tariffs.
So once that happens, I think that the US effective tariff rate would settle between 10 to 15% permanently.
Ben: So can you again try to flesh to this scenario, what would be some companies that you can imagine. I've seen some announcements, but
what are some examples of companies and countries that would do what you're describing?
Anna: For example, you have already seen Taiwan offer the TSMC. Vietnam already offered to lower their tariffs, and I think particularly countries which are traditionally US allies in Asia, particularly like South Korea, India, and Malaysia, US would probably be more. Friendly and conducive to offering to lower the tariff in exchange for some concessions on investment.
So for example, Malaysia exports a lot of active medical ingredients to US pharmaceutical commodities. I am not a equity person, so I cannot really tell you about company names. I would just say that at the sectoral and trade level, I think some of these countries, which are not really US targets and are not too large in terms of their impact on US trade deficits would likely see, uh, lower tariff going forward.
The ones where us have structural trade barriers from the US perspective are places like China. Germany, Germany and Germany, particularly EU sounds really feisty. The national rhetoric coming from EU in response to US induced trade war appear to be really feisty. At least many of the Asian countries are willing that stay silent, but it is possible that the trade war the Europeans would drag on a lot longer.
Ben: So what does success with China?
Anna: I fear that there won't be an outcome that is successful. It may look successful on the service, but ultimately there is a rivalry to be the global leader. It's a clash of civilization. I am hard pressed to find an optimistic scenario in China. Maybe success would be lowering the tariffs.
'cause right now the tariffs with China is at least 67%, possibly going higher. Success may be lowering to 45%, but with tariffs on Chinese goods at 45%, that still means that US imports from China could decrease by 70 to 80% over the long term. Basically e sating US China trade.
Ben: I heard that, that there's some scenarios where US China trade goes close to zero, and I'm trying to imagine how companies like Apple.
Or a lot of companies manufacture components in China. What's that transition look like in a successful scenario?
Anna: I suppose that from the Trump administration's perspective, a successful case of Apple is if they announced investment in creating factories in the us.
Ben: So then the Apple phone costs $3,000 a phone.
Is that what success looks like?
Anna: Well, I think that Trump's horizon is longer than one year, and moving production across border will take many years, and it could be many, many years later. Then don't forget that scarcity is oftentimes the mother of innovation. And if there are not enough people to produce it and there's too many unions, then automate, who knows, four to eight years from now how robots or the manufacturing process will look like.
Ben: Okay. Are there any countries that you think will make a deal with the United States that ends up being the model of success? I'm still trying to stay on the success scenario.
Anna: The model of, and Ben, let me just be clear that this is the most optimistic scenario. We are both trying to imagine it. I'm not selling it.
I'm explaining. You're asking me to imagine it. I'm imagining it for you. And if it's hard to imagine, it's okay.
Ben: I have this thing I learned from a friend called most generous Interpretation, MGI. So I usually try to use that first before I get to the negative side. So I trying to do that here. What about India?
So India is probably the swing global or geopolitical country in the world, and maybe you could see a lot of apple factories moving to India. Is that success in the Trump administration
Anna: possible? If India offers something else to Trump
Ben: their view, they really wanna bring this manufacturing back to the United States.
Anna: There are probably two factions within the Trump administration. One, are those hardcore? Who wants to bring it back to the United States? The second group is more like, it's okay if it's nearshoring, not onshoring. So basically the terminology is nearshoring or onshoring, and many Republicans are already formerly free traders, and to them tariffs are distasteful.
Not to mention onshoring. So I think a large proportion of Republicans would be pushing and okay with Nearshoring.
Ben: Is that Mexico or who else is that?
Anna: Yeah. Near to France.
Ben: To France. Okay.
Anna: I think the reason why Mexico was a target in this current Trump administration not only was because of immigration issues, but also because Mexico was perceived as a backdoor for China exports.
This is why if Mexico voluntarily imposed a 50% tariff on China, I think Trump would be more amenable to reducing the tariff between US and Mexico.
Ben: Isn't that the same challenge with Vietnam and other countries?
