Chicago Fed President on inflation, recession, and Trump’s attacks

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1:34Austan Goolsbee: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. That's Austin Goolsbee, president of the Federal Reserve Bank of Chicago. I wanted to talk to Austin as the Fed heads into a big gathering today in Jackson Hole, Wyoming to get an insider's perspective on the state of the U.S. economy and how the Fed may act under the new leadership of Chair Kevin Warsh.

2:16Austin 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.

2:51I'm Bob Safian. I'm here with Austin Goolsbee, president of the Federal Reserve Bank of Chicago. Austin, great to chat with you.

2:59Austan Goolsbee: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, 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 drapesing out into these little cabins.

3:39Austan Goolsbee: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 the meaningful speech. I mean, as an economist, 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.

4:26I feel like right now things seem particularly uncertain with geopolitics and trade. Does it feel that way to you?

4:34Austan Goolsbee:Yeah, it always feels like that. And then it's even worse sometimes. And now it's 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.

5:23Austan Goolsbee: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 mean, I was wondering too, because your job is trying to create some sort of vision through the uncertainty, whether this kind of environment is like exactly what you're trained for or whether like you just can't be trained for times like this.

6:02Austan Goolsbee:You're exactly going to be in the line of fire that AI is going to replace you. So I appreciate that you said it was what 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 have changed lanes. Then when you switch, then the other lane goes.

6:42Austan Goolsbee:But sometimes you drive by and you're like, oh, dang, there was a wreck in that lane. Like I would have just sat there for the whole day if I didn't change lanes. It's exciting in the worst way. You know, 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.

7:23Austan Goolsbee:And that's the whole job. By law, sometimes both of those things are not conflicting. So 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 trade-offs. Inflation's in and out of control. oh, 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?

8:07And like, how big a deal is it? I mean, with tariffs, in some ways we could say, we've seen this movie before with this administration.

8:14Austan Goolsbee:A little of both. I mean, I should stay 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.

8:58Austan Goolsbee: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 price will 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. That's what – Because it becomes self-fulfilling, right?

9:41Austan Goolsbee:Yeah, it becomes self-fulfilling. We call that the unanchoring of inflation expectations, where everybody says, if prices are rising 5 % a year, I need wages of 6 % increase. 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 rise prices 7%. That kind of dynamic is extremely difficult to get out of. 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.

10:25Austan Goolsbee: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. It's business as usual. It doesn't stay. It's business as usual. But we've been making progress at various points along those six years. I wasn't there the whole time. So I'm not going to accept blame for the beginning part. But in an environment where we've been struggling, 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.

11:16Austan Goolsbee:Now, if you start adding terrorist wars, oil prices, computer chip shortages, competition with AI data center build out things that are driving up the price. People, it's so, so much more salient. Everywhere you go, I'm here in the seventh district of Chicago is 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, you know, and so our margins are lower.

11:59Austan Goolsbee: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, right? And at the same time, the economy is relatively strong. The job market is relatively strong. The stock 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-100-year flood every year, but it's like the flood's got to be getting bigger and bigger.

12:42Your job is to try to help avoid, as you say, deep recessions. But you also know the way cycles work, they're going to happen.

12:52Austan Goolsbee:Who wants that as the message? 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? Yeah, yeah. We don't think about gasoline prices and we don't think about grocery prices when we're thinking about inflation. She'd be like, that's the only thing I think about. When I first started at the Fed in 2023, I went and looked up the polling.

13:37Austan Goolsbee: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.

14:17You have two sophisticated logics in that question, which are there's a tension between wanting to be clear to the public, to the markets, to the world about how do you see the economy transpiring and what you're going to do. Um, there's a tension between that clarity and being so dependent that you, and, and

14:46Austan Goolsbee: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, that's what the, the, uh, the central banks and the economists call giving explicit. said, 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 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.

15:42Austan Goolsbee:Now you can add more volatility. And so we got to bounce those off. You and Kevin Warsh, the new Fed chair, you were foxhole buddies, I think is the term you used during the global financial crisis. Are there things that 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.

16:23Austan Goolsbee: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.

17:15And 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 about interest rates. It seems like that. You mentioned earlier that, you know, the Fed is constructed to sort of avoid political pressure. And in the last few years, you know, you face more overt political pressure than ever. I mean, charges from the White House about specific Fed figures, you know, Jerome Powell, Lisa Cook. Like, does that make everyone more cautious?

