CNN One Thing

This is One Thing, I'm David Reind, and this is Justin Wolfers.

Our economic stability is quite literally on the line.

That's after this. Stick with us.

Now we have a man that just refuses to lower the federal debt, just refuses, and he's not a smart person.

President Donald Trump is not a fan of Federal Reserve Chairman Jerome Powell. Despite appointing him during his first term, Trump has been insulting him for months, saying he's hampering economic growth by not lowering interest rates.

Too late. I call him too late, Powell, because he's always too late. I mean, if you look at him, every time I did this, I was right 100%. He was wrong. Maybe I should go to the Fed. Am I allowed to appoint myself, Doug? I don't know. Am I allow to appoint my self at the Fed? I'd do a much better job than these people.

So for months, the question has been, will Trump fire Powell? Economics experts said that could set off a financial and perhaps constitutional crisis. Well, on Monday night, Trump fired a Fed official. It just wasn't Powell.

'Breaking overnight, he fired Federal Reserve Governor Lisa Cook. There is a word for how rare this is. Unprecedented. It has not happened in the Fed's whole 111-year history.

This comes amid signs that the impacts of Trump's tariff agenda are starting to be felt by everyday Americans. The term sneakflation is starting to get thrown around. So let's break down what that is and how this Fed firing could impact the entire economy. Justin Wolfers is a professor of public policy and economics at the University of Michigan. First of all, Justin, can you just tell me who Lisa Cook is and why Trump wants her out?

Lisa Cook was a professor just around the corner. I teach at Michigan, she's at Michigan State. She was appointed to the Federal Reserve by Joe Biden and President Trump, I think, wants her out because she's the one he thinks he can fire and he'd fire any of them if he could because the Fed's not doing what he wants and he, I, think is on a path to appoint loyalists rather than folks who would look at the economy in a boring, technocratic way that serves the best interests of the American people.

And there's these allegations of mortgage fraud, and there's a lot we still don't know here. CNN reviewed mortgage documents, which showed that Cook did take out mortgages for two properties, both of which were listed as her principal residence. It's not known why she did so or if she did it so intentionally. The issue was referred to the Justice Department. There's been no charges brought. And I should say, Cook said she's staying put, that she's not resigning, and that Trump has no authority to fire her. Do we know if he does have the authority to her?

He has the authority to fire someone for malfeasance. Can he, and there should he? Whether he can or not is up to the lawyers. Whether he should or not, is manifestly obvious. Attacking the Fed, an institution that helps our economy run a little more smoothly, and remolding it in his own image, is bad for your listeners.

And can you explain why getting involved in the Federal Reserve in this way is viewed as so extreme and so negative?

The basic idea is this. Presidents care a lot about what happens while they're president. They care a whole heck of a lot of what happens before the next election. But yours and my interests don't depend on the electoral cycle. Look, the idea here is actually a little simpler. Do you want monetary policy operated in the best interests of President Trump or the best interests or the American people? If you politicize the Fed, you get the former. And if you have an independent central bank, you got the latter. And actually, you get a bonus. See, here's a funny thing about the way the economy works. Expectations really matter. If people expect high inflation in the future, they start jacking up their prices right away because they're expecting their costs are going to go up. They're expecting that their rivals will raise their prices and so on. You can actually get a vicious cycle where the mere expectation of inflation creates the reality of inflation.

It's like a psychological thing.

'Psychological, economic, sociological, we can call it any-ogical you want to call it, David. But it's a vicious cycle and it's the self-fulfilling reality. Now this isn't a theory, this played out a decade ago under Turkey and we can learn from it.

When it comes to economic policy, we are following quite a different trajectory than the rest of the world.

So Turkey has President Erdogan, who has a remarkable number of similarities with President Trump. Both are strongman populists with an idiosyncratic belief in the power of low interest rates to cure everything.

The lower the interest rates, the lower the inflation will be. So this is my thesis.

And what happened was Erdogan ousted members of their central bank and installed loyalists, loyalists who would live up to the Erdogian economic theory, which is low interest rates are a good idea.

As expected by many, the Turkish Central Bank on Thursday lowered interest rates yet again.

That created the perception that inflation would rise, and that created the reality that inflation would rise. Inflation rose, and then the Turkish central bank, because it was committed to low interest rates rather than low inflation, actually added fuel to the fire, it kept interest rates low, which created further inflation.

A lot of Turks feel that they are getting poorer by the day. They are waking up to find their incomes, their salaries, their life savings, losing value sometimes on a daily basis.

Inflation in Turkey rose to 85%. You can see how we're actually on a path to following something very similar in the U.S. So our economic stability is quite literally on the line.

