CGTN Europe interviewed Miles Cary Leahey, Professor of Economics at Columbia University
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00:00Miles Carolehy is a professor of economics at New York's Columbia University.
00:06Trump's advisors told him he was on the brink of really crashing down the whole house because of the behavior of the treasury market,
00:14which was even to them more scary than what was going on in the equity markets.
00:17So I think what we should take away from all this is that, one, there is effectively going to be about a 10% tariff on just about every nation,
00:24with additional focus on two areas, the first we just already mentioned, which is a tremendous focus on China and disentangling the U.S. from China.
00:33And secondarily, there are higher tariffs on the U.S. automobile business, which is tied globally,
00:38but particularly here in the United States with Mexico and Canada.
00:42So the market treats that as a tremendous relief because it could have been a lot worse.
00:47And I think they were banking on where they are today is about where they thought they'd be about a week ago
00:52with a 10% blanket tariff and mainly just focus on autos and China.
00:58And if you're right, what does all of that mean for short-term and long-term inflation?
01:07Well, most people like me who are trained as economists would argue that the tariff effect would be a one-time impact on the overall price level,
01:15so inflation would rise, it would be temporary.
01:16But the worry for people like me and you and particularly at the Federal Reserve is that could become more permanent
01:23as it rolls its way through the costs in the system, particularly on wages.
01:27So if a one-time tariff increase leads to higher wages down the road, it could take you 18 months to two years to figure all that out.
01:34So a one-time effect may become more permanent or at least rolling out slowly, which would make things much more difficult.
01:41But I think most people are thinking that, at least on the U.S., the impact on inflation, where we stand exactly today, is probably well under 1%.
01:49So a 2.5% inflation rate may be over the next year about 3.5%.
01:53And, of course, it isn't just about the United States, is it?
01:56I mean, how do you see these tariffs impacting inflation and growth abroad, particularly in export-heavy economies?
02:04They're going to have a major issue.
02:08There's always this question of who's going to bear the tariff.
02:11And if you assume the exporting nations will bear most of that tariff,
02:15it's going to mean that they'll have to raise their prices to cover some of the costs, which is obviously inflationary,
02:21and they're going to lose some business.
02:23So the impacts on export-heavy businesses, particularly China and others in Asia, are quite severe.
02:28But I would argue that if this tariff for a country like Vietnam stays at below 10% or 15%, that's manageable.
02:35It's bad, but it's still manageable.
02:37But anything over that, over 20% affected tariff, would be a major problem and probably a recessionary-like shock.
02:44I wonder how the tariffs, however they end up, I wonder how the tariffs complicate the Fed's usual inflation-fighting toolbox.
02:55Well, the Fed has gained great credibility over the last 30 years in keeping the inflation rate down.
03:01But generally, when push comes to shove and the labor market softens a lot, and it certainly hasn't softened yet,
03:07the Fed would switch gears.
03:09So if you look at one potential episode, the 1973 OPEC-1 oil price shock,
03:15the Fed flip-flopped between worrying about inflation, then worrying about growth, and then worrying about inflation.
03:20So they're not in a good place right now.