Central Banking Cartel's Austan Goolsbee, and Lisa Cook on US Economy LIVE

And then there's the some specific indicators you cited. The yield curve inverted just means long rates 10, 20, 30 year interest rates are actually lower per year than the one-year interest rate. That's unusual. And usually when that happens, that's a pretty solid sign that a recession is about to take place. We had the yield curve inverted for two and a half years with no recession, and people looking around saying, 'Wait, what? How could that be?' Trucking close to my heart. My dad was in the truck trailer manufacturing business for his whole career. I got a bunch of uncles and cousins that were in truck driving. And my one uncle ran a trucking company for a long time. It was always a leading indicator of the business cycle. Hasn't been. It was as if you took that or temporary employment, temp firms, another indicator of the business cycle, they've had month after month after month of losing jobs in the temp industry, normal sign of recession that didn't happen. One of the things that made this such a weird, interesting, maybe I should call it time is the COVID business cycle looked nothing like the business cycle. I told you the Fed has one tool which is about raise the interest rate or lower the interest rate to affect the interest rate sensitive parts of the economy, and those are normally the most cyclical parts of the economy. Durable goods, housing, business investment, the kinds of things that pay attention to the interest rate most closely are also the industries that go up with the business cycle, down with the business cycle. The COVID recession looks nothing like that. It's not a recession; the demand for durable goods went up in the recession because you couldn't spend money on services. The recession was led by a bunch of things that never go down in recession like elective surgeries and going to the dentist and a bunch of service sector things. So as we've come out of it, as I say, if you have seen anybody professing to be an expert, 'Ah, no, I know what's going to happen,' they're lying because nothing like this has ever happened before. So we had to think it through. We had to kind of think through the fundamental economics. They've meant many of these recession indicators just didn't work. I think because this business cycle, recession and recovery really look nothing like the demand driven recessions of the past.

That number is 2.3% looking backward. Okay. So it's the last 12 months what has been the inflation rate, and of course what matters is what will the inflation rate be that's coming in. So this was the last, we've had a couple of months of quite solid reports that look good. Inflation looked good. It's good. It's coming. The Fed's 2% target is not CPI inflation. It's PCE inflation. If you get into the weeds, the CPI has a basket that they announce, here are the goods, and they track the prices of what's in the basket. The PCE inflation tracks everything, all personal consumption expenditure, so it's a little more comprehensive, it's a better measure. I think the 12 months of PCE inflation were around 2.1%, so very close to the target, but that's old news, that's over the last year. And so these were the last reports coming in before the tariffs. So now they're just question marks. Is that going to, are the tariffs going to have a small impact or are the tariffs going to have a large impact? And now we're just kind of, we got to wait and see what happens.

Okay, this is two different parts of that. Let's start with the second part. How the tariffs affect it? Well, look, they probably will directly affect the prices. When we're meeting with business leaders, a bunch are talking about how quickly would cost increases be passed through, and they think pretty quickly. Last night at dinner with some CEOs and business folks here in Cedar Rapids, they described that in some cases they just added a column to the spreadsheet which is the tariff price. They're just going to add it on. So that implies a 100% pass through of whatever the tariff cost is going to go right into the price. So that one we would see within a month, certainly within a couple of months. If it's going to affect prices in a significant way, you would expect there's a one-month lag on the price data. So that one would start showing up.

The other expression that we get of concern from folks that we're talking to, and it's worth remembering, the Chicago Fed district is most of the economies of Iowa, Wisconsin, Illinois, Michigan, Indiana. So it's kind of heart of the Midwest. And make no doubt about it, that's by far the highest exposure to tariffs of all the districts in the United States. Of the seven most exposed states, four of them are in that district. And Iowa, I think, is number four. Michigan is number one, Indiana's number two. Maybe Kentucky's number three. And I think Iowa's number four because a lot of manufacturing, a lot of agriculture. Both of those get imported inputs in the supply chain and rely on exports, export markets for a lot of their output. The expression that the folks in the industry have to us is, 'What if this leads to slowdown? What if this raises our cost and leads to slowdown?' That one won't show up in the data for a while. So that's why we do almost 40 rounds a year throughout the district trying to talk to business leaders like what we did last night, like what we're going to have on the panel here today, because that's in real time. That won't show, the GDP numbers don't come out for a quarter. So it will be a long while before we find that.

