Top Trump economic adviser explains why the Fed should cut rates despite the strong jobs report

Key Concepts

September Jobs Report: A strong report showing significant payroll growth, but a slight increase in the unemployment rate.
Payroll Growth: Increase in the number of jobs.
Unemployment Rate: Percentage of the labor force that is unemployed and actively seeking work.
Labor Force Participation Rate: Percentage of the working-age population that is either employed or actively looking for work.
GDP (Gross Domestic Product): The total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period.
Federal Reserve (Fed): The central banking system of the United States.
Interest Rates: The cost of borrowing money.
Tariffs: Taxes imposed on imported goods.
Affordability: The ability of consumers to purchase goods and services.
Inflation: A general increase in prices and fall in the purchasing value of money.
Fiscal Responsibility: Managing government spending and revenue in a way that avoids excessive debt.
Supply-Side Tax Cuts: Tax reductions aimed at increasing the supply of goods and services.
Government Shutdown: A situation where non-essential government functions cease due to a lack of congressional funding.
Federal Reserve Independence: The principle that the Fed should be free from political influence in its decision-making.
Sound Money Policies: Monetary policies aimed at maintaining the value of a currency.
Reconciliation Package: A legislative process in the U.S. Congress that allows certain budgetary measures to be passed with a simple majority vote.

September Jobs Report Analysis

The September jobs report exceeded expectations, with payrolls rising by 119,000. While the unemployment rate saw a slight increase to 4.4%, Kevin Hasset, Director of the National Economic Council, highlighted positive aspects of the report.

Key Points on Payroll Growth:

Education and Healthcare: Outsized growth was observed in education and healthcare sectors. Hasset noted this can be seasonal around September due to people returning to school, but also acknowledges a sustained trend of increasing demand for healthcare workers.
Construction Surge: A significant increase in construction employment was a notable highlight. Hasset linked this to the "big beautiful bill" and its provision for expensing factory construction, indicating that new factories are beginning to break ground, which is a positive sign for future economic outlook.

GDP and Economic Outlook:

Strong GDP Growth: GDP was running at approximately 4.2% in the third quarter, following 4% in the second quarter.
"Full Steam Ahead" Economy: Hasset described the economy as being "full steam ahead" and "about as good as an economy gets" prior to the government shutdown.

Unemployment Rate and Labor Force Participation:

Hasset explained two scenarios when analyzing the unemployment rate:

Decreased Labor Force Participation + Increased Unemployment: This is a negative sign, indicating people are becoming frustrated and giving up on job searches.
Increased Labor Force Participation + Increased Unemployment: This can be positive news, as it suggests more people are coming off the sidelines and actively looking for jobs.

The September report showed a significant uptick in labor force participation, which Hasset interprets as a sign that the strong economy is encouraging people to seek work. This, combined with construction job growth, leads him to consider it a "really strong report."

Federal Reserve Policy and Rate Cuts

The strong jobs report has made a December interest rate cut by the Federal Reserve less likely.

Pre-Report Context:

Previous Fed Stance: Two meetings prior, the Fed indicated plans for three rate cuts, which was largely priced into federal funds futures markets.
Conflicting Data: Between the last two Fed meetings, negative news emerged, including a government shutdown expected to reduce GDP growth by 1-1.5%, and a Consumer Price Index (CPI) report that was better than expected (lower than 48 Bloomberg forecasts). This data would typically argue in favor of a rate cut.

Hasset's Perspective on Rate Cuts:

Jobs Report Offset: Hasset believes the September jobs report is not large enough to offset the other negative news that would support a rate cut.
Fourth Quarter Headwinds: He anticipates strong headwinds for the fourth quarter, particularly due to the government shutdown, which occurred at an inopportune time, disrupting holiday travel and potentially impacting GDP.
Fed Pause Inadvisable: Hasset stated it would be a "very bad time for the Fed to pause" its current policy. He anticipates a slowdown in the fourth quarter before a potential bounce back next year.

Potential Fed Chair Candidacy and Federal Reserve Reforms

Kevin Hasset addressed the possibility of being named the next Fed Chair.