Anna: Exactly. So I think a situation where Trump would be okay is if these countries who are perceived as the back door for Chinese trans shipments, voluntarily erect trade barriers vis-a-vis China for Trump, he would think that LA I'll be more open with free trade with you.
But I think he a, we are just really drawn to the scenario right now, stretching our imagination. Let's.
Ben: So let's do the bad scenario, and maybe there's scenarios here, plural. So walk me through how this goes badly. It'd be great if you could do it chronologically like, here we are today. How would it play out over the next few months where it really goes poorly for us.
Anna: I think the bath would be what the models are expecting. So economic models would say that the tariffs at the current level, which is supposed to be going higher, would knock, I believe about 3% off GDP. That would be recession. And on top of that, the models would suggest that inflation would be about 2% higher.
So that would make this into stagflation. So when you have inflation at say 4% at the end of this year or next year, the Fed will be hiking rates, even if the unemployment rate were to be at 4.5 or even 5%. Remember at the peak of inflation in 2022, I believe Core PCE peak at 5.4%. So now if you look
at these sell size shops who are revising their inflation outlook, you have places, some of them are saying 5% Citadel UBS.
They have 5% core PC inflation in their outlook. If that's the case, they're basically saying there will be a return to 2022 type of monetary policy, and worst of all, it would be stagflationary because the labor market would be weakening too. And the absolute worst case scenario is if inflation expectations, or at least if the Fed interprets the inflation expectations to be Ed.
So it doesn't matter. I think the absolute worst scenario is if inflation expectations actually didn't unan, but the Fed thinks it did. Then that policy mistake would be that the Fed would be raising rates when they should not be raising rates, and that would totally exacerbate the downturn and the economy would be in a deep recession.
Ben: Yeah, but wouldn't it be even worse if you have higher rates and the 3% GDP shock, aren't you talking about negative even more than that? Negative 5% on GDP.
Anna: A deflationary shock. A deflationary shock has to be that the GDP has to be zero or even negative. Well, inflation was really, really high.
Ben: So where is unemployment in that situation?
Anna: Unemployment would go to six. In that case, if the Fed were to be raising rates, even as unemployment were to be moving upwards, I would say once unemployment started breaching 4.5, 4.6 and the Fed did nothing, that would really trigger these non leaner dynamics and you can't control it. Once you unleash the Kraken, there could even be something worse.
What's even worse is that the Fed is not offering the Fed put, they're not cutting rates. Worse there at hiking rates. And on top of that, Trump also decided not to pivot, stick with his tariffs. So you have neither the Trump put or the Fed put. That would be an ingredient for a deep recession on top of the actual economics of it, which is that when you have higher trade barriers, then it leads to perhaps manufacturing inefficiency.
Cost of production's higher, it slows down the potential GDP growth of us over the next four to eight years and looking internationally if in this period where US is in stagflation. If China continued to make progress on ai and also if Germany and China and the rest of the world were able to successfully bend
together and create their own isolated economic region excluding us, that would be pretty bad because since World War ii.
The explicit or implicit international monetary system, basically it is configured as US, generates the demand for all the other country's goods, and all the other countries in the rest of the world basically sell to the us. This relationship has persisted for 70 years, 80 years. Sadly, if us were to do a self imposed exile and all the other countries were able to also be self-sufficient among themselves and prosper, which I actually don't think is the likely scenario, honestly, just as our optimistic scenario could be too optimistic.
Even in this scenario, it's too pessimistic because. I do think that much of these relationship is very much entrenched because imagine how could South Korea, Japan, and China ban together for a trade region when they all just wanted to sell to the us For example, China's goods have been produced for selling to the US market.
The fashion from Sheen or tamu does not fit the needs of South Koreans. South Koreans have their own fashion. Japanese have their own fashion. It'll be very difficult for China to sell goods they intended for the US market to other Asian markets
Ben: also, don't they have their own geopolitical conflict?
Anna: Yes, absolutely historical relationships and geopolitical conflicts, but I'm just saying this is a bad scenario.
So bad it actually could get worse, but I'm just keeping the really, really worse for our third surprise scenario.
