If you're going to have tariffs and then the war in the Middle East begins, so the price of oil goes up before the tariff shock went away, you got to keep a very close eye on how the inflation is going to transpire. But I don't want to be the guy who says this is a once-in-a-hundred-year flood every year. It's possible that it's a once-in-a-100-year flood every year, but it's like the flood's got to be getting bigger and bigger.
That's Austan Goolsbee, president of the Federal Reserve Bank of Chicago. I wanted to talk to Austan as the Fed heads into a big gathering today in Jackson Hole, Wyoming to get an insider perspective on the state of the US economy and how the Fed may act under the new leadership of Chair Kevin Warsh. Austan shares eye-opening insights about what business leaders may be misreading about inflation, AI impacts, and the future of employment. And he talks directly about how the Fed operates in the face of pressure from the Trump White House. While he calls himself a grim optimist, his presence is certainly energetic and he shares practical on-the-ground advice for navigating an uncertain environment. So, let's get to it. I'm Bob Safian and this is Rapid Response.
I'm Bob Safian. I'm here with Austan Goolsbee, president of the Federal Reserve Bank of Chicago. Austan, great to chat with you.
Yeah, Bob, great to chat with you.
There's a big Fed meeting in Jackson Hole this week. I was wondering how much of what goes on there is theatrics versus substantive engagement—lots of conversations trying to cajole folks to see things your way or more a, quote, "working vacation"?
It's put on every year by the Kansas City Fed because Jackson Hole, Wyoming is in the Kansas City Fed district, but it's rustic. And so you got all of these central bankers from around the world—you know, the head of the European Central Bank, the head of the Bank of Japan—and they're kind of traipsing out into these little cabins. So, it's good fun. I wouldn't call it theatrics, but there's a lot of learning for me at least.
They're bringing in top people who are giving papers on various subjects. And there is substantive work I think that gets done, but it's not an FOMC meeting where we're making any decisions. And of course, everybody's sitting on the edge of their seat. They want to know what the chair thinks, and the chair often gives a meaningful speech.
As an economist, you know, you're trained to assess this broad range of factors, right? Jobs and supply chains and prices, and you're trying to integrate all that into this cohesive view in some ways, which there's always uncertainty in. I feel like right now things seem particularly uncertain with geopolitics and trade, and does it feel that way to you?
Yeah, it always feels like that, and then it's even worse sometimes. And now is just a really, really strange moment. But that's no different than business people and startups in every venue. We're always trying to make decisions under time pressure and without full information. And that's true at the Fed, too.
And so that's why I actually think this committee character that it has, where there's 12 Reserve Banks from around the country and there's seven political appointees, each of which is on a 14-year term staggered so that you kind of try to get this as far out of the realm of political interference as is possible—I think that 19 people sitting around the table, each one with a different worldview, is pretty important at times when you got this much uncertainty because at least we're not thinking the same way. We can yell at each other, get mad at each other, but my colleagues can change my views or how I interpret the data. And I think that's one of the more important aspects of how they have it set up.
I was wondering too, because your job is trying to create some sort of vision through the uncertainty, whether this kind of environment is exactly what you're trained for or whether you just can't be trained for times like this.
Oh, I thought you were going to say is exactly going to be in the line of fire that AI is going to replace you. So, I appreciate that you said it was one I was trained for. Yes, kind of, but that doesn't mean that we can't make terrible mistakes. You know what I mean? Yes, you could be trained for it, but you could convince yourself that inflation is temporary and then it turns out it's not.
The analogy is, you know, you're driving to work and there's traffic and you're kind of, "I've been sitting here some time. Should I change lanes?" Sometimes you shouldn't change lanes. Then when you switch, then the other lane goes. But sometimes you drive by and you're like, "Oh, dang. There was a wreck in that lane. I would have just sat there for the whole day if I didn't change lanes."
It's exciting in the worst way. We got wars, we got tariffs, we got a bunch of stuff that's driving up inflation, and we're trying to figure out: Are these persistent inflation shocks? Are they one and done and they're going to go away? And the law, as you know, the Federal Reserve Act, lays out a simple-sounding criteria of what's supposed to drive monetary policy. It's just two things: you're supposed to stabilize prices and maximize employment. And that's the whole job by law. Sometimes both of those things are not conflicting.
At the same time you're trying to maximize employment, you're not worried that you're overheating the inflation side.
But when you start getting things that are stagflationary, that is they're making both sides worse at the same time, so now you got to make some tradeoffs. Inflation's getting out of control. Well, the only tools we have to slow inflation involve driving up the unemployment rate. In a world like that, it gets more tenuous and more difficult.
These tariff wars that have erupted with Canada, did this catch you off guard? And like how big a deal is it? I mean, with tariffs in some ways we could say, "Ha, we've seen this movie before with this administration."
A little of both. I mean, I should say at the outset tariffs is a fiscal policy. That's the administration and the Congress can decide whatever they want. And I always say, look, we're in Chicago. Our motto is: there's no bad weather, there's only bad clothing. And you tell us the conditions and we'll go figure out what's a jacket and hat combination to deal with that.
