Introducing

Ethan Harris

Ethan Harris has a Ph.D. in Economics from Columbia University and was the Head of the Domestic Research Division at the NY Fed. He was Chief US Economist at Lehman Brothers from 1996 to 2008 and Head of Global Economics at Bank of America from 2009 to 2023. Currently he is the author of the blog Ethan on the Economy.

Publications by Ethan Harris

• USA| Aug 25 2026

  No Free Lunch for the Fed or the Treasury

  A surge in productivity growth could solve a lot of problems. It would mean higher government revenue and, combined with spending discipline, lower the budget deficits. Indeed, it is the centerpiece of Treasury Secretary Bessent’s deficit reduction plan. It could also mean easier Fed policy: if productivity increases are not matched by higher compensation growth, unit labor costs and inflation weaken, allowing the Fed to ease rather than hike. This was Warsh’s argument for rate cuts early this year (and he continues to talk about how great productivity is).

  The case for and against a surge

  Both Administration economists, and Warsh during his campaign for Fed chair, argue that growth-friendly Administration policies and the AI revolution mean higher trend growth. Tax cuts, they argue, stimulate investment and labor supply, while deregulation increases economic efficiency.

  I’m skeptical for three reasons. First, we have seen this movie before, and it had a flat ending. Starting with President Carter and continuing with Reagan there was a major push for deregulation in the 1970s and 1980s. Indeed, it was much bigger than what Trump is doing. Reagan also implemented major tax cuts in marginal tax rates. Again, they were much bigger than what Trump has implemented.

  And yet, history shows there was no pick-up in productivity or trend growth during this period. With the benefit of hindsight, the CBO has good estimates of what happened to trend growth during and following the “Reagan revolution.” They show productivity initially rebounding from the 1982 recession but then fading for the rest of the recovery (chart). A sustained pick-up did not happen until the “new paradigm” technology boost, starting in 1995.

  In my youth, I co-authored a paper on The Supply-Side Consequences of U.S. Fiscal Policy in the 1980s at the NY Fed. We found early evidence that supply-side indicators, like investment, productivity and the labor supply did not respond to the policy changes. We then used a simple simulation model, to show that the crowding out of investment from surging budget deficits offset the benefits of lower marginal tax rates and deregulation. The CBO numbers confirmed those preliminary findings.

  by:Ethan Harris

  |in:Viewpoints
• USA| Jul 23 2026

  The Trade War Escalation and the Economy

  As expected, the trade war is making a comeback and will likely be as disruptive to the economy as last year.

  Trump Always Tries Again (TATA)

  For the last three months or so the trade war had been bumped out of the headlines. This is partly because courts reversed some of the Administration’s original tariffs, and partly due to the all-consuming focus on the Iran War. Meanwhile, behind the scenes the Administration has being doing the prep work for “Section 301” tariffs. These take time to implement because they first require an investigation to prove “unfair” practices.

  Those investigations are now bearing fruit. Not surprisingly, the Administration has defined “unfair” in the broadest way possible. Brazil has been slapped with 25% tariffs due to six kinds of practices: an unfair payments system, digital and tech policies, agricultural barriers, weak protection of intellectual property, and illegal deforestation. President Trump is has threatened a 100% tariff on countries that levy a tax on U.S. companies offering digital services, and a separate 100% tariff on generic pharmaceuticals.

  Several other fights have escalated. At the start of the month, the US decided not to ratify the USMCA, forcing new negotiations. The US is also threatening 50% tariffs on, Canada due to provincial bans on US alcohol, auto tariffs and quotas, and dairy restrictions. There is a bill in Congress that would give the President the power to put a tariff on any country buying Russian energy, including the EU.

  However, the biggest threat is being justified by “unfair” weak enforcement of labor laws. US trade officials have drawn list of 59 countries countries that either have weak enforcement of labor laws or trade with countries that have weak enforcement. The later means that a vast majority of US imports could be impacted by this definition of “unfair “ trade practices. The list includes Australia, Brazil, Canada, the European Union, India Japan, Mexico, Norway, Singapore, South Korea, Switzerland, and the UK. The irony here is that by this definition the US should also be on this list because it trades with many of the same countries with weak labor law enforcement.

  Digging in for a long fight

  Not only is there a flood of actions in the pipeline, but there are three reasons to expect long, ugly fights. First, prior agreements have left a lot of unfinished business. For example, some included promises of big investment in the US, most of which hasn’t happened. Other deals are up in air due to similarly vague, hard to achieve demands or because the original US tariff threat no longer exists.

  Second, some of the Administration’s demands are simply unreasonable. Why would countries unilaterally accept tariffs based on “unfair labor” enforcement when the US has the same violations? In other instances, the US is effectively asking countries to ruin their economy by out-source key domestic industries—like Canadian autos or Taiwanese chips—to the US. It is also a violation of the balance of payments identity for US trading partners to both reduce their trade surplus and increase net capital flows. The two move up and down together as the capital flows finance the deficit.

  Third, leaders in other countries are under intense popular pressure to push back against US demands. They’ve seen that acceding to US demands only encourages more demands. Surveys from Pew Research show the dramatic drop in outside views of the US (chart), As the last two columns show, the median view of the US is now worse than the median view of China! Canada has taken the lead in pushing back against the US, but Europe is close behind. The upshot is that new negotiations will likely be even more intense than last Spring.

  by:Ethan Harris

  |in:Viewpoints
• USA| May 20 2026

  Warsh and the Bond Market Vigilantes

  Warsh and the bond market vigilantes

  The recent bond market sell off is a reminder of the many risks to the market, including Warsh’s appointment as Fed chair. The market is justifiably worried about three of Warsh’s main policy views: (1) productivity growth will solve the inflation problem without help from the Fed, (2) the Fed should be selling off most of its bond holdings and (3) the Fed should be focused on the weakest of the core inflation metrics—the “trimmed mean” PCE deflator.