I know there's a lot we don't know about Cook's situation, but even if she stays on and maybe is at some point in the future removed after all the court challenges play out, do we have a sense of how that would impact things?

'Throughout that process, if the president continued on his current path, we would understand that the Fed is under attack, and we would understand that at some point the president or his successors may win, and therefore we would understand that our future monetary stability is not to be taken for granted. And so the possibility of disruption in the future can again create the reality of disruption today. What's astonishing? Is that what Trump wants, Trump's approach here is self-defeating on its face. So what Trump want, he's a low interest rate guy. He wants low interest rates. If you've got low interest, people will spend more. If people spend more, the economy runs faster. But what he succeeded in doing, this literally happened overnight, short term interest rates fell. That's because markets believe there's a chance that Trump will succeed and he'll succeed at installing a governor who'll vote for low interest rights. But long-term interest rates rose. And they rose because markets also understand there's a chance that Trump succeeds, ignites inflation and creates a whole bunch of future economic problems. Now the thing is what matters for factory investments or for housing investments or for construction of any form is long run interest rates. So Trump, in his campaign to lower interest rates, lowered the wrong ones, short-term interest rates and raised the ones that really matter, long-term interest rates. And so Trump is actually going to slow economic growth as soon as this year as a result of what he's already doing.

'We'll be right back. So you talk about the long-term view and then the immediate view of what's happening right now. So I want to ask about how consumers are experiencing Trump and his economic policies. Because I know these tariffs have been an on again, off again kind of situations really difficult for people that don't follow the news as closely as you and I do to follow. So I think it's worth checking in on the impact they're having on Americans. And so my question is, are tariffs raising prices for Americans?

Great, so let me separate actually your question into two parts. How are consumers doing and then what's going on with prices? Let me start with the former and David, bring me back to the latter. Okay. And then maybe I'll let you run the interview after that, how's that? Look, how are consumers going? Consumers are terrified. There's a range of surveys that ask people how they feel about the state of the economy. They believe that unemployment is going to rise over next year at enormously high rates. They believe inflation is going be higher. They believe their own incomes are not going to keep up. They are, without being prompted, mentioning tariffs as one of the most important things that's disrupting the way they're feeling about the economy. They believe recession or economic slowdown is fairly likely over the next couple of years. They believe now is not a good time to buy appliances and on and on it goes.

So the vibes are bad. Really bad, man. Well, so then the second part, what is happening to prices?

Okay, so as a simple matter of arithmetic, when you impose tariffs, one of three groups has to pay. Either it's foreigners, American businesses, or American consumers. So if it's going to be foreigners, which is what President Trump promised us, the thing to realize is that when Best Buy imports a washing machine from, say, Samsung, it will buy the washing machines from Samsung. That they'll arrive at customs. Best Buy cannot get that washing machine out of customs until Best Buy writes a check to the US Customs Authority. So that means at a literal level, like a legal level, Best Buy pays the tariff. But that's not how economists think. We like to think about how everything's connected. So the way that foreigners could pay this is if Samsung really wants to maintain market share, if now Best Buy had to pay an extra 100 bucks in tariffs, Samsung could cut the price of washers by a hundred bucks. That's how foreigners would end up wearing the cost of tariffs. The most important thing is realize foreigners can't pay the tariffs. They don't write the checks unless the way they do it is by cutting prices to Americans. Although, of course, Samsung could send its washing machines anywhere around the world, so why would they cut prices for Americans when they could just send those washing machines to Europe or Australia or Canada or somewhere else? In fact, we have a price index that tracks the price that foreigners charge Americans. For all imports. It's called the import price index. If Trump was right and foreigners were paying the tariffs, the import price index should have fallen 10% last month and by the end of this month, 18% to account for the full impact of the tariffs. They haven't fallen a penny. This is not a tariff on China. This is a tarif on Americans. Now, actually, Best Buy has one more choice, which is it can decide to raise the price of the washing machine. And this, of course, is a metaphor for all imported goods. We're seeing a little bit of that happening right now. We're saying the price of appliances rise, the price if furniture rise, but not at all by the extent to which tariffs are rising. So that tells us what's happening so far is that this is a hit to the profitability of Best Buy. And Best Buy here is a metaphor. We've seen earnings reports from Ford and General Motors and Walmart and so on, where they've been saying our profits have taken a, in some of those cases, billion dollar hit because we're paying higher tariffs and haven't passed it on. Realize that's always the case. It takes a while to decide whether to reprice something. So those companies now have all got their pricing groups actively thinking about what we can do. And in the long run, it's a law of gravity. If costs rise by a hundred bucks, prices rise by 100 bucks. And so at some point over the next few months, consumers are going to see much more widespread price rises for imported goods.

