Jason Furman is Aetna Professor of the Practice of Economic Policy at Harvard University, former Chairman of the Council of Economic Advisers of the White House, and a member of the Bund Summit's International Advisory Council.
Let’s first talk about the broad situation of the US economy. The recent rise in unemployment rate has triggered worries of a looming recession, while many others are still expecting the US to deliver a perfect “soft landing”. How do you evaluate the US economy and labor market as they stand today?
Overall, the US economy is in much better shape than I expected a year or two ago. The inflation rate has come down dramatically. The United States is not currently in recession, and the most recent growth number was very strong. And in fact, when you compare it to other advanced economies like Europe and Japan, the United States has the strongest growth and is in the best position.
There are always risks in the economy. Recently, the risk of inflation has fallen, but has not gone away; the risk of recession has risen, but it is not certain. Different economic indicators are telling different stories and that's usually the case. You need to sort through a messy fog of data. The unemployment rate, which is rising, is the most concerning sign. But some reasons why it isn't like what it normally is when it rises is that it's not that businesses are firing their workers, they're just not hiring them as much. And there's been a big surge of immigrants. So, employment growth has been strong - it's just labor supply has been even stronger.
When you look at other indicators, consumers continue to be spending money at a very high rate. Business investment has increased recently and the economy has gotten some relief because even that the Federal Reserve hasn't cut interest rates, financial conditions have loosened, so mortgage rates are lower and the stock market is up.
So, in summary, I think the United States economy is in a good position. But monetary policymakers should be more worried at this point that there might be a recession than they are worried about continued inflation.
We were thinking about asking you to predict whether the US will head toward a recession, soft landing, or no landing. It seems recession is not going to be your answer, at least?
Look, it's always a game of chance. In any given year, there's a bet of 1-in-6 chance there’s a recession. Over the next year, I think that chance is a little bit higher, given that we've seen the unemployment rate rising. But basically, right now, I think we're within sight of a soft landing. We're not there yet, by the way—the inflation rate is still above 2.5%. I think we would want to see it fall below 2.5% to feel really good about where inflation is. The most likely thing is a soft landing. But there are, as always, threats to that soft landing coming from every side of inflation.
US CPI fell to 2.9% in July, the first time it was below 3% since 2021. How do you interpret this data?
It's been very exciting seeing inflation come down. It's something that I thought would require a lot more pain and higher unemployment than what we've actually had.
If you look at the numbers that the Fed tracks and sets as its goal, the Personal Consumption Expenditure (PCE) measure of inflation, it’s fallen when you take out volatile categories by 2 percentage points over the last year. I think a lot of that is because the Federal Reserve raised interest rates, which reduced demand in the economy. You see that in sectors of the economy like housing, which have been hit by the rate increases.
The result has been of the lower demand is the job openings—the number of jobs that businesses advertise because they want to hire people—has fallen very, very sharply. At the same time, the unemployment rate has increased very gradually, and that has resulted in a real loosening of labor markets where there's fewer job openings for every unemployed worker. That's meant less pressure on wages and less pressure on prices. That is the dominant story.
At the same time, there's some other things going on on the supply side of the economy, where post-pandemic problems in areas like microchips, for example, have gradually worked themselves out overtime.
Over the course of this year, US inflation has seen some ups and downs, but has remained on a downward track on the whole. Do you think inflation has been falling at a good pace, compared to your expectations?
It depends when you set those expectations. If you ask me a year and a half ago, we're in better shape. In December, it looked like maybe inflation was completely gone already. Then there's been some disappointment since then, because we had quite a lot of inflation in the first quarter of this year.
What economists are trying to sort out and we don't know the answer is, was the first quarter a fluke and we should ignore it? Or should we average it into our calculations and think inflation is still high?
To be clear, no matter how you measure the numbers, inflation has come down quite a lot. The question is, has it come all the way down to where the Fed wants it to be? That's what you'd think if you just looked at the last couple months, but if you looked at the last seven months, then you'd be a bit more worried about where it's going to be.
