The path of US inflation hinges on the future of the Federal Reserve, with leading Harvard economist and former Obama administration Council of Economic Advisers chair Jason Furman warning that another variable for inflation is whether the central bank can remain independent.
“Look, the policies matter; you tell me the average tariff rate and I’ll give you a prediction for inflation,” Furman told the Top1000funds.com Fiduciary Investors Symposium.
“[But] my prediction for inflation five to 10 years from now is: is the Fed independent? Then it’s 2 per cent. Is the Fed not independent? Then it’s much higher than 2 per cent. That’s where you need something institutional on that time horizon.”
The newly minted Fed chair Kevin Warsh may soon be forced to make an interest rate call against the wishes of President Donald Trump, who appointed him to the position. With strong US employment numbers and high oil prices amid on-and-off operations across the Strait of Hormuz, the bond market is pricing in rate increases before the end of the year.
Furman said the major inflationary pressures are tariffs, the Iran war and demand for data centres – most of which are transitory.
“Tariffs [are pushing up inflation] probably half a point to one point… Iran a similar amount, even more for headline [inflation], less for core,” he said.
“Data centres also turn out to be both overall turbocharging demand in the economy, but then very specifically the prices of chips and computer components has been playing a disproportionate role in the increase in the PCE inflation that we’ve seen lately.”
Furman believes that the institutional integrity of the Federal Reserve will hold up, and that, despite being the root of market madness, Trump has a “reaction function” – demonstrated in the aftermath of Liberation Day, where he backed down from a slew of tariff threats due to the reaction of the bond market.
“He cares to some degree about markets, to some degree about his peers, to some degree about the Senate, to some degree about certain news channels,” he said.
“I don’t know exactly what it is he cares about… but in retrospect, I think it was about a week before they started to dial back a little bit and have Bessent send some signals [to the market]. So that reaction function is important.”
Still, the Fed could be in serious trouble if it comes under attack across a sustained period – even several administrations, Furman said. This is different to the short-term pressures the institution and its individuals are under, including Trump’s move to fire Fed governor Lisa Cook by suing her for mortgage fraud, which is being warded off by the US Supreme Court until it has heard oral arguments in the case.
“I don’t think there is anything Donald Trump could do over the next two and a half years to really put much of a dent in the independence of the Fed. The court would stop him. There are 12 FOMC voters, he only gets to nominate one more,” Furman said.
“If you put a six-year effort into it – concerted effort by two presidents in a row – I think there’s almost nothing that could defend the Fed, because you could eventually appoint enough people that they could replace the other people, and you could make it over.
“How much do we see someone following with a similar approach that is maybe even more effective and sustained, and with a higher level of attention to it? In that sense, I am nervous.”
Warsh, who spoke at the Top1000funds.com Fiduciary Investors Symposium in 2025 shortly before he was appointed to lead the world’s most powerful central bank, has the political acuteness to handle various government stakeholders, but has another challenge, Furman said.
“The challenge he’s going to have there is… he’s A-plus at criticism, and sort of incomplete, which would be the polite word, on what his alternative is,” he said.
“If he has good constructive ideas, he will be able to bring about change, but he needs actual ideas, not just the things he doesn’t like.”