Steve Liesman joins us now with a special interview. Steve?
Yeah, Joe. I think it's a good time to have Austan Goolsbee here, the Chicago Fed president. Austan, thanks for joining us this morning. And good to see you again. You can see that headlines are moving fast and furiously. Give us an idea how a policy maker like yourself views the incoming news and what's happening right now in oil markets, the outlook for inflation, and the effect on the policy outlook.
I mean, it's an intense moment. We got a lot that hangs in the balance. As you know, through 2025 we experienced another inflationary shock. People complaining about prices. We stopped making progress on the inflation front and at best it stalled out and started inching its way back up. So, we've been waiting for that to have proved transitory to have gone away and to pile a new inflation shock on top of this before that one has left the scene. This is going to be a tough moment.
Austan, I'll just tell you that minutes before the president put out his Truth Social, I was about to come on air and talk about how the outlook for the Fed funds rate in December had now turned fairly decisively toward a rate hike. In addition to the idea that many of the Fed watchers who I read every weekend and every day were kind of capitulating in the sense that even in the face of a weak job market, the inflation story was going to be intense enough that the Fed was going to have to hike rates. How was your view even before this happened about the outlook for policy?
Well, as you know, last year I was a voter and I dissented at the last meeting of the year because we did not have the data to show that inflation was going away. The argument that rates should go down in the immediate term was premised on that the inflation was going to be transitory and go away. I remained fairly optimistic that by the end of '26 rates could go down, but I wanted to see proof that we're back on an inflation headed to 2%. This definitely throws a wrench into the plans. We do need to see progress. Steve, as you know, when I'm thinking about what could lead inflation to turn into something more extended and not be temporary, one of the key mechanisms is if everybody starts expecting inflation is going to remain high. And there's a lot of research work that documents that the price of gasoline specifically has a very high impact on individuals' expectations of what inflation is going to be over the next year. So to have already been operating at an inflation rate that was uncomfortably high and stuck well above the target and now to add something that might be a lasting gasoline price shock. I think this is, as I say, an intense moment and we have to hope that this does not prove to be a lasting impact on the economy.
Austan, the question becomes how much weakness in the job market are you willing to look through in the fight against inflation.
That's an interesting way to put it. I would point you to the framework when we did the monetary policy framework. We absolutely thought about the question, what do we do if both sides of the Fed's mandate start going wrong at the same time? And we outlined a process that we will follow and we voted unanimously in favor of that which said we'll look at which side is the deviation bigger and how long do we expect each side is going to take to get back to something acceptable. If you look at the unemployment rate, it hasn't gone up much. So the payroll job creation as an indicator of labor market slack I think is a little fraught at a moment when population growth and immigration and there are a bunch of question marks about labor supply. So I prefer looking at rates like the unemployment rate, the layoff rate, the hiring rate, the vacancy rate. Most of those have shown stability and are at levels that are closer to full employment than we are on the target on the inflation side. So at the moment I think the inflation's got to be a little ahead of the employment.
Hey Austan, Steve asked you already and showed us earlier this whipsaw reaction at the Fed futures. You know, suddenly thinking that the odds were far more likely that we would see you all raise rates in December rather than cut and that turned around really rapidly. Anyway, just erratic behavior, but it's everybody else just trying to figure out what you and your colleagues are actually going to do. Does your own mind follow this whipsaw pattern of like, whoa, we're going to have to hike rates or, oh my gosh, we're definitely cutting. Does your mindset follow that or is it a much slower?
No, that's not my mindset. Look, Becky, as I always say, the central bank's job is to be the steady hand. If you look at that kind of whipsaw pattern and just ask people, what do you think the next rate change will be? It's constantly up, down, over, and around. And if you look at the actual rate, it's much smoother. The most important thing is to figure out the through line of what is happening and that is what makes this a fraught but intense moment is nobody can tell us what's going to happen on the ground in the conflict in the Middle East and how long that lasts. If they are able to resolve these issues and there's not a permanent lasting impact on gasoline and energy prices, that would be a far more favorable outcome, of course, than if this is extended. And if we start to see that drifting into inflation expectations, you would see more of this rising long-term interest rates as people are trying to compensate for that.
Yeah. You know, Austan, it's almost like a Rorschach test. And we had Waller on. When was that, Steve? Was that Friday?
God, it's only been... I don't know. Seems like... There's some people and they're really smart people, they always come up with this that inflation looks like it's anchored. They look at different things, spreads and things like that. Austan, and you know, tariffs are one-off, what's happening now in the strait, that's a one-off, but overall inflation seems like it's anchored. And then if the labor market isn't really sizzling, it seems like you're not going to get like a wage pressure and inflation component. Is it anchored? And what do inflation hawks, what do they have that maybe someone who's not as concerned has? What are they looking at that makes them think it's really ready to be back to 4%?
I don't totally know. And you know, I don't want to violate the rules. I'm not supposed to say what's in anybody else's mind on the FOMC or what the committee is going to do. Just myself, I've been optimistic over the longer term and a little more pessimistic on inflation in the shorter term because it seemed to me that there were a number of things that could make this a repeat of the team transitory mistake where everyone assumed a supply chain will just fix itself real quick and the inflation will go away. If so far inflation expectations do seem anchored, but it's a little bit of the sunburn theory of inflation expectations. Once they start to go wrong, you're going to wish you put on sunscreen. It's a little hard to put the cat... you know, once a cat is out of the bag, it's hard to get it.