I'm not sure of the answer to that. As always, you need more data; as always, you're looking through a foggy car window. But I think that we've had enough softening in the labor market that increases recession risk we discussed before, which will put further downward pressure on inflation. So, I don't think inflation's all the way there yet, but the labor market weakening we've seen should get it the rest of the way.
How do you depict the trajectory of inflation going forward? When do you expect the 2% goal to be reached?
First of all, there's a question of what the goal of 2% means. Does it mean inflation needs to be 2.0%? In which case I think that could take a while and probably wouldn't happen absent a recession. Is something like 2.3% inflation good enough for the Federal Reserve? I think it should be. I think it will be. It's basically close enough to 2%, and I think we could get that in the year 2025 given some of the loosening we've seen in labor markets, the normalization of supply chains, the lower inflation expectations and just the general trajectory that we've seen in the housing market especially, which is an important part of inflation. So, I'm pretty hopeful that we are close enough that the inflation number rounds to 2% in the year 2025.
Do you see the softening of the labor market in July transitory, or do you see it likely to continue?
The biggest fear was the unemployment rate really jumped up in July to 4.3%. Now, 4.3% is still pretty low. If it stayed at 4.3% for the rest of time, I'd be perfectly happy. It wouldn't be the best thing that could happen, but it would still be pretty good.
There were strange things that went on that month: there was a Hurricane; some auto companies were retooling. I think we're going to see the unemployment rate fall again a little bit when we get the next data, but whatever happens, whether or not it falls a little bit, it'll still be higher than it was a year ago. So, the overall trend in the unemployment rate is clearly up. The question is, is it gradually up that's plateauing at a new higher level, or is it rapidly inflecting itself up?
The other thing is on some insurance built into the economy, which is if the next unemployment rate goes up, I think the Fed will cut rates by a lot, maybe by 50 basis points at the next meeting. If the next unemployment rate is down, then they'll probably only cut interest rates by 25 basis points. So, there is also some self-correction built into the system. With the lower inflation rate we have now, the Federal Reserve has more room to cut rates if and when it's needed to stabilize the job market.
What is your estimation of the natural rate of unemployment in the US at the moment? Is it higher than before?
It's a very uncertain concept. Economist need to use the natural rate of unemployment to do their analysis, but we hate it because we don't quite know what it is. I would go with the number 4%. That's what the Federal Reserve thinks it is. I don't have a lot of reasons to think it's different from that, and I certainly don't have any reason to think it's risen, in fact, now that the unemployment rate has been above it and there has been this downward pressure on inflation.
One of the ideas that's grown in appreciation in recent years, although it's an old idea, is that you shouldn't just look at the unemployment rate and think about inflation dynamics. You should also look at the number of job openings. In particular, when you have a lot of job openings relative to the unemployed, that puts upward pressure on wages and prices, and the opposite when you have a low number of openings to unemployment. So, I wouldn't just look at the natural rate of unemployment, I'd also look at job openings.
Based on your observations of the US economy, how do you foresee the Fed rate policy path ahead, including the pace and extent of cuts? Where will the federal funds rate end up at the close of this monetary loosening cycle?
Most advanced economy central banks have already started cutting their rates. The Fed has been more cautious than other central banks, and I think that's appropriate. We went through a very scary episode with inflation, and they want to really make sure that it's gone before they make any changes.
But now they've made it completely clear that interest rates are going to be cut at their next meeting in September. The only question is, are they going to cut by 25 basis points or 50 basis points? It's very likely that interest rates will continue to be cut at every meeting, again in November, and again in December.
Largely, I think the Fed has been correct in its approach and has done a very good job. Certainly, the last jobs number showed the unemployment rate went up. The Fed would have liked to have cut rates, but they didn't have the data at their meetings, so it's not a terrible thing in the economy when you have to wait a couple weeks to do the thing you want—the economy doesn't move so rapidly. That is a problem.
