Good evening. Good evening and welcome. I'm Heather Russell, executive vice president and chief legal officer of TransUnion. I also have the privilege of serving on the executive committee for the board of directors here at the Chicago Council on Global Affairs. So happy to have you all here with us in person and online. You know, it's an especially interesting moment to be talking about the economy. On one hand, inflation has come down significantly from its peak. Unemployment remains relatively low and the economy has continued to grow. And on the other hand, Americans are still feeling the strain of higher prices. Businesses are navigating uncertainty around trade and tariffs. Rapid advances in technology are reshaping industries faster than policymakers can respond. And at the center of many of these conversations is, of course, the Federal Reserve. The Fed's decisions influence everything from borrowing costs and business investment to hiring, consumer spending, and financial markets. But understanding the economy today requires looking beyond interest rates alone. It also means considering how global developments, technological change, and regional economic conditions shape the challenges facing policymakers. Those broader economic forces are reflected in communities across the country and few places illustrate them better than Chicago. As one of the nation's leading centers of finance, manufacturing, transportation, and innovation, this city offers a unique perspective on how businesses and households are responding to a rapidly changing economic landscape. We are extremely honored to have with us tonight Austan Goolsbee, the president and CEO of the Federal Reserve Bank of Chicago. President Goolsbee's leadership and expertise have helped shape both regional and national economic policy and we're looking forward to that continuing under new Fed Chair Kevin Warsh, who President Goolsbee recently characterized as a foxhole buddy from his years during the financial crisis. Joining him in conversation is Brent Neiman, the Edward Eagle Brown Professor of Economics at the University of Chicago Booth School of Business, whose work on international economics and public policy makes him an ideal moderator for tonight's discussion. Please join me in welcoming President Goolsbee and Professor Neiman to the stage.
All right. Well, welcome to everyone. Thank you for being here. And thank you to Heather for that terrific introduction. My name is Brent Neiman. I'm the Edward Eagle Brown Professor of Economics at Chicago Booth at the University of Chicago, and I'm a former emerging leader here at the Chicago Council on Global Affairs where I also now sit as a board member and chair our global economy roundtable.
I've emerged. That's right.
And couldn't be happier and more honored than to be on stage tonight with a former colleague of mine, Austan Goolsbee, who is currently the president and CEO of the Federal Reserve Bank of Chicago, which does many things. It conducts economic research. It monitors regional economic conditions. It supervises and regulates banks and bank organizations and provides financial services to banks and the US government. Austan also currently serves on the Federal Open Market Committee, which is the part of the Fed that makes interest rate policy, that sets interest rates. Now, prior to becoming president of the Chicago Fed, Austan was the Robert P. Gwynn Professor of Economics at Chicago Booth, which he joined in the faculty in 1995. He served also as a member and then chairman of the Council of Economic Advisers from 2009 through 2011 and was a member of President Obama's cabinet. So for tonight, we're going to start with a discussion. I'll ask Austan some questions. We'll have some back and forth. And after that, we're going to do a Q&A with the audience. All audience questions for tonight's program, whether you're watching remotely or whether you're here in the live audience, all questions should be submitted please through an online interface and the address for that is ccga.live. So if you want to submit a question, go to ccga.live. And that will then compile and when we get there I'll read through some of those questions. Lastly, I just want to remind everyone that today's program is on the record and any views by speakers that we host here at the council are their own views and don't necessarily reflect any institutional positions. With that, let's get started and welcome Austan.
You know, my claim to fame is I was right above the stairwell from Brent. You go down the stairwell, three offices in there, that's where he was. We almost wrote a paper together. Remember that? It just didn't work. We had the data, we crunched, and it just didn't.
Yeah, it was close. There's still time. So, you know, hopefully soon enough. So,
Okay. Thanks for being here, Austan. I want to ask you a bunch of questions about the current state of the world. But before we get there,
can we kind of zoom out and essentially just sort of set the stage? If you could give us a bit of a Fed 101? What's monetary policy? What's fiscal policy? What does the Fed do and not do? And how does that manifest in your life?
