Inside The Fed and the Future of Interest Rates and More with Austan Goolsbee, President of the Federal Reserve Bank of Chicago

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2:32This is very exciting, this mashup. I love a Money Rehab Mo News mashup. The first ever, but not the last. Definitely not the last of the conversation we just had with Austin Goolsbee, President Austin Goolsbee of the Chicago Fed. Yes, show your deference. What were President Goolsbee, once we get into this, but once named the funniest man in Washington, uh he which is a very low bar it is a low bar right it is a low bar which is hilarious he is funny but it was fascinating nicole uh he is one of the handful of people on earth who makes the decision when it comes to the fed interest rating he took us inside the room yeah i thought that was fascinating because it's a place that we don't get access to we don't get access to the supreme Court.

3:22We don't get access to these super fun FOMC meetings. A girl can only dream. But to be clear, when you called him a president, the way the Fed works is that there are governors and they get to vote on things like interest rates. And then there are rotating bank presidents. The New York Fed bank president always votes because they cover Wall Street. But then the other bank presidents rotate. So right now, Austin is voting in this big meeting that's coming up that's going to decide interest rates, which everybody cares about. And he described how you have to like check your cell phone at the door.

3:59And then he took us into all of the numbers. You know, he's a self-described data nerd. And he was taking us through the numbers and all the considerations they have as they make this hugely consequential decision when it comes to interest rates, the impact it has on jobs, the economy, productivity, inflation. And so I found that perspective really fascinating. And I hope it translates to the listeners here. Yeah, I hope nobody falls asleep because this is really important. Can you give the context of why, just as a refresher, BLS matters? What is it? What's the deal with everybody caring now about the Fed?

4:36I mean, you and I have covered this for 100 ,000 years. And not once, not ever, do I remember this much interest in all the inner workings of the Fed? Well, one of the reasons it's gotten so interesting, and it's something we attempted with him but knew that he wouldn't dive too deep, is that there's a certain individual these days who is particularly interested with what the Fed does. His name is President Trump. He posts on social media about it. He was actually one of the only presidents ever who has actually made the trip down to the Fed recently to be in person with Jay Powell. And he's been very clear that he wants interest rates lowered.

5:10So we dove into that. But some of the data that they have to interpret going into this is also something that President Trump has been particularly interested in, which is the jobs number. In fact, he thought the revision was so significant recently that he fired the head of the Bureau of Labor Statistics. So we talk about that. And that's one of the questions I had for Goulesby here is that, you know, do you trust the numbers that you're getting? The president certainly is critical of it. Others are critical of these revisions. Is there a better way to be doing things? So when it comes to that and, of course, again, the president's interest in the Fed has gotten to the point where recently he has attempted to fire sort of in limbo right now.

5:51But he fired a Fed governor, Lisa Cook. So she'll come up in this podcast. And that's another question we had for President Goolsbee was, what do you make of this? He's firing people. How does what's happening at the White House impact the decisions you guys are making over the Fed? Yeah, we didn't ask if we should call him president or doctor. He has a PhD in economics. Right. So he's a doctor. I wonder if he raises his hand on a plane when there is a request for a doctor. Is there a doctor on the plane? Yes. No. Dr. Goolsbee. Dr. Goolsbee, can you assess the condition of the patient? He's like, only if the patient is the nation's economy.

6:30I cannot do much for this lady. He was actually, his prognosis overall, I think, was pretty positive. And he really settled in on where he thinks interest rates should go. We'll have to check the internet, but I don't think he's done that yet. But he did it here. I think you broke some ground there, Nicole. I think that people should listen to this entire episode. Again, I think we have a lot of listeners who are nerds out there. I think the conversation is interesting. I think he keeps it relevant. And he definitely uses a lot of metaphors. We talk about dragons and tunnels and night watch. We mixed some metaphors and it hurt my literary heart, but generally my economic heart was so glad.

7:15And we all have Chicago connections. And so we get into that as well. It has been such a wild time to be a member of the Fed. Honestly, I can't even remember a time where there's been this much focus on all the players of the Fed. No offense. Can you? No, not. I mean, it's it's been highly unusual. Maybe the economy was so unusual. This is one of the strangest five year periods, most unprecedented five year periods for the economy ever. So maybe that that's what makes it weird for the Fed, too. It is pretty weird. I mean, the next Fed meeting is also a really big one, September 16th to 17th. Can you tell us a little bit about what goes on in these meetings?

8:01It's one of the few places that we don't get to see inside of. So can you take us in the room where it happens, so to speak? Yeah, look, if you're an econ nerd like me, going to the FOMC meeting is just about the coolest thing there is in the world. You go in a huge room, biggest table I've ever seen in my life. we sit around the table the shades come down so nobody can spy and see what's being said do you have to give up your devices you have to give up your devices and i famously i was on the fed for five minutes i'd been there five minutes in my very first meeting and somebody's phone goes off like it's begun they're just like taking the role and there's all these formalities at the at the beginning.