The beginning of the rate cutting cycle is much more predictable. Will it be 75 basis points this year, or 125 basis points this year? Those are the types of questions and it depends on the economy.
The much harder question is where will rates end up at the end of this process. My guess is that they'll end up at something like 3.5%. That is higher than they were before Covid. The neutral interest rate has gone up for a variety of reasons, including public debt is up, businesses have increased their demand for investment quite a lot, and there's been some diminishing of inequality which results in stronger consumption growth.
Overall, I think it's unquestionable that the neutral rate is higher than it was five years ago. The question is how much higher? For nominal interest rates, we used to think about 2.5% was neutral. I think to say it's gone up about a percentage point and so now at 3.5% to me seems like a completely plausible answer to that question.
Will the start of the cutting cycle stretch the last mile of disinflation? Is there a risk of inflation resurging or never going back to the 2% target during that process?
There's always risks of everything in the economy, and what the central bank needs to do is balance risks. So, cutting rates is partly saying that they think the risk of recession is greater than the risk of continued inflation.
The other thing to understand is they can always stop the rate cuts if they need to. Just because they start in September doesn't mean they need to continue. I expect them to continue, but if my optimism about inflation is wrong and we see a lot of resurgent inflation, then they'll stop the rate cuts.
After the first rate cut, interest rates are still contractionary. Right now, the federal funds rate is between 5.25-5.5%. If that's lowered to 5%, that'll still be a pretty tough, contractionary interest rate. Moreover, we have seen all this weakening in the labor market that we've discussed that will affect inflation not just now but over the next year with a lag. So, I think the risk of prolonging the inflation at this point is very low. We're still at a very restrictive stance for interest rates.
Looking back on this inflation cycle, the Fed moved late because it thought inflation was transitory in the beginning. Then in December 2023, it shifted its tone of communication from focusing on disinflation to striking a balance between inflation and the economy, which was considered a sudden shift and a premature rate cut guidance, and disrupted the market. How do you explain the Fed behaving like this?
In the end of 2021 and the beginning of 2022, the Fed flat out made a mistake. They were way over optimistic relative to the data. They kept trying to explain away what they were thinking. They were too slow in wanting to adjust and they got months behind the curve.
If they hadn't made that mistake, the trajectory of inflation still would have been quite similar. The massive fiscal impulse and the supply dislocations in combination would have resulted in much higher inflation no matter what the Fed did. But yes, they absolutely got months and months behind the curve.
Since then, they did an incredibly impressive job of catching up. They raised rates much more quickly than I could have imagined in the year of 2022. They continued to do that in 2023, even when some cracks started to emerge in the financial system.
And then they followed the data, which looked better at the end of 2023, so they did what they should have. They did not cut interest rates. They did not start to make a change, but they signaled the change might be coming. Then the data turned again, and they said, well, we thought we could be in a position to cut interest rates, but it turns out we're not going to be able to, and those rate cuts got postponed by about six months.
You're not talking about very big differences in the trajectory of rates, and I think what you've seen over the last year and some of the back and forth is just the normal back and forth you get as surprising economic data comes in. It's very different from the very predictable high inflation we had in 2022.
With Jackson Hole just around the corner, what do you expect Chair Powell to say?
I think he will emphasize both sides of the Fed's mandate. He'll talk about the inflation job is not done yet, but will shift to a greater tone of concern around the job market and making it clear that the Fed will do whatever it takes to ensure that the United States doesn't go into recession, or minimize whatever pain resulting from that recession. So, you'll see some tilt in language towards the employment side of the mandate and the importance of that going forward.
Some of the traditional models and indicators have dysfunctioned in this economic cycle. For policymakers and economists, what are the good and bad things about data dependence?