But the thing is tariffs are supposed to be a one-and-done impact on prices. They drive up prices, but they're not supposed to keep driving up prices. It's supposed to just be a one-time thing. But that's only true if it's one and done, not if you keep adding new ones. And so we're in this environment where we've had a tariff and the prices went up, and then another tariff and the prices go up, and then another tariff. Then the court unwound some of the tariffs, so it was like, "Hey, maybe the prices come back down." No, but now we got some new ones.
So that's a complicated environment because you're trying to figure out: Is this actually a temporary thing or is this a permanent thing? If people become convinced that inflation is going to be with them for an extended period, the job of the Fed becomes 100 times harder.
Because it becomes self-fulfilling, right?
It becomes self-fulfilling. We call that the unanchoring of inflation expectations, where everybody says, "If prices are rising 5% a year, I need wage increases of 6%." And the employers are like, "Wow, if wages are going up 6% a year and our costs are rising, we're going to have to raise prices 7%."
That kind of dynamic is extremely difficult to get out of, but it's probably impossible to get out of without a deep recession. So we absolutely don't want that to happen. It's what I said was also the danger if you're going to have tariffs and then the war in the Middle East begins, so the price of oil goes up before the tariff shock went away. Now again, you got to keep a very close eye on how the inflation is going to transpire.
And part of that is a failure on the Fed's part too, which is we're now coming on six years that we've been above the official 2% inflation target.
Not business as usual, but we've been making progress at various points along those six years. And I wasn't there the whole time, so I'm not going to exact blame for the beginning part. But in an environment where we've been struggling to get the inflation rate down, and sometimes it's been coming down, but it's still for almost five and a half years been above where we wanted it to be.
Now, if you start adding tariff wars, oil prices, computer chip shortages, competition with AI data center build-out, things that are driving up the price, it's so much more salient everywhere you go. I'm here in the Seventh District of Chicago, kind of heart of the Midwest. I go around, the number one thing that I hear is about affordability, is about cost. If I talk to businesses, they say, "Ah, our input costs are way up." If you talk to the farmers, "We're getting squeezed on both sides. We can't sell the stuff for very much, but the costs are jamming us, and so our margins are lower."
So in an environment where everybody's attuned to that, then getting shocks is even more dangerous that it could lead to the self-fulfilling prophecy.
I mean, it's just such a confusing moment because those feelings that you're tapping into, people worried about affordability, it's totally real, and at the same time the economy is relatively strong, the job market is relatively strong. The job market is like crazy.
It's confusing. But I don't want to be the guy who says this is a once-in-a-hundred-year flood every year. It's possible that it's a once-in-a-100-year flood every year, but it's like the flood's got to be getting bigger and bigger.
Your job is to try to help avoid, as you say, deep recessions. But like you also know the way cycles work, they're going to happen, right?
Who wants that as the message? You know, it's like with inflation, too. If I tell you when the Fed looks at inflation, we tend to look at core inflation because energy and food prices are extremely variable, so we have convinced ourselves that doesn't tell you what the underlying inflation is, so we exclude it. And then, as I say, my mom is like, "What do you mean you exclude it? We don't think about gasoline prices and we don't think about grocery prices when we're thinking about inflation? That's the only thing I think about."
When I first started at the Fed in 2023, I went and looked up the polling. A large majority of Americans say they are familiar with the Federal Reserve, but they do not know what it does. And an even bigger majority say that they may not know what the Federal Reserve does, but they think they're doing a bad job.
There is all this armchair discussion about will the Fed raise rates or lower rates. It's like you're sort of in the middle of the action in some ways in this job, which in some ways I guess could be fun, but it's also kind of torturous because you can't always say exactly what you think. And you know, not everyone's going to interpret what you're doing maybe the way you would ideally have them wish they would.
You have two sophisticated logics in that question, which are: there's a tension between wanting to be clear to the markets, to the world, about how do you see the economy transpiring and what you're going to do. There's a tension between that clarity and being so dependent that you—and Chairman Warsh has been impatient before he was the chairman. He kind of thought there's a little too much forward guidance. That's what the central banks and the economists call giving explicit, "Here's where we think interest rates are going to go. If X happens, then we will cut the rate. If this happens, we will raise the rate."
That's forward guidance. The chairman doesn't like forward guidance: let's do less explicit promises, let's not tie our hands. Now, the other tension is if you don't give some explanation about how you react or what you're seeing in the economy, then people are going to fill in whatever they want it to be. Now you can add more volatility, and so we got to balance those off.
You and Kevin Warsh, the new Fed chair, you were foxhole buddies, I think is the term you've used during the global financial crisis. Are there things you expect to shift with his leadership that we haven't necessarily seen all of yet?
I do expect it to shift, but I don't know what that's going to be yet. When he first came in, the world knew he didn't like forward guidance. You saw reflected a change to the statement. Whenever the Fed makes a decision, they put out a little statement: "Here's what we did and here's why we did it." And the statement got a lot shorter and had a lot less expressions of the committee's forward guidance.
He also set up these five task forces, one of which is about inflation, one of which is about AI and productivity, one of which is about the balance sheet, and named very high-profile, smart people, many of whom are close friends of mine, to be the heads of these task forces. And we're still waiting to get the output from those task forces. I think they're going to give us suggestions, recommendations. I have no doubt that once we get those five reports, we will have a big discussion about should we change our behavior. And if we do, I do think these would be kind of signature things for the chairman.
He's exploring different tools and different kinds of information that those of you in the Fed would use in making the decisions you make.