8:49And I was like, what idiot brought their photo? And then I realized, oh, no, it's me. It's me. I was like, I'm sorry. I'm sorry. I'm the new guy. Did you get a timeout or did you get in trouble? What happened? Well, I got a little trouble, but nothing had happened yet. So I didn't get in that much trouble, but that never happened again. And they go around the table and day one is about the state of the economy. And day two is about what we do with rates. And Jay Powell's going to say, here's what I think about the economy. And then if you're going to walk down and President Moussala, what do you think about the economy?

9:29President Goolsbee, what do you think? It's a deliberative body. It's got a formal aspect. And after some time, the transcripts will come out. So if you're really into this sort of thing, you can go read word for word what happens at the meetings. But it's a it's a very important deliberative body and people are coming. They built the Federal Reserve in the Federal Reserve Act to have independent thought coming from all around the country. And that's why we have these 12 reserve banks sprinkled all around the U.S. And people come from very different backgrounds and very different perspectives.

10:07And it's been it's been pretty great. I mean, you said Jay Powell. Do you call him Jay Powell? I got a J-Pow. Do I call him J-Pow? I started calling him Mr. Chair, but he insists on J. So that's what I call him. In the transcripts, I will say Mr. Chair. That's very official. But off the record, it's J or J-Pow. Off the record, it's J or J-Pow. Yeah. Obviously, Austin, we get information so, so quickly now. Some say these meetings aren't necessarily in line with the speed of information. You guys are sitting around this big, massive table. You know, banks, investors are setting prices every second.

10:48So by the time you guys are meeting, potentially the stuff you're talking about is old news. I assume you guys are looking at some exciting new data that the rest of us don't already know. I'm sympathetic to that critique. You said some people, but is it you? You may agree with that. I feel like we're in a time where the speed of information is light speed, and you guys might be a little slow. That's always an issue from central banks and has been from the beginning that whatever is the speed of the data and whatever is the speed of the economy, that's on a different timetable than the speed of the central bank.

11:28but the only place that is an objection is not really an objection it's an observation the timetable of traders and the stock market and the social media and in the instantaneous that's not the timetable of the central bank and you don't want the central bank to be on that timetable because the most important thing that the central bank's got to do is figure out the through line and be the steady hand. And if you plot the graph, I'm sure you've seen it, of what does the market think the interest rate is going to do? It's up, it's down, it's in, it's wiggles around, it's crazy. Because the business model of a trader is to get the information as instantly as you can and to try to process it as fast as possible.

12:22And if you look at the actual rate, it's much smoother. And I think it should be smoother because this steady hand and figure out the long view, that's kind of the job that the central bank has to do. And that's where I do think having a committee of people who are coming from different regions and coming from different backgrounds is actually pretty effective at figuring out a through line in a way that just the straight up instant reaction is maybe not as good. Will you go in there, Austin, and have a certain idea of what you think needs to happen and then be convinced by the arguments of the other?

13:05Is there like a real robust debate that happens there? Sometimes it's not. In high school and college, I was a big debater, and I used to debate Ted Cruz when he was in college. It's not a debate like that. It's more each person giving their thoughts. And there is a robust debate that kind of takes place across meetings. So we'll come in and each person will speak their piece. And then we each bring a plus one research director or something. And they will write down what everyone said. And then we'll come back. And as a group at the Chicago Fed, we'll try to process. Here were the arguments made by the others.

13:48Do we agree with that or not agree with that? What should we be on the lookout for in the data coming up? So one of the issues coming into September, as you know, is have we defeated the inflation dragon or is it still under there potentially coming back? And these issues like, well, there's been less inflation on goods than you might have thought from tariffs. But now maybe the inflation is rising on services. Thoughts like that might come up in the discussion, and then we'll come back and be like, here's what we're going to look out for. And then at the next meeting, we kind of have that debate.

14:27So I'd say it's robust, but it's not like a how do you answer, Moshe, to what Nicole just said. It's not like that. The core debate I know that's been there for a bit now is you referred to the inflation dragon. There's also the jobs dragon. Yes. There is the growth dragon. I don't know how many dragons you guys have. There's a lot of dragons. And the solution for one dragon is different than the solution for the other. That's the worst. That's the evil. But isn't like Wizard of Oz, there's good witches and bad witches. The same is true for dragons. And so they get the stagflation dragon, which is a combination of a couple dragons.