17:56Austan Goolsbee:It puts me on edge. There's two components of it. One are the attacking of individuals, criminal investigations of Chair Powell to attempted firings, et cetera. The other is explicit browbeating saying you need to lower the interest rate. That's in the space of the traditional Fed independence. It's a very narrow type of independence that all economists – before I was ever at the Fed, I joined the virtual unanimity of economists saying central bank independence is really important. It is independence from political interference when setting the interest rate. If you just look at countries where they don't have that, or you look at times in the United States even, where we relatively did not have that, where the sitting administration can interfere and tell the Fed, here's what we want you to do with the interest rate, inflation comes roaring back.

18:59Austan Goolsbee:Their incentives and their timetable is totally different than the central bank and the economic timetable. So that's why they have designed the system in the United States of the Fed to be as separated from the political sphere as is possible in a democracy. My experience at the FOMC is that the 19 people sitting around the table, some are economists and some are market people, some are business people. They have a lot of different backgrounds. They take the job really seriously. You're out of the elections business when you went to the Fed. You were part of the Obama administration. You chaired the Council of Economic Advisers.

19:46Back in 2009, 2010. You're not a Trump guy.

19:50Austan Goolsbee:I started as a Democrat, but like I say, when you're at the Fed, you're out of the elections business. I just want to be clear about it for folks, you know, because Trump has been particularly aggressive, Powell and Lisa Cook being directly challenged. Look, in the environment, if a sitting administration is trying to remove Fed officials to get interest rates down or to influence interest rate decisions, that's a problematic circumstance. And I think any economist would say that's a problematic circumstance. I appreciate Austin's willingness to be candid about the pressures on the Fed, even if he can't always be quite as explicit as he'd like.

20:42So what's real and what's mirage about AI's impact on the economy right now? And are we headed toward a dot-com era like market bubble? We'll talk about that and more after the break. Stay with us.

21:01Austan Goolsbee:When you've built substantial wealth through your business, it's often tied up in a single equity position. The upside is real, but so is the risk, and knowing when to act isn't always obvious. Creative planning works with business owners to build a strategy around concentrated equity, when to diversify, how to manage tax risk, and how to protect what you've spent years building. Creative Planning, where wealth works together. Learn more at creativeplanning.com slash masters of scale. Humans will never be more intelligent than AI. There's going to be two types of companies. Those are great at AI and those that went out of business because they weren't.

21:40Austan Goolsbee:How do we build a future that is human-centered? I'm Rana Elkhaubi, and on my podcast Pioneers of AI, we answer that question and so many more. As an AI scientist, entrepreneur, and investor, I know what it takes to build AI that works for everyone. Every week, I sit down with the pioneers shaping our future, and we take you behind the scenes of the AI that's transforming our lives. Find Pioneers of AI wherever you tune in. Hey, listeners, Bob here. If you listen to Rapid Response on Masters of Scale, you may be missing half the show because every Friday we release a second Rapid Response exclusively in the Rapid Response feed.

22:28The guests and topics are just as compelling and timely from Ford's CEO to NASA's administrator to the lessons from the Devil Wears Prada. It takes about 10 seconds to find. Just search Rapid Response wherever you listen to podcasts and hit follow to make sure you never miss an episode. I hope to see you there.

22:54Before the break, the Fed's Austin Goolsbee talked about the U.S. trade war with Canada, inflation risks, and what new Fed Chair Kevin Warsh is changing. Now he talks about AI's impact on the economy and why it might be different than a lot of news reports suggest. plus the risk of a dot-com-like stock market bubble and the metrics that matter most for business leaders to track. Let's dive back in. I'm curious what you're hearing about AI's actual impact, whether it matches what we read in the financial press. People are all over the map,

23:31Austan Goolsbee:and partly it depends what sector you're in. I talked to the head of a major arbitration agency who said AI is already as good or better than arbitrators. They can feed all the reports in and all the facts of the case. That's one that sounds like high productivity immediate with the technology we have. We have the most manufacturing of all the districts in the Fed. In manufacturing, there's still a little more – if this turns into robotics or some kind of automation, it would have a bigger impact. Right now, they're still looking for the use cases, what are the best use cases. And you do hear some blowback a little that says, we've invested heavily in this.

24:29The tokens are expensive now and we're not yet seeing it.

24:35Austan Goolsbee:It's kind of like we want people to use it. We want to find the productivity application. But so far, we're not seeing it. You've seen over the last two and a half years an uptick of the productivity growth rate, which maybe was tied a bit to the use of technology, machine learning first, AI. But now we've had six months or so, the productivity growth rate hasn't been that impressive. So you got some people saying maybe that argument was a blip. And then just back to what's the day job of the Fed is to try to prevent overheating, stop inflation. It's not exactly like if we come back in 20 years, will this have revolutionized society?