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So, US markets closed lower after President Trump threatened to slap a 35% tariff on Canada. The Dow fell nearly 300 points. Nonetheless, US markets have been on a run recently with the major indices routinely closing at record highs. Now, meantime, JP Morgan Chase CEO Jamie Diamond says investors underestimate the possibility of interest rates going higher.
Diamond told an event in Ireland that there is a 40 to 50% chance the Fed will raise rates. He also warns that the EU is falling behind the US economically. Alan Blinder is a former vice chair of the US Federal Reserve. He's now an economics professor at Princeton University. And we are so happy to have you on the show as we continue to try and figure out um what is really going on with this economy.
We will begin in fact uh with the issue of the interest rates. As much as the president continues to push for them to go lower, Jerome Powell has been very clear that he is still worried about inflation. What do you think? Do you think he's right to be worried about inflation? Yes, I think he's right to be a little bit worried.
I don't think he's apppoplectic about it. And I think if he was going to give you his honest guess, they're not going up. But it is a possibility. And the the possibility is governed largely by the tariffs, their magnitude and their timing, and also by something that's getting a lot less attention, which is the squeeze on the labor force caused by this immigration crackdown.
These police tactics that we're seeing on the streets of uh America are ugly, but they're also diminishing the labor force. both the people that are taken into custody and the people that are afraid to go to work and this was predicted and at the same time that certainly distorts what go is going on in the American economy but could also bring up u wages for labor as well.
Yes. Yeah. That I mean that that's the good side of it but I mean the good side is being uh obtained by some very bad behavior. But yes, you cause a labor shortage and you bring up wages. In terms of where the the tariffs stand now, and let's be clear, we don't know where they're going to be in three or four weeks.
The the markets have been very calm about this, but do you believe that, you know, a lot of the backwardlooking data about this, the fact that unemployment is fine, inflation is in check, what do you think we're going to see in quarter three and quarter four? Well, I think the what you said is very gerine.
We're starting off now uh with the economy in very good shape both on what we call the real side that is jobs and GDP growth and things like that and on the what we call the nominal side which is the inflation rate. Now, it's not yet down to 2%. And the worry is it's going to go up, not down, because of the tariffs.
But right now, we're in a very good uh position. I, you know, I think you can't do this, but if Jay Powell could call a halt and say, "Let's freeze the frame right here and keep it this way forever," he would do that. He can't do it, of course. In terms of what the Trump administration is already doing with tariffs, the Treasury announced a surplus, a substantial one, and some of it uh certainly thanks to the money uh the United States is collecting over tariffs, obviously taxes by another name.
How do you see that outlook going uh in the next six months? Well, there will be revenue from tariff. Not nearly as much as the administration thinks. I don't Well, I don't know what they think. They change the tariff schedules about three times a day. So, I don't know what they think, but let's not forget that a very large tax cut was just uh enacted and signed into law by the president.
That's going to dwarf the tariff revenue. Okay. You're used to this. You're an experienced soul. Um, if I had to put you on the spot given your prior position, what would you do if you were Jerome Powell? Would you keep interest rates as they are or would you lower them in the months to come because you know that US consumers whether you have a car loan or a mortgage or a student loan right now they are suffering?
Yep. I would keep them where they are for now. Now how long for now will mean depends on a lot of things including especially the tariffs. It's not impossible, as we said a few minutes ago, and as Jamie Diamond said, although I wouldn't give it a 40% probability, that the next interest rate move will be up.
I doubt that. I think the next interest rate move will be down, but it's not a lead pipe cinch because of the tariffs. And let's not forget, as Jay Powell and the his colleagues on the FOMC are not forgetting, the last big mistake they made was to be too slow on the draw as inflation rose after CO. They remember that and they don't want to repeat the same mistake twice.
And Jerome Powell continues to describe inflation as sticky. So, uh, we will watch and wait what happens. Alan Blinder for us. Thanks so much. Appreciate it.
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