15:03Right. And so curious, as you go into the meeting right now, is it more an art than a science? Is there one that you're more worried about than the other? How do you weigh both of them, given the ramifications here, both domestically and for the global markets? This is the hardest part of the job. This is exactly what the central banks are grappling with. And you've highlighted multiple dimensions on what makes the job is simple to understand and not simple to carry out. And that is the law, the Federal Reserve Act says that when setting monetary policy, we're supposed to follow what we've called the dual mandate, which is maximize employment and stabilize prices, which the Fed has interpreted stabilized prices means get the inflation rate to 2 % and keep it there.

15:55and in normal times normal business cycle times there are booms and busts and when you're in booms and the economy tends toward overheating that tends to push up the inflation rate and unemployment will be very low when inflation is high and when you're experiencing recession unemployment will be high and inflation will be low and we developed not just in the united states but all central banks kind of developed an arsenal of tools, tighten or loosen the screw of interest rates to offset what's happening in the overall economy. Things get interesting when stuff starts going wrong simultaneously on both sides, or you start getting shocks that are unprecedented and things don't look like a normal business cycle.

16:51And that, of course, is what happened in 2020, in 21, in 22. We're getting pandemics, supply chain shortages, a huge escalation of inflation that drives everyone crazy. Then the hottest job market, tightest job market we've ever experienced. And so we're slowly working through and trying to answer the question, are we back to normal? is this there's a town in Illinois, as you know, normal Illinois. Have we gotten back to normal? It is normal. It's a twin city with Bloomington. So as I phrase it, it's like, are we back to normal? Are we still in Bloomington? You know, that's kind of the home of Illinois State University.

17:36That's right. Yeah, that's right. Good for you. Listen, as a as a Chicago born and raised Illinoisan, I think a lot of pride in the in the land of Lincoln. A lot of fun facts. We could do a separate trivia hour, Austin, on Illinois. Okay. But back to the topic at hand here. All of what we've discussed here, Austin, comes against the backdrop of a president who has taken on, you could say, a historic interest in what the Fed is doing, but also is historically vocal in what the Fed is doing. I imagine you've been watching all the various headlines. First, I want to ask you about one of the people who's going to be at that Fed meeting, Lisa Cook, presumably.

18:15What's been going on there, the firing, and what you make and how you handle your job, given the interest and the way that President Trump has been trying to push you guys in a certain direction? I mean, I've been at the Fed for almost three years. I was a research economist at University of Chicago for 30 years before I got to the Fed. I was always a firm believer, as virtually every economist unanimously is, in the importance of Fed independence, that a central bank needs to be independent from political interference or else inflation is coming back. Growth is going to be slower. The unemployment rate is going to be higher.

19:01Just look around the world at places where they do not have Fed independence. It's a mess. And that includes countries where they had it and then they got rid of it. And it's kind of like the day they announced there's not Fed independence, all hell starts to break loose. So it worries me having nothing to do with the partisan whatever. You become a sworn member of the Federal Reserve, you're out of the elections business. But it's important that we remember that Fed independence is critical. The reason why the governors are appointed to 14-year non-overlapping terms and that there are – the reason there are 12 Federal Reserve Bank presidents who are not political appointees, they are chosen by local boards of business people and civic leaders to represent their region.

19:57and the chair is not on the presidential cycle. All of these things tell you that when they created the Federal Reserve, as today, people were deeply uncomfortable with Washington, D.C., plus Wall Street from controlling the whole U.S. financial system or setting interest rate policies with things in mind other than the dual mandate. What should drive interest rate policy should be the economy. And what are the prospects for maximizing employment and stabilizing prices? All of that's the long backdrop to say, I'm just trying to do my job as best I can to represent this region in the Midwest. And I base all of my decisions about the interest rate and monetary policy on the state of the economy and the economic outlook.

20:59And my experience with everyone around that table, whether they were appointed by Democrats, Republicans, or are non-political appointees like me, they take that job very seriously. And I think they're going to, I think whoever comes on changes, the composition of the committee changes, but I would be very surprised if, as people become sworn members of Federal Reserve, they don't take the job real seriously. Are you worried about the rhetoric or are you saying here that the members of the Fed, you guys have blinders on and no matter what is true socialed out or tweeted out or announced by the president, it has no effect on your decision?

21:39You didn't know. But the way you asked the question would get me in trouble to answer, which is nobody on the FOMC is allowed to speak for the committee or for anybody else on the committee. They can only speak for themselves. Got it. I like to think that I'm the most omnivorous data consumer that is on there. But I'm one member of what I call the data dog caucus. And that's anybody who's not on the committee can have any opinion they want. And I try to pay attention to the opinions of informed people and what their arguments are about where we are in the state of the economy. But the only thing and you can read the minutes yourself and you'll get the transcript and you could read word for word what's on people's mind.