Ben: Well, let me just ask some follow up questions here. So what's the policy rationale for the Fed to raise rates? When rates primarily impact demand? And this is supply shock. Is that the right way to think about this?
That by increasing the costs of supplies already you're gonna have a decrease in consumer spending. Why raise rates? How does that help lower inflation? Really in practice,
Anna: I. So in a traditional fed model, that's exactly how things work. When the supply shock hits, then prices temporarily became elevated, and that lowers consumption and thereby natural economic forces would force disinflation over time.
So that's why the feds should not move. That is exactly the argument why the should not be raising rates or responding to a transitory supply shock. The arguments for responding to it by either not cutting or even raising rates is if they think that inflation expectations are not anchored, and then in that case, even the model that the Fed have would say they should be responding.
'cause if inflation expectations are not anchored, then we'll see what we saw in 1970s here, which is that there will be a wage price spiral. As prices increase, then everybody will start bid up each other's prices. All the firms started raising prices. Then there's this wage price spiral will reinforce each other and over time the natural mechanism for disinflation to take hold would break down and you just see higher and higher and higher inflation over a period of five to 10 years.
And the tricky thing about this is that inflation expectations are very hard to monitor. The Fed does have a range of indicators they look at. There's a whole bunch of market indicators they look at based on Wall Street pricing of inflation swaps or inflation compensation five years from now. But then there's also survey based inflation expectations like the University of Michigan or the New York Fed Survey of consumer expectations.
The Fed is taking a wild guess based on these results. By the time that inflation expectations are truly uncured, it'll be too late already. So the Fed always wants to preemt this from happening, and if they were to be worried about, the expectations are unor, they will be taking decisive measures just as they did in June, 2022, back in June, 2022 with the fed base rates by 75 basis points.
Sure the inflation is high. They were actually more worried by the five to 10 year inflation expectations. Reading in the University of Michigan survey,
Ben: I'm trying to imagine how rates expectations move much higher in a recession. Because the 1970s was a different period. There was real supply constraints.
It wasn't just about price. You literally couldn't get oil at some places. You couldn't get gas wasn't available at prices that were possible. There was a lot of policy mistakes in that era. So can you tell me what things would be happening on the ground? Imagine storytelling, the things you would say, oh, if this happened, that's the thing that would actually change Rate expectations.
Anna: So in this bad scenario, recall then I said that it's not that inflation expectations are actually unor, but it's just that the Fed thinks it's unanchored, but it's not actually on anchored because then by raising rates it would be a policy mistake. But what you're asking me just now is basically moving to the third scenario of what I was prepared to say.
And the third scenario truly is maybe one of the worst of the worst. Which is okay, which is that this trade war caused China to take aggressive action toward Taiwan and that US also take aggressive action toward Iran. So what do you have would have a double whammy of supply shock? Well, if you invade Iran or attack Iran, then oil price would surge.
But the new oil in today's era that's comparable to oil in 1970s is really semiconductors, which is where Taiwan comes in. So if you do have war. Then truly that is stagflation because that would be comparable to the second oil shock in late 1970s. If I were to compare today to that period, it's most similar to today.
We're at the cusp of 1969 and 1971. The tariff is like Nixon shock. Nixon imposed the 10% unilateral tariffs to bring all these countries on the table to get them to appreciate their exchange rate against the us and as a result, that ended the Bretton Wood system, the comfortability of us to gold. And I think today's macro situation puts us at around that time.
So Powell may not be Arthur Burns. It could be the next Fed Chairman that will arrive next spring 2026. Who would be the Arthur Burns if this third scenario happened? But certainly the Fed Chairman in the 1960s, though he did not go down history with a reputation as status as Arthur Burns, also is responsible to the wage price spiral in the 1970s.
Implicitly what he did is that he didn't bring inflation back to Target when he could have. And while Chairman Powell may eventually blame Trump for inflation not returning to target, I think the truth of the matter is inflation was not going back to target even without Trump. And that was the key insight in Arthur Burns very notorious speech in 1970s where history judged that speech very harshly.