Discussions with the President:

Hasset declined to discuss conversations with the President, stating it's not something White House advisors do.
He expressed humility at being on the shortlist of candidates.

Priorities as Fed Chair:

Federal Reserve Independence: A high priority, ensuring the Fed is free from political influence.
Sound Money Policies: Implementing policies to maintain the value of the currency.
Data-Aligned Interest Rates: Ensuring interest rates are set based on economic data.

Critique of Current Fed Policy:

Hasset criticized past Federal Reserve decisions, suggesting they have been partisan:

Rate Hikes Under Trump: The Fed began hiking rates even before President Trump's inauguration and continued during the tax cuts, which he argues should have spurred growth without inflation.
Inflation Under Biden: He claims the Fed downplayed inflation under President Biden, calling it "transitory" and failing to act until after Powell's reappointment.
Surprise Rate Cuts: Hasset pointed to surprise rate cuts before the election, suggesting they were intended to benefit Kamala Harris.

Need for "House Cleaning":

Hasset believes "a lot of house cleaning needs to happen at the Federal Reserve" to restore its independence.

Affordability Challenges and Tariff Policy

The discussion shifted to affordability concerns and the administration's efforts to address them.

Wage Growth vs. Inflation:

Wage Growth: Wage growth was reported at a strong 3.8%, exceeding the inflation rate of 3%.
Public Perception: Despite this, 76% of voters view the economy negatively, and fewer than one in five believe inflation is under control.

Initiatives to Lower Tariffs:

Agricultural Products: The administration has announced initiatives to lower tariffs on beef, coffee, nuts, spices, and other agricultural food products.
Purpose of Tariffs: Hasset reiterated that the primary purpose of tariff policy is to onshore production and enhance U.S. economic security and job creation.
Exceptions: For items like bananas and coffee, where domestic production capacity is limited, tariff reductions are being considered as it's not the intent to create large-scale domestic production for these goods.

Impact of Inflation on Households:

Hasset provided stark examples of how inflation has impacted household budgets:

Mortgage Payments: The typical average mortgage payment has jumped from about $1,300 a month when President Trump left office to $2,500 a month due to inflation and higher mortgage rates.
Grocery Costs: A typical family's monthly grocery bill increased from around $400 under President Trump to approximately $515 under President Biden.

Path to Affordability:

Fiscally Responsible Plan: The administration aims to fix affordability issues through a fiscally responsible plan that reduces the deficit.
Income Growth: The strategy is to increase incomes significantly more than prices. Hasset cited that under President Trump, incomes rose by about $6,500 before the COVID shutdown, and they expect to outperform this in the future.

Potential Direct Payments and Fiscal Policy

The conversation touched upon the possibility of direct payments to middle and lower-income brackets.

Dividend for Lower/Middle Income:

President Trump has indicated consideration of a dividend of at least $2,000 for middle and lower-income brackets, which would require legislation.

Inflationary Concerns vs. Tariff Rollbacks:

Deficit Reduction: Hasset highlighted that the deficit has decreased by about $400 billion year-over-year due to spending reductions, tariff revenue, and high tax revenue driven by real growth.
Room for Support: With a projected $600 billion deficit reduction this year and a potential $6-7 trillion reduction over 10 years, Hasset believes there is room to provide more assistance to those in need.
Legislative Discussions: He anticipates discussions between President Trump and congressional leaders regarding potential reconciliation packages that could include such support.
Inflationary Risk: While acknowledging the potential inflationary impact of direct payments, Hasset contrasted this with the benefits of rolling back tariffs, which he sees as a more direct way to address affordability.

Conclusion

The September jobs report signals a robust economy, but concerns remain about fourth-quarter headwinds due to the government shutdown. Kevin Hasset advocates for a strong stance on Federal Reserve independence and sound monetary policy, criticizing past decisions he views as politically motivated. The administration is actively pursuing measures to improve affordability, including tariff reductions on agricultural products, and is considering further support for lower and middle-income households, balanced against fiscal responsibility and potential inflationary impacts. The overarching goal is to drive income growth significantly above price increases to solve pocketbook issues.