Okay. So monetary policy is the control of one interest rate basically. But the Federal Reserve System and the Federal Open Market Committee meet every six weeks in Washington. They vote on the Federal Funds rate, but it's basically about short-run interest rates. And economists think of it as the divine coincidence that the law gives the Fed the job to do two things when setting that interest rate: maximize employment, stabilize prices, which we have interpreted to mean get inflation to 2%. The divine coincidence is that most of the time when you're trying to maximize employment, it's the times when unemployment is high, inflation is low. And usually in the times when inflation is high, unemployment is low and they're overheating. And it kind of works because the most cyclically sensitive parts of the economy are also the most interest rate sensitive parts. So if it looks like things are overheating, then you raise the interest rate, kind of cools it down and you get inflation down. If it looks like you're teetering on the edge of recession, you lower the interest rate, you get more investment, you get more construction, you get more consumer durables purchase. That's what the Fed does on monetary policy. And that's gets most of the public attention. But Brent was right to raise there are other functions of the Fed. One is it's the lender of last resort. When everything goes wrong, the financial institutions can come to the discount window if they have good collateral and get us through a crisis, the various crises. We run a major portion of the payment system, the plumbing that underlies the financial system in the United States, wire transfers, ACH, direct deposit, the majority of that is going over the Fed rails. And then we're kind of a, as part of that, we're a bank to banks. And all the cash in the entire economy is printed by the Bureau of Engraving and Printing, but is distributed through the Feds. And we've got many tens of billions of dollars of cash sitting in the vaults down underneath in the way basement. And there's armored trucks coming in every day. And we're running it through machines and pulling out the counterfeit and the whole bit. And then we're major parts of our communities. When they set up the Federal Reserve Act in 1913, they were suspicious as people are today about the federal government controlling the entire monetary system of the United States with no input from the rest of the country. So they built 12 reserve banks from out in the heartland. And I at that time we were the West. I don't know. And so we come there, we're supposed to represent our regions, the seventh district, widely acknowledged the greatest of all the districts, but we're most of Michigan, Indiana, Illinois, Wisconsin, Iowa, 90% of that economy, kind of heart of the Midwest. And we play a key role in just getting out, talking to people, and hearing from them.
All right. So, we'll make sure to filter those questions out if any come. So, all right. The Fed's got a new chair. So, it was Chairman was Jerome Powell. Now, it's Kevin Warsh. He oversaw or oversaw his first FOMC meeting. This recent meeting in June where interest rates were held steady and the committee about half set expectations. They said that they thought that over the next year there might be rate hikes or the expected rate hikes. But leaving aside the actual interest rate decisions, is there anything that you can tell us about how you think the Fed might have a different style or leadership norms or operate differently under Warsh than was the case under Powell?
Some of the most obvious. Now, the rules of the committee are everybody's only supposed to speak for themselves, not speak for the committee, not speak for anyone else. And they're very hush-hush and secretive, as you might imagine, of what happens in the meeting. There's a federal blackout period surrounding the meeting and they drop the shade so nobody can see in the windows and it's like the situation room. You got to leave all devices outside of there. So I'm not going to tell you what what he said, but I will say it's obvious from the statement. Every time there's a decision comes with a statement and the statement this time was dramatically shorter and did not involve what we call forward guidance. So in the statements before Chairman Warsh, there would be the committee feels that it cannot cut rates until X thing happens, that it would kind of make a sort of a semi-forecast of what's on people's mind. Chairman Warsh has never been a public fan of forward guidance and he scaled the statement way down and that sparse statement that is purged of forward guidance has a bunch of the financial analysts like, ah what what does this mean? We're used to having more information. I'm sympathetic and was sympathetic before. I have always been uneasy with the use of forward guidance on a routine basis in the statement. I kind of don't like it, I think. And why? A couple of reasons: one, there are moments when forward guidance no question is useful like when we're hitting the zero lower bound and the rate is already to zero and now what do you do? Your options in monetary policy are quite limited. So when that happened, that's when they started creating forward guidance that maybe we could get all the rates to go down if we start saying we don't think we're even going to contemplate raising the rates above zero until we see XYZ happen. I described the purging of the statement a little bit like a caffeine cleanse that even if you like forward guidance, it still makes the forward guidance more effective if you're not drinking three cups a day every day. And that we kind of got into an element like that. The other more technical thing that makes and made me uncomfortable with forward guidance is there is a sentiment that goes let's not surprise anybody. The point of forward guidance is let the world understand what the reaction function is so nobody's surprised. Now, the problem with that is then there's a sentiment, well, we can't do anything until if we have the forward guidance, we got to go at least another meeting and take the forward guidance out before we actually do it. And if you get on that, you can just make yourself slow-footed and move too late. All of that said, I do think there's an element of any time the Fed says something that is a prediction, that's a speculation that ends up not being true. And it might not be your fault. It might be something happened. There was a war you couldn't have expected. But I think anytime you hear the Fed officially making a prediction that doesn't turn true, the credibility takes a ding. And that might not be a big ding, but that's what I don't like.