They said that he just didn't have the political courage to raise interest rate, but. I think that in that speech, one of the key insights, what he said is that shocks constantly come supply shocks. Whatever shocks arrived in an unpredictable manner. If the central bank could not bring inflation back to target on a timely
manner, then these shocks are gonna hit at whatever time, and then the Fed would be drifting away and away from the target. It's like, do you sail Ben?
Ben: A little? Not really.
Anna: If you're a sailor or you drive a boat, if you have a man overboard, you really gotta point to that man. A finger. A person has to be physically pointing to that man and immediately pick him up. Otherwise, the boat drift away. So if you are really close to that man and you couldn't pick that man up and you delay it, you just drift further and further and further.
That's basically Arthur Bird's insight that you gotta do it on a timely manner, and if not, new shocks will hit. In a timely manner means you gotta keep real interest. Rate above 2% is sufficiently restrictive. And what we have seen the Fed did in the past five years is that the inflation target has been above 2% for
already almost five years.
And in the last five years, the Fed tried to precisely calibrate rates such that there is no recession. And they have a dual mandate, but at the same time, inflation is not exactly on target, and now they are celebrating amongst themselves that they have successfully generated a soft landing. The fact is they also unsuccessfully returned inflation to target in five years.
So here with Trump's tariff on liberation day, here comes another shock. And it's like that analogy where I just gave you that if you have a man overboard, if you don't pick him up asap, it's just gonna drift away. And that's also repeating the insight of Arthur Burns.
Ben: So you're saying that the Fed, if they really were worried about the shock, they would raise rates fast right away or be much more hawkish in the short term so that it doesn't get away from them if they wait too long.
Anna: Yes, but I think that the mistakes are paved over a period in the sixties and seventies, the wage price spiral. 'cause we are on the point of this wage price spiral stagflation, the wage price spiral in the seventies is not just blamed on the Iranian shock. That's not the solf effect, possibly not even the dominant factor.
I think the dominant factor is the end of Bretton Woods, the end of the goal to dollar. How is it applicable to today? So if Trump's tariffs lead to a loss of the
dollar as a reserve currency, the loss of dollar reserve currency status, which is a byproduct of the Bretton Woods, one or two arrangement, and the first arrangement, it was explicit, the link between gold and dollar.
In the second woods, it was implicit that everybody treat the dollared by the US as the trust of tariff. Cost the loss of this dollar reserve status. That means there's permanently less foreign demand for dollar, permanently less foreign demand for US Treasury. That could lead to more expensive fiscal financing over time.
The lower dollar also could lead to more inflationary pressure over time. So all these are very stagflationary, very similar to the post Nixon shock, 1971, and Nixon knows that the 10% tariffs could potentially be inflationary. That's why at the same time as that Nixon shock 10% tariff announcement. He also announced the wage and price freeze.
And for a while, for at least a year, the wage and price freeze worked. But then the moment they removed it. And then the oil shock hits. Then you see this wage price spiral. History rarely repeats itself similarly, but there are just a lot of rhymes. Certainly, I agree with Powell that we are not in the late 1970s yet, but we are very close.
We have been living through the similarity of late 1960s, setting the stage for whatever to come. So these exhaustion, shock that may come in the next couple of years could determine whether we are in 19 73, 74, or not.
Ben: I had a couple of surprises I wanted to throw at you. Mine were related to the fiscal side, so you have austerity or budget cuts likely to come through Congress and the Trump administration.
You didn't really mention that, and I know you've talked a lot about how the Biden administration, a lot of stealth stimulus, which the Trump administration has been removing. So with those cuts of various kinds happening to the federal spending. Isn't that one more stick on the fire.
Anna: So my baseline is that the tariffs would be, the supply inflation impact of tariffs would be constrained by the decrease in economic activity from the removal of those steal stimulus.
I think that the slow down in consumption is not just due to tariffs, it's due to other things. Like 10 million people are about to see their credit score decreased by. 50 to 180 points, and that will have long lasting impact on their consumption
behavior. Imagine if somebody discovered that their credit score, they are used to be prime and they are now prime, then it affects their ability to buy a house.