And I apologize for being too long on this one. What do I look at? You saw the dual mandate. Mostly we look at job market numbers and inflation numbers. Those are the two most important numbers. But when I joined the Fed, it was not as a dove or as a hawk. I joined a proud member of the data dogs caucus. And the first rule of the data dogs is know when is the time for sniffing. And the time for sniffing is when whenever you have uncertainty, gather more data. And like with the other dogs, anything that hits the floor, come over and sniff it because it might be food. So I don't throw any data away.

We've seen since COVID some of the private sector data sets have been extremely useful for supplementing the official data. There's still the US is the finest official data, I would say it's a gold standard, but in my world that's a bad thing. We don't want the gold standard. We have the best data. A lot of these private sector, especially housing market data, pricing data, and some orders data, I look at a lot of credit card information they release, that's really good information on consumer spending.

Again, I can only speak for myself. I think that partly the answer to that question depends heavily on well what's going to happen in the next three months to the data on prices and to the data on employment. There's a lot of policy uncertainty. We had a Fed Listens event and a big advisory council event. One of the folks at that described this as, he was leader of a construction firm, described this as a pencils down moment, that they just cannot proceed to the next section of the test until we get a little more clarity, a little more consistency. If what happens is the impact of the policy after all of this dust clears out of the air is like where we were in February, March. I already told you I think where we were coming into April 2nd was stable full employment with prices coming down to the 2% target, and therefore rates would be a fair bit below where they are today. But with the uncertainty, I can't express that with too much confidence because who knows if we wake up tomorrow and the tariffs are going back to 50% on the world. There are a lot of domestic production that's going to suffer and have to figure out how to deal with that.

My thinking on supply chains evolved. Most economists never thought about supply chains before COVID, they just kind of assumed, oh yeah, the costs go up and that's pass through, or costs go down and that's pass through. We discovered circa 2020 that a bunch of the things that we took for granted, you can't take for granted in a moment of crisis. They take a lot longer to play out. My read of the data and in discussing with people is that the supply chain is mostly healed. It's mostly back to normal. That led into the anxiety as the tariffs began. Oh no, don't take us back to a period that we don't ever want to go back to. A period like 2021, 2022 where costs are raging out of control, or a period like 2020 where they're literally just shortages and we can't make the product because we can't get chips and we can't get workers and we can't get those. So I think the supply chain is mostly back. I think the healing of the supply chain is what allowed 2023 to be a most unusual in the positive way year for central banks. Which is to say, if you plugged into ChatGPT at the beginning of 2023, 'What must the central bank do? What should the Fed do? Inflation is way too high.' It would have based on the historical experience said jack the interest rate up to 15% and have a very serious recession. That is the only way anyone has ever gotten rid of inflation. And yet in 2023, inflation fell pretty close to as much as it has ever fallen in a single year. And not only was there no recession, and not only did the interest rate not go to 15%, the unemployment rate never got above four for the entire year. Nothing like that has ever happened. And I think one of the key ways that it didn't happen, there was too many negatives in that one. One of the ways that it happened was the supply chain was healing, and so it got what some people derisively called immaculate disinflation. It turned out to be true. We did get some immaculate disinflation because of the healing of supply.

Okay, to the first one, some of both. It's remained strong. I told you that's stable full employment. That's what it looks like to me. And partly from immigration, partly from the way we measure some things, just the big two, the unemployment rate and the number of jobs created in the month, those are usually what everyone looks at. They've gotten a little noisier over time. So now we're looking at some broader measures, expanding the aperture of sniffing, that is a mixed metaphor, but we're sniffing more area to include vacancies data, hiring rates, quit rates, a series of things. All the measures of the job market to me point very much to stable full employment at the same time that it has cooled from where it was. We were hotter than stable full employment there for a while where you couldn't get workers, and especially in places, the unemployment rate in parts of Iowa was in the twos. And when we would go around, we would go to factories, I would go to banks. The guy at the bank said they couldn't hire any tellers, they had midweek quits. People would be like, 'Hey, I just heard I can get $40 an hour over there with nobody. I'm done. You can find somebody else to come in Thursday and Friday.' Okay, that was a nonsustainable kind of environment. So it has cooled, but it cooled to stable. Immigration, I don't know. I don't know what the impact. It depends what happens and how many people are affected. New immigration has been more than 50% of the labor force growth in the United States over some medium to longer run period. So it could affect the labor force. And last night we heard some of that discussion from CEOs that labor force participation here in Eastern Iowa's been high, really high. So there's not an untapped group that it's going to be easy to turn to if we go back into a period of labor shortage. So the stable full employment is still probably about as good as what we're hoping for.