22:30You're going to see what's on their mind is not elections and politics. What's on their mind is what's the state of the economy, what's happening to growth, employment, inflation, et cetera. So you, Austin, one man, are not concerned that the president says he's seeking a majority on the Fed's board? What do you make of that with this implication? I'm not a pundit. I know that the, as I say, the composition of the committee changes over time. We have a structure that's as insulated from politics and political interference as is possible. And I just reiterate, it's crucially important. The Secretary of the Treasury, Besant himself, said he wants the Fed to remain independent.

23:24And economists are unanimous. The Fed must be independent. If it's not, inflation is coming back. Well, Ray Dalio, who was just on the show, recently said that with huge budget deficits, and I'd love to make the linkage in just a second, a strong independent Fed was hugely important. I mean, don't you love being in agreement with Ray? I do like being in agreement with Ray. We don't comment on fiscal policy, but I will say that the canonical test case, definitional, why is Fed independence important? It is precisely so that in the kind of the, would you call it an arms race in the economic literature, if you have a heavy fiscal expansion, you want to be able to convey to the world that that political monetize the debt argument will not carry the day in the central bank.

24:28If it does, that's why inflation comes back and long interest rates go up and a bunch of things start to go wrong in an economy. And this is not just a theoretical. There are countries that did this. And if you go look in countries where they do this, it often ends very badly. And we should not be going there. Well, that, I think, is what Ray is talking about. That's what we're saying. If short end of the curve goes down, it floods the market with liquidity, increases government spending. So eventually that trickles out to the long end of the curve. And that's what Ray has been worried about for a very long time.

25:08Do you think that that hurts the government when it comes to financing our national debt? If it becomes that much more expensive? I mean, how worried are you or how worried should we be about the debt? As I say, it's not my place on the monetary policy side to tell Congress or the president or whoever what tax policies they should set, what fiscal policies they're going to set. you've seen chair powell say at press conferences and you just go pick up the cbo report you know that the long-run fiscal position of the united states while being better than most rich countries is not fiscally the the the debt to gdp ratio it continues to rise we're not at some stabilized debt to GDP ratio.

25:57My own thinking is that that is not that that's sounds close to the monetizing the debt argument to say, well, should the Fed change the interest rate to make the debt less costly and make it easier to to run debt? That is the fiscal dominance, monetize the debt type argument. That's not in my head. That's not how I think about it. I can't speak for the committee. But I think it's important in my mind for a central bank not to think that way, that we're going to go off of what the conditions are. We're not trying to make it easier or harder for them to make their decision. So when we were talking about the dragons earlier, the debt dragon is not one that you're trying to fight.

26:48The debt dragon, that's not our job to fight the debt dragon. That's straight up fiscal policy and the president and Congress and the American people got to decide what they want to do. I always say, look, you know, you're an Illinois guy. There is no bad weather. There's only bad clothing. And so you tell us the conditions and then our job is to figure out the jacket. And the fiscal policy are the conditions on this one. Well, listen, I'm an L.A. lady who went to Northwestern. And so I figured out that I needed to buy socks for the first time when I was 17 years old. But speaking of all that data, Commerce just announced that they were putting GDP on public blockchains.

27:29I mean, should that be the rule and not the exception? Is there a better way to get this data that you cite? I heard that, but I don't exactly know what that means. You're never going to hear me say, throw some data away or pay no attention to it. I'm an absolute omnivore of data. I'll take whatever you got, because getting more data helps you figure out the through line, my view. To the extent that everybody, private sector and public sector official data, have gotten noisier because people don't respond to surveys as much, things on the internet that just have a lot more noise. One worldview says, oh, therefore we should throw it away or pay no attention.

28:19in a world where every data series got noisier, I want more series, not fewer series. Putting the data on the blockchain, if that connotes we need more real-time measures, I basically agree. I love the real-time measures. Before I was ever at the Fed, I was involved with a friend of mine who's teached at Stanford, Pete Clino. He and I helped Adobe create this online CPI, called the Digital Price Index, and it tracks online inflation, and you can do it daily. You know, you could do it minutely if you wanted, and at a granular level of detail. I find the new data sources really exciting and far noisier than the official numbers are.

29:13So, I think people want to be a little careful if they go the extra step and say, well, if we put something on the blockchain, then maybe we don't need the unemployment rate anymore. Or maybe we don't need to do the first revision. I think that's dangerous because if you start peeling back the layers, almost all the private sector data to be in the realm of less noisy rely on calibrating with the official data. Talking data, there's been a lot of talk of late about the BLS number, the jobs numbers, the controversy around that, the revisions. Yep. As somebody who takes in all the data, do you think there should be a new approach to how that data is either taken in or released, given how the survey has been put out, the response rate keeps getting worse?