No one likes data dependence, but I don't think there's any other choice. I mean, the alternative is that you just keep moving in a certain direction even if the data changes and says you don't move in that direction.
The economic data is always confusing. It's been more confusing lately. A lot of that is we've had a huge surge of immigrants into the United States. Those are not measured in the data nearly as well as other aspects of our economy, and it's wreaked havoc with all sorts of economic statistics. We've seen some unusually large revisions in some of the numbers as well.
So, what the Fed needs to do is to be data dependent, but it shouldn't depend very much on any one data point. You get one bad inflation print, you don't panic; you get one good inflation print, you don't celebrate. You wait until you get a pattern of a couple months.
That's why the Fed, notwithstanding all the complaints about its data dependence, hasn't changed interest rates for well over a year at this point, because even as the data moves this way and that way, it hasn't been enough and it hasn't been convincing enough for them to change rates.
Do you think it’s necessary or possible to reconstruct more stable and reliable models or frameworks in the current economic cycle?
I think there are some better ways to understand the economy. One of them that I've talked about already is don't just look at the unemployment rate, but look at the combination of job openings and the unemployment rate.
There are better and worse ways to read the inflation data, and we're getting a slightly better understanding of what are the best ways to separate out the signal and the noise in the inflation numbers.
There are better and worse ways to read the GDP statistics. For example, subtracting volatile categories like inventories lets you focus more on the underlying signal in the data rather than the noise. That's something that's been understood for quite some time now.
So, you can always try to do signal extraction and discard noise. We've gotten a little bit better at that, but the noise is doing pretty good job of keeping up and almost increasing. So, it's like an arms race. We get better at extracting the signal, while the noise gets bigger, and the whole result is imperfect, and that's just something you have to accept and work for them.
How do you think the US inflation and Fed policy will be influenced by who is going to move into the White House next year?
Chances are whoever moves into the White House will not change what the Fed does, because the Fed is very independent. There is a 14-year term for the governors; the presidents of the regional Federal Reserve banks are not even appointed by the president, and the president can't tell them what to do.
When I say chances are, I think what I just said is 100% chance of being true if we have a President Harris. She'll appoint excellent people to the Fed and they will do whatever it is they think needs to be done without checking back with the president.
President Trump has said he does not believe in the independence of the Federal Reserve. When it comes down to it, he probably will not act on his belief. The stock market would fall quite a lot if he tried to do what he says he wants to do on the Federal Reserve. But I think there's more of a risk that the Federal Reserve loses its independence under President Trump. So, I would not put what I said about its independence at 100% chance. If we have a President Trump, it would be something lower than that.
But still, most likely, no matter what happens (the Fed is going to maintain its independence). We've had a lot of different presidents over the decades, and the one thing that stayed constant for 50 years now is the very strong independence of the Federal Reserve.
How do you foresee the trend of US Treasury yield and the US dollar index in the second half of the year?
The dollar is usually no good reason to predict. It's going to go up or down, so I'm going to go with “staying the same”. The United States is going cut interest rates at a faster pace than some of the other economies in the world, but that's already predicted and baked into the numbers, and shouldn't affect things.
What could affect the dollar is the election and President Trump if he wins. Although he said he supports a weak dollar, he has a fiscal expansionary program. So, I think his winning will actually make the dollar stronger, whereas Harris’ winning would make it a little bit weaker relative to the expectations built into the market. But for the most part, I expect it to be about the same.
On the US Treasury, certainly, short rates are going be coming down, because they follow what the federal funds rate is, and we've talked about how the Fed is going be cutting interest rates.
The 10-year Treasury yield right now is at about 3.8%. That is where I predicted about a year ago it would roughly be. Over the next decade, I think there's more room for that to move up from there, then there is room for that to move down from there. But there's no reason over the next six months to have any view that the market has some predictable direction of travel.
How do you think the evolvements in the US economy and policy environment will influence the world economy and global markets?