So this little by little price increase that you say is coming, my colleague Alicia Wallace wrote a great piece for CNN.com over the weekend and about a term I'd never heard before called sneakflation. Is that what you're talking about there?

I think some of it might be sneaky, but some of it might much more direct. I think consumers understand what's happening, and it's going to be something across the industry, so they're not going to need to sneak it. They're just going to charge you an extra hundred bucks for the washing machine.

Are these tariffs making money for the US, though, in any way? Because Trump has been touting a recent Congressional Budget Office report which showed his tariffs will reduce the federal debt by $4 trillion over the next decade. That sounds pretty positive, right?

'Okay, right, so let me put it in more familiar terms, which is tariffs are a tax on Americans. What you've just told me is when you raise a tax rate, you raise tax revenue. Absolutely. Completely and utterly. Taxes raise tax revenue. I mean, breaking news. Honestly, I was going to say my 12-year-old could figure that out, but truth is, he knew it when he was four. When you tax Americans, the American treasury gets more money. Now, let me go back a step because actually it's worth putting the pieces together here. Trump just passed a big budget, a big, beautiful bill. Which took an existing budget deficit and blew it out even further. And it did that by offering big tax cuts to the wealthy. And the claim from the White House was, I will make it up with tariff revenue. And yeah, they will make a lot of it up. But so what we're doing is effectively swapping taxes, the tax that hit the rich for one that hits working in middle-class America.

Well, so as businesses start rising prices more and more to a level where people can actually see it, is there anything consumers can do to keep up?

'That's actually the most important thing to understand here. We've had many episodes of inflation in American history. Many of us lived through it recently with the pandemic. Now, the way that worked was prices rose, and so therefore your boss had more money. What you were producing at work was selling for a higher price. Therefore, your boss found you more valuable in dollar terms. Therefore if you threatened to leave for a job elsewhere, your boss would offer you a pay rise. And in fact, what happened during the pandemic inflation, in fact through almost every inflationary episode in American history, prices rise and then wages rise to keep up. It doesn't feel that way. And sometimes it takes a year or two for wages to catch up. But eventually most people's purchasing power is unchanged. Now tariff inflation is different and enormously more costly. Because here prices rise, but they're rising because the boss has to send more money to customs. The boss has no more money to give you a pay rise. You are no more valuable to the boss. And so this is a case where prices rise and wages don't rise to keep up. Now understand how importantly different this is. So it may be during a normal inflation, prices rise 5%. Let's say 10%. Let's be dramatic. And it takes wages a year to catch up. That means you have one year of being 10% behind. Let's say this time prices rise 3%. But wages never catch up, or the rest of your working life might be 40 years. The total reduction in your purchasing power is 120% of one year's income rather than 10%. So by that very simple example, tariff-fueled inflation is 12 times more painful than regular inflation. I don't really expect inflation to rise through the roof. I expect it to rise, I expect to be noticeable, but what I expect is to be is much, much more painful.

Just because of the fact that the wages are not coming up, so...

Are never going to catch up. There is no reason for your boss to offer you a pay rise because the White House just issued a tariff. And so your standard of living, material standard of live in inflation adjusted terms remains lower forever, as long as the tariffs stay in place.

Well, Justin, thanks so much for the perspective. I really appreciate it.

Hey, man, I wish I could be here and be optimistic. So when there's good news, can you invite me back and we can just be happy, jolly, japesters celebrating America's extraordinary success.

I didn't want to underline it too heavily, but yeah, this was kind of a bummer.

It's an exciting time to be an economist because there's a lot to do, and it's a depressing time to become an economist, because everything that's being done is being done.

Well, regardless, I think our listeners, and me, appreciate the information one way. On Tuesday, after Justin and I spoke, Lisa Cook's attorney issued a statement saying he will be filing a lawsuit challenging Trump's attempt to fire her. Abby Lowell wrote, quote, His attempt to fire her based solely on a referral letter lacks any factual or legal basis.

No, she seems to have had an infraction and she can't have an inflection, especially that.

Meanwhile, in a cabinet meeting at the White House, Trump doubled down.

And we'll have a majority very shortly, so that'll be great. Once we have a majority, housing is going to swing and it's going to be great, people are paying too high an interest rate. That's the only problem with housing. We have to get the rates down a little bit. And when we do, it's gonna be a tremendous difference. The country is going...

That's all for us today. Thank you so much for listening. We're back on Sunday. I'll talk to you then.