I think that's from business uncertainty. Businesses are like, we just don't know what the rules are going to be. So we're not going to get rid of any of these people, but we're not going to bring on any new people. We're just going to sit and wait.
You said uncertainty on the rules.
Yeah. Some on rules, some on tariffs — there's a lot of uncertainty across a lot of spaces.
If I'm right about that, it feels like these uncertainties continue. So we might see that environment for a while, but I could be wrong. It's not like the economists have this all sorted out — we're all debating this question. I do think though that the job market in my mind is stable without being good. It's not changing. Even the low hiring rate hasn't gone down — it's been flat. The low layoffs rate hasn't gone up — it's been flat. Unemployment is basically flat. So I think the job market is pretty stable. And just to make sure I got it, the idea is if there's a lot of uncertainty, you might sort of wait and see — you just hold off on some new decision.
Yeah. You don't decide to bring on new people. Now, in different sectors, of course, this isn't true. I have a son who's a coder. Look, there are layoffs in some sectors, but in the overall economy, I think it's been pretty stable and characterized like that.
All right. Then you just mentioned that your son's a coder, which certainly brings us, I think, naturally to AI. There's a ton of excitement about AI, a ton of investment pouring into it. But what I assume — and you tell me — is the most important thing about AI from the perspective of monetary policy and the Fed is: does it increase productivity? Does it actually produce that economic return? I'd like to hear what you're seeing on that question so far.
Okay, so the productivity growth rate — economists love productivity growth. It's probably the most talked about and important thing to us. If the public asks what's one number nobody pays attention to that they should, this is the number. The prospect that some technology would raise the productivity growth rate is wonderful. That's what made us the richest major economy in the world. It will make us rich again. But remember, the Fed is about the business cycle, about the short run and stabilization. A lot of this productivity is long run in nature. We've seen in the last two and a half years productivity growth is a fair bit higher — 75 basis points, one full percentage point higher than the trend before COVID. I don't know if you can attribute it literally to AI because AI adoption hasn't been fast enough yet. But I gave a speech at Stanford saying it looks like it might be tech-driven as opposed to a one-time bump from COVID. If so, big general-purpose technologies take time to diffuse through the economy. Here's the part where I want to caution everybody. If you knew it was coming, it makes a huge difference. Is this productivity growth expected so everybody understands it, or is it landing on us unexpectedly? What's happened so far landed on us unexpectedly. But now this is the most expected increase in productivity growth of our lifetimes. The problem with expected productivity growth is that's an increase in your wealth today. If I tell you you're going to get a big pay increase in two years, you want to spread that spending out — you start spending now. If you have IPOs worth a trillion dollars and suddenly everybody at these companies is rich and starts buying stuff, or data centers have massive investments planning on high equity valuations, you can easily overheat the economy in the short run before the productivity has arrived. So I do think it matters a lot to the Fed — not just whether it increases productivity, but whether it's shifting activity into the present and overheating the economy.
Is there like a historical precedent or some example that you use to help you think this through? Or is it really something novel?
There's a loose parallel — kind of like a cousin but not an identical twin — at the end of the '90s, where there was a big runup in valuations, a big increase in internet use, and an increase in productivity growth. A lot of people remember Alan Greenspan, the Fed chair at the time, arguing we don't have to raise interest rates because productivity growth will lower inflation and we can run the economy hotter. That's a parallel, but it goes even farther. That was circa 1996 and it hadn't shown up in the data yet. Greenspan deduced there must be an increase in productivity growth happening because corporate profits were going way up, unemployment was falling, and there was no inflation. He said it must be that productivity growth is increasing and we just don't know that yet. And he was right — that was the famous conundrum. But by 1999, the data proved him right, and the Fed started raising interest rates rapidly on the grounds that this was overheating the economy and there were dangers of inflation and valuations getting out of control. One of the lessons from general-purpose technologies — electricity, telephones, combustion engines, computers, the internet — is it takes much longer for them to spread throughout the entire economy than you'd think. Certainly longer than the biggest AI promoters are alleging. They're kind of like, within two years every job is going to be gone and AI will be running everything. But if you look at electricity, phones, engines, it took much longer.
Okay. So we've only got a few minutes left. Couple quick questions.
He's being polite. He's like, 'You need to be more...'
No, no, no. We got time here. But you said that it was a consensus view that the Chicago Fed district was the best district, the greatest district.
