Markets 'Terribly Wrong' to Price in Rate Hike: Hassett

Key Concepts

• Supply-Side Economics: An economic theory arguing that economic growth is most effectively created by lowering barriers for production (e.g., tax cuts, deregulation, and investment incentives).
• Phillips Curve: An economic concept suggesting an inverse relationship between unemployment and inflation; the speaker argues this is not currently applicable.
• PCE (Personal Consumption Expenditures): A measure of the prices that people living in the United States pay for goods and services, used by the Fed to track inflation.
• Risk Premium: The return in excess of the risk-free rate of return that an investment is expected to yield; here, it refers to the volatility in oil prices due to geopolitical tensions.
• Expensing: A tax policy allowing businesses to deduct the full cost of investments (like factory construction) immediately rather than depreciating them over time.

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1. Economic Performance and Job Growth

• May Jobs Data: The US economy added 172,000 jobs in May, significantly exceeding market forecasts.
• Wall Street Forecasting: Kevin Hassett noted that even the most optimistic Wall Street analysts underestimated the job numbers by approximately 40,000, suggesting that current economic models—specifically those failing to account for supply-side dynamics—are outdated.
• Labor Market Participation: Contrary to previous concerns regarding immigration policy, the administration reports that native-born Americans are entering the labor market in large numbers, contributing to positive job growth.

2. The "Big Beautiful Bill" and Investment

• Capital Investment: The administration claims to have attracted $18 trillion in global investment. Advanced durable goods data showed a 3% increase in equipment investment in March.
• Construction as a Leading Indicator: While manufacturing job growth is currently modest, construction employment is surging. Hassett explains this as a direct result of the tax policy allowing for the immediate expensing of factory construction. The logic is that construction is the "leading indicator"—once factories are built, machinery installation and permanent manufacturing job creation will follow.
• Federal vs. State/Local Employment: While there was an uptick in government jobs (54,000), Hassett clarifies these are primarily state and local seasonal fluctuations. He emphasizes that the federal government has reduced its own workforce by over 300,000, framing this as a long-term tax saving for the public.

3. Inflation and Monetary Policy

• Oil Price Shocks: Addressing the 3.8% PCE inflation rate, Hassett argues that current inflation is driven by temporary oil price shocks rather than structural issues. He asserts that these shocks do not lead to lasting inflation because the public does not adjust their long-term inflation expectations upward.
• Fed Guidance: Hassett advises the Federal Reserve against raising interest rates, arguing that the current economic environment is a "supply-side boom" where high growth can coexist with stable inflation. He cites the 1990s under Alan Greenspan as a historical precedent for this phenomenon.
• Geopolitical Context: The administration views the current oil price volatility as a short-term disruption linked to negotiations with Iran. Hassett argues that once the threat of Iranian nuclear capabilities is neutralized, the "risk premium" on oil will decrease, stabilizing prices.

4. Wage Growth and Real Income

• Real Wages: Hassett disputes concerns regarding lower-paid service sector jobs by highlighting that real wages have increased by approximately $3,000 on average since President Trump took office. He maintains that wage growth is occurring "across the board."

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Synthesis and Conclusion

The administration’s perspective is rooted in supply-side economics, positing that tax incentives and deregulation are driving a "golden age" of investment. The core argument is that the current economic expansion is not a traditional "Phillips Curve" event where low unemployment inevitably triggers runaway inflation. Instead, the administration believes that by focusing on supply-side capacity (building factories and incentivizing investment), the US can sustain high growth without the need for restrictive monetary policy. The primary takeaway is that the administration views current inflation as a temporary, exogenous shock (oil prices) rather than a systemic failure, and they urge the Federal Reserve to prioritize growth-oriented data over traditional inflation-targeting models.