AYESHA RASCOE, HOST:
Federal Reserve Chairman Kevin Warsh gave a highly anticipated speech in Jackson Hole, Wyoming, on Friday.
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KEVIN WARSH: We must be confident that underlying inflation is moving to our objective clearly and at sufficient speed. Otherwise, we have work to do.
RASCOE: And there is work to do as inflation continues to rise above the Fed's 2% target. We're joined now by Mary Lovely. She's a senior fellow at the Peterson Institute for International Economics. Welcome.
MARY LOVELY: Thank you, Ayesha.
RASCOE: Let's start with the Fed and inflation. What's your takeaway from Warsh's speech?
LOVELY: Well, I think he clarified his view for a lot of people. He stopped short of signaling his support for an interest rate hike in September. But he did say that inflation isn't meaningfully slowing, and I think that accorded with a lot of people's sense of what's happening. So that tends to build confidence in his outlook and the belief that he will be a straight shooter.
RASCOE: So it seems like his words did comfort the markets a bit, and many expect the Fed to modestly raise interest rates at their next meeting in September. Would that be enough to bring inflation down?
LOVELY: You know, so much depends on what happens externally. So we still have pressure on prices from President Trump's tariffs. You know, he has again threatened higher tariffs on Canada. We also have the continuing conflict in Iran and in Ukraine, both of which are affecting the price of diesel fuels and other fuels. So there's a lot out there that's happening that keeps the fear that the inflation rate will continue to go up.
RASCOE: You mentioned that the U.S. has threatened to impose more high tariffs on Canada. How do you win in this trade war between the U.S. and Canada, or is this a lose-lose scenario?
LOVELY: This one makes absolutely no sense. You know, we've often understood the Canadians to be our close partners in production, with, you know, lots of things going back and forth across the border - very important inputs, from energy to wood to aluminum, coming from Canada into the U.S. economy to be made into other products. So this just doesn't make any sense from any point of view.
I think many people don't realize that there are already tariffs on the Canadian-made portion of vehicles. That's a direct violation of the USMCA, which was the revision of NAFTA that President Trump signed during his first term. This is what led Prime Minister Carney to say that whatever U.S. signs is signed in pencil because President Trump is violating the agreement that he himself negotiated.
RASCOE: And tariffs on Canada are different from other places because - isn't it true? - it's not like we just buy things from Canada.
LOVELY: You're so right, Ayesha. This is a very integrated North American economy. And many products go back and forth across the border at different stages of production. Canada is now our largest source of imports, and many of those imports are what we think of as producer intermediate goods. They're used by our factories to make things. Raising the price of those things hurts American producers. It hurts American exporters. It makes them less competitive when they try to sell their products on global markets.
RASCOE: Earlier this month, Treasury Secretary Scott Bessent set out this plan to buy back tens of billions of dollars of Treasury bonds in an effort to lower interest rates on government debt. How would that work? And, I mean, do you think that's a good idea?
LOVELY: I think the markets don't think it's a good idea. If the fundamentals - the supply and demand for long-term debt - are in conflict with what Secretary Bessent wants, kind of the market's going to win. And we saw that. His efforts had a very short-lived effect.
It's also interesting to note that while Secretary Bessent wants interest rates to come down, we may see the Fed chair pushing the short-term interest rates up. So I think it's a confusing pattern right now, especially for businesses which are already facing an enormous amount of uncertainty about when to invest, where to invest. So while we have seen fairly healthy investment in the U.S., a lot of that - almost half of it - is in data centers. And we need investment in other sectors that make things and provide services for the economy.
RASCOE: What else are you paying attention to when it comes to the economy?
LOVELY: I think we really need to be attentive to whether the investment that we're seeing is going to be job-producing. And we've had a lot of good discussion, I think, about what the effect of AI will be on jobs. But we also have this lopsided investment - lots in data centers. Data centers don't employ a lot of people.
So we're already seeing pressure on new high school grads, college grads to get that first job. I myself have a new graduate, my son, and I'm deeply concerned about what his path will look like. Many people that I talk to, whether it's at the dentist's office, in the grocery store, are saying that they don't think that their kids will have the same opportunities that they had. And I think that that's a sad thing, and I think it will influence people as they go to the ballot box.
RASCOE: That's Mary Lovely. She's a senior fellow at the Peterson Institute for International Economics. Thank you so much for being with us.
LOVELY: Thank you, Ayesha.
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