It affects their ability to buy a car. Not to mention, the cars also are experiencing massive tariffs. So I think that economic growth was gonna slow anyway. And the tariff, they accelerate these shocks because what the tariff is primarily the burden has fallen on the stock market. Because if firms cannot pass through the input price increase, then they take a margin, hit margin, hit main stock market.
And stock market, most of the stock market is held by the top 10 to 20% of wealth in a country. So in that sense, tariff is indirectly a progressive tax because it affects the wealth holder. So I think that my baseline for the economy was things were gonna slow anyway, but now the stock market is further hit because of the tariffs and unemployment rate is gonna go up because of the margin compression.
And I think the unemployment rate would hit 4.8% by the end of this year, possibly maxing out in five-ish, around spring of 2026. And then when a new Fed chairman comes in, spring of 2026, and also that coincided with a period where inflation should be slowing and coming down because that's just basically how inflation reacts to a labor market deterioration.
Then there will be a lot more aggressive fed rate cuts in 2026. I'm expecting now only one rate cut this year, but 100 basis point of rate cuts next
Ben: year. That's your baseline and. Has happened with the tariffs in that baseline scenario, is it they have stayed on more or less?
Anna: My baseline is that the tariffs would peak at 29%, but then post negotiation would settle at about 15%.
So that would generate about around 300 billion in revenues per year.
Ben: And then where is PCE again, or CPI?
Anna: So Core pce, I think will return close to target by the end of next year. Ben: So your baseline's like a pretty good scenario? I feel
Anna: it's good for unemploy to reach five point something and the stock market to have fallen by 30%.
Ben: I guess after the bad scenario where went to 6%. I don't know where the stock market is in the scenario described. So what would make you change your priors? What would make you change your baseline to be either better or worse?
Anna: The first thing I think would be very influential is if the Fed truly is willing to cut.
This year. So far, what we have seen is that Powell has sounded remarkably dovish in the last FOMC press conference from the March beating. He even mentioned how inflation from tariffs could be transitory. While I believe it's transitory. I doubt he truly believe it's transitory because I think that the majority of the FOMC members as well as the feds Federal Reserve Board staff, they're probably penciling in core PCE to be hitting over three points, 3.0 at the end of this year.
But I think how has been downplaying it lately just because he wanted to avoid, uh, political fire from the White House. So suppose that he truly believed in the transitory view of chair inflation against the recommendations of his staff and the rest of the FOMC. Suppose he truly believes it, and he's willing to use his soft power as a chairman to impose his views on the majority against the wish of the majority of the FOMC, like what he did last September when he cut rates by 50 bips.
Most of the FOMC didn't want it, but he was the one who. So if he applies that authority on the rest of the committee and the staff, then I think we actually do have a hope of truly achieving a soft landing. Because the tariffs will clean out the last mile of getting inflation back to target by the end of next year because the tariff impose some hardship generated a very mild recession that the Fed should have generated in order to bring inflation in target effectively.
But basically, Trump finished the last mile on inflation and the Powell cut on time. Then I think that would truly be the best outcome. But I doubt.
Ben: Some fears you have of institutional and other bias at the Fed. Do you wanna expand on that here?
Anna: I think it's well known that if you look at the voters registration of Fed staff, over 90% are registered as Democrats, and the ratio that was published in
this independent research was 48 to two. In terms of Democrats to Republicans, you know, economics, as much as it claims to be a scientific.
Field is full of judgment, which is indirectly related to one political ideology. And just to give you some example of how judgment factor into one's forecast, for example, for example, one could be what fiscal multiplier should I put on a tax cut? So for left, leading institutions might say that the multiplier from a tax cut on economic activity would be really low.
Whereas they would also assume that the tax multiplier on raising tax rates on the wealthy will be also very small. So a lot of actually going back to 2020 and 2021 on the issue of these fiscal stimulus checks, how would it stimulate the economy? Then some of the judgment among economists is that, well, if we're not directly translate to spending.