  Independent, but in agreement

  President Trump has made it abundantly clear that he wants lower interest rates. Indeed, he has said he will not appoint a Fed chair who does not believe major cuts in the funds rate are warranted and he expects the Fed to cut under Chair Warsh.

  Last month, Bessent offered a more flexible message to the Fed. He noted the uncertainty around the Iran war, saying “if they [the Fed] want to wait for some clarity, I understand that.” Indeed, “we should wait for the new chairman, Warsh, and let him lead the next cycle.” Looking ahead, he said, “the conflict will end, prices will come down, and then headline inflation will come down.” This suggests a short honeymoon period for Warsh, followed by a string of rate cuts.

  In his campaign for the Fed chair, Warsh has been adamant that he has independently arrived at a similar conclusion. He does not want to lower rates because the President wants it, but because economic fundamentals warrant lower rates. Specifically, he strongly supports two arguments. First, the Fed does not need to hike rates to bring inflation down. Quite the opposite, surging productivity will not only solve the inflation problem, but demands that the Fed cut rates to accommodate .

  Second, he argues that any upward pressure on inflation is transitory. Indeed, in his testimony, he argued that the Fed should shift to the “trimmed mean” PCE as its preferred measure of core inflation. This metric strips out the components with both the highest and the lowest inflation. In March, the year-over year increase was just 2.4%, and much lower than other metrics (chart).

  by:Ethan Harris

  |in:Viewpoints
• USA| May 01 2026

  US Inflation: the Fed has more work to do

  The surge in inflation in March is likely to be repeated in April and will continue as long as the Straits of Hormuz remains closed and energy inventories get tighter and tighter. The FOMC and its prospective new Chair have some work to do if they want to restore the Fed’s anti-inflation credibility.

  The Cleveland Fed publishes a “nowcast” for the next CPI and PCE inflation releases. For the core they simply extrapolate the recent trend. However, for food and energy they look at actual daily data and hence they get a good estimate of what headline inflation will look like.

  https://www.clevelandfed.org/indicators-and-data/inflation-nowcasting

  Recall that the consumer price survey is taken over the course of the month. Hence it reflects average prices rather than end-of-month prices. This is important today because food and energy prices rose over the month of March. Hence as the chart below illustrates, the CPI for gasoline will be higher in April than in March.

  by:Ethan Harris

  |in:Viewpoints
• USA| Apr 24 2026

  Energy Shock, What Energy Shock?

  While the press is filled with stories about the biggest oil supply shock ever and crippling gasoline prices, the economic data look fine so far. Nonetheless, I’m getting more, not less, worried.

  So far, so good

  The business press is loaded with stories about how the rise in energy (and related) prices is a huge shock to the economy. There are endless articles about how $4/gal gasoline prices are devastating to households. And perhaps warning comes from none other than the International Energy Agency. They are all over the press arguing that this is “the largest supply disruption in the history of the global oil market.”

  And yet, seemingly miraculously, the US economy seems fine. Most March indicators were solid. Payrolls surprised to the upside and jobless claims remain low by historical standards. suggesting low layoffs. The various purchasing managers indexes are healthy. The only ugly data is the chronically weak consumer confidence surveys. Overall, trendlike growth of 2% or so seems to continue. What gives?

  Time

  The first thing to note is that there are lags between the onset of the shock and the impact on the data. It takes time to change behavior—people tend to look through temporary shocks. Moreover, current data releases measure where the economy was in the middle of March. April data should show some (small) impact.

  A small shock so far

  Despite the warnings from the IEA, so far this is a small shock by historical comparisons. It makes no sense to measure an oil shock looking only at the peak amount of supply disrupted. The duration of the disruption is more important. It is the cumulative amount of oil taken off the market that matters. A short disruption is cushioned by inventories and the consumer response to a short price spike will be small. The size and duration of today’s price shock isn’t even close the recent Russian shock, let alone the 1970s oil shocks (chart).

  by:Ethan Harris

  |in:Viewpoints
• USA| Apr 13 2026

  The Trump Economy, One Year In

  The US economy is neither in a “Golden Age,” as Trump supporters argue, nor is it regularly flirting with recession, as Trump critics argue. In reality, Administration polices have contributed to “stagflation”—a combination of below-trend growth combined with persistent above-target inflation. An even bigger test lies ahead, with a significant risk of a major energy shock.

  Presidential report cards

  In comparing Presidential regimes, a common approach is to average growth and inflation over the four years in office. Of course, this ignores other drivers of the economy, and the lagged effect of policies from the prior President.

  Trump’s Presidency is different. He took “ownership” of the economy out of the gate, with sharp shifts in economic policy. In the process Congress was largely sidelined and Fed policy became secondary. This has been Trump’s economy from the get-go.

  Let’s briefly look at how five kinds of policy shifts—trade, immigration, tax cuts, deregulation and war have impacted the demand and the supply-side of the US economy.

  Demand damage

  The impact of Administration policies on spending and demand has been mixed. The good news is that income tax cuts tend to stimulate consumer spending and corporate tax cuts tend to stimulate investment. Unfortunately, these positive effects have been canceled out by the dramatic increase in consumer and business uncertainty.

  The chart below shows a news-based measure of policy uncertainty from Bloom and others. There has been a massive spike in policy uncertainty in general and trade policy uncertainty in particular. The later is much higher than during the first trade war. This has put sand in the gears of the economy, with firms reluctant to hire and invest and households reluctant to spend. This is one of the reasons why business investment, outside of data centers, has remained weak and manufacturing jobs have declined.

  by:Ethan Harris

  |in:Viewpoints