Far and away, the most important question on a timescale beyond the six months to a year that we've mostly been discussing is what happens to productivity growth.
The biggest possible upside in productivity growth is the extraordinary amount of innovation in artificial intelligence (AI), which is really being led by two countries in the world right now, by China and by the United States.
The advances in the United States in the foundational models are just stunning and way past the pace that anyone expected. But businesses still haven't figured out exactly how to use and adapt those models and put them into practice in their everyday businesses. There are lots of experiments that businesses are making, and there are lots of effort that's going into translating it. I'm doing the same in my classroom, trying to build a digital tutor for economics that my students can use that's customized to my very particular class. But so far, that's required some time and effort on my part. But there's no output yet—the tutor isn't up and running.
So, for me, the biggest way the United States is going to affect the global economy is if we figure out some of this AI—not just the foundational models, but also the applications, how to deploy it in business, and how to change the way you do everything with it—that will be an enormous benefit to the global economy. You'll get higher growth.
And in a world of higher growth, maybe you have somewhat lower tensions and concerns about populism by countries around the world. In the short run, maybe there will be a little bit less pressure on inflation, which we've been talking about. It's almost like a free lunch that solves all problems.
To be clear, I'm not sure this is going to happen. I'm not sure we're going to be able to figure all of this out more than anyone in the world will. But it's a huge upside risk that we have right now and one that's very exciting to think about.
With the Bank of Japan’s normalization underway, recent developments in the US and Japanese economy has triggered a global market meltdown earlier in the month. With major economies diverged on monetary policy, what suggestions do you have for emerging market economies?
One thing that emerging markets sometimes like to complain about is policy in the advanced economies, and I get that. It spills over all over the world. But complaining never does anything good for anyone, you have to take it as given, try to predict what it is and do the best with it.
People were worried that the United States’ rapid increase in interest rates would create problems for emerging markets around the world, but it didn't. And the reason is that emerging markets were raising interest rates, and they raised interest rates not because the United States did, but because of their own reasons. They themselves were coping with inflation. They had to raise interest rates. This, by the way, is most emerging markets, as China was in a different position for a variety of reasons, but many other emerging markets.
As a result, what we saw was a global increase in interest rates. Now inflation has come down in lots of emerging markets. They're going to be in position to lower interest rates at the same time the United States is. And so, whenever you see the global cycle synchronized, those spillovers aren't much of an issue to handle.
Japan and the United States have been out of sync in that the United States and Europe are in the process of cutting rates, while Japan is still raising interest rates, and that has created something trickier. But frankly, it's trickier for investors in the stock market, bond market and currency markets than it is for any actual workers or macroeconomy. And I don't think it's the job of any central bank to make the stock market go up. The job of central banks is to get inflation and the economy under control. And I think that's what you've seen in central banks around the world.
Do you have any other important insights to share, as additions to our discussions above?
I think another just important thing, not on the time horizon of six months, but on the time horizon of six years or 60 years, is how integrated the global economy is.
The degree of economic integration been enormously beneficial to both emerging markets and to the United States. You have economic integration with trade and flows of capital, ideas, and people. The more that we're in a position to maintain and even expand and build on that, the stronger the global economy will be in the coming decades.
But of course, globalization is always under a certain amount of threat. Not everyone loves it at every point in time. Even when you say you love it, maybe you don't fully practice it. And so that's a big wild card and question for the economy in the coming decades.
As a member of the Bund Summit’s international advisory council, you have contributed superb suggestions to the agenda, as well as very valuable insights with your speeches and roundtables at this event. This year will be your fourth appearance at the Summit, and the first in person. We wonder how you feel about this event over the years, and what are your expectations for this time, and maybe beyond?
As I said, globalization is really important. It's important to have mutual understanding in order to foster that globalization. And the Bund summit brings together just an incredibly impressive roster of global economists with economists in China. So, I'm really excited and think it plays an important role and happy to make a small contribution myself.