The multiplier and economic activity would be lower, but in fact it was very big because the stimulus checks really jacked up the demand for a lot of goods. So I do worry that group think would affect the way that the Fed would respond to the current economic situation, but it sounds like Powell is truly trying to strike apolitical stance and trying to play both sides.
And it's hard to tell whether Powell truly believe in the neutrality that he is striking. Or is he saying it Just to protect the independence of the Fed and try to avoid the political fire from the Trump administration.
Ben: In your baseline scenario for China, tariffs come down some, there's a mild recession or maybe almost even soft landing.
PCE normalizes 18 months from now. What's happening in China during that time? How much is their trade falling with the us? What's happening to their economy? What's happening politically? You understand China more than most people. So can you tell me how you think this plays out in China the rest of the next few years?
Anna: I think my baseline for the US tariffs on China is that it ultimately settles between 30 to 45%, but that would still imply that the US trades imports from China would decrease by 60% or 70% over time. So that means that China will have to find alternative sources of demand. And in the last four years, one of China's growth challenges is to generate enough domestic demand.
Consumption. Demand has been at rock bottom, partly due to the housing market. China's housing market has a big overhang. Will require several years
to clear the excess housing inventory. Many of the Chinese households have put their wealth on betting on the housing market, which is why the bust in the housing market is playing such a big role in decreasing the wealth, enhance their consumer confidence.
And China also has been reframing from the all out fiscal infrastructure stimulus that they did in 2009 and 2016. Because they also have a local level debt problem. US is a federal level debt problem. China is a local level of debt problem. So now if the US tariffs will maintain a, an elevated level like that vis-a-vis China, China will have to either find the replacement for the US demand from the other countries like Europe or other Asian country, or they have to replace it with domestic demand, either coming from private consumption or a government stimulus.
I think to stabilize the Chinese government. The Chinese government likely will expand fiscal stimulus. They will provide measures to stimulate the stock market, shore up the stock market, generate wealth effects for our Chinese households. Worst comes to worse, kind of like what Hitler did post World War I, which is usually in history.
We have seen examples where when the economic circumstances is really dire and you can blame that circumstances on external factors, you could increase nationalism. And this is why our third scenario of invasion on Taiwan, it's a situation if us pushed too hard and put China in a corner and they have to do something that is really the ultimate retaliation.
Ben: How do you look at those probabilities? You have 50, 50, 10% chance.
Anna: I would not even dare to put a probability on this then, because that would be World War iii. Imagine if us invade Iran and then China attacks Taiwan, then you will have a two front war, one in Middle East, one in Asia. It will be World War, and we won't even care about economics anymore because nobody would care about economics at that time.
Ben: There's $30 trillion of foreign investment in the United States today. I think it's something like eight and a half trillion treasuries. 15 trillion equities, trillions of bonds, foreign investors. How do you think they react to this? Are you gonna see them pulling dollars out of the US because that would drive the currency down a lot.
Anna: That's what one would expect if the dollar lose its reserve currency status and the exorbitant privilege. It'll be more costly to finance the fiscal debt. So in
a way that all this would backfire because while you increase the revenues from tariffs, you also have worsened the financing terms because all the foreign investors have fled.
Ben: Well, can we end on a positive note? What kind of positive things would you say short term over the next couple months? I.
Anna: The next couple months would probably feel like the worst of it because I think traders still have a pretty unrealistic assumption of policy support. I think that if the s and p 500 already have fallen eight or 9% in the past three days, even as they're assuming that the Fed will cut this year by 110.
It means that by the time they realize that the Fed will probably only cut 25 bits or zero or even hiking, that the s and p 500 has a long way to go in correcting.
Ben: Wow. So that's not exactly the positive note I was looking for, but I So appreciative you came on the show. You and Tyler Cowen, my favorite economists in the world.
So thank you again.
Anna: You're welcome.
Ben: Onward. You've been listening to Onward, the Fundrise Podcast with Anna Wong, chief US Economist at Bloomberg Economics. My name is Ben Miller, CEO of Fundrise. We invite you again to please send your comments and questions to onward@fundrise.com.
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Thanks so much for joining me.
