How the Fed Evaluates Inflation During a Shutdown, with the Chicago Fed President

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0:41Good morning, Brew Daily Show. I'm Neil Freiman. And I'm Toby Howell. Today, a Fed president takes us in the room where it happens. Then the gym bros are coming for your pastries. Protein Pop-Tarts are now a thing. It's Thursday, October 16th. Let's ride.

0:59Good morning. Today's show is going to be a little different, but in an exciting way. Yesterday, we spoke to Chicago Fed President Austin Goolsbee in this studio. Thank you for your questions, by the way. And while going in, we expected to use that interview for a part of the show. The conversation was so interesting, we kept the tape running and are going to bring you about 20 minutes of Austin, then wrap it up with some final news headlines, of course. A couple of things stood out to me about this interview, Neil. First, Austin does not scream a Fed official. His dream job was actually doing voiceovers for car commercials.

1:31Second, he's a data dog through and through. And I tell you what, the dog is hungry amidst the data blackout due to the government shutdown. And finally, it was so cool talking to a voter on the central bank's interest rate setting committee. Just wait until he talks about the size of the table they all sit around. One of our favorite interviews so far. So we hope you all enjoy. And now a word from our sponsor, Remarkable. Toby, would you say you're an organized person? You've seen my home. Yeah, it's a nightmare. That's why you gotta get the remarkable Paper Pro. You can fit a practically unlimited number of notes and documents on this third generation paper tablet, all organized into folders, tagged and searchable so you can find what you need in seconds.

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2:45Whether you're in a meeting or deep in a creative session, this paper tablet helps you think better. You can try Remarkable Paper Pro for 100 days for free. If it's not what you're looking for, get your money back. Visit Remarkable.com to learn more and get your paper tablet today. That's remarkable.com. And now here's Austin. Austin Goolsbee, thanks so much for being with us. Yeah, what a treat. Thank you for having me. This is going to be great. So it's Wednesday morning. You're a Federal Reserve official. You should be waist deep in the monthly inflation report that was supposed to be released today.

3:15But instead, you're here with us because the consumer price index was delayed from the government shutdown. And that is a problem because you and other Fed leaders are huddling up in two weeks to make an interest rate decision that will determine the fate of the economy. How is this data blackout impacting your ability to do your job? Do you have the information you need? It's a mess. I mean, we always have to make a decision with imperfect information. But there's imperfect and then there's imperfect. If you don't have the information, it just adds more question marks, makes it harder to see.

3:48And what is it like for you not having data at your fingertips? Because I remember you called yourself once a data dog. Yeah, and I'm one of many. It's frustrating. Try not giving your dog food for the whole day and see how the dog reacts. That's exactly how I feel. And what did you mean by this? You said the first rule of the day to dogs is there's a time for walking and a time for sniffing and knowing the difference between those. What is the difference between those? What do you mean what is the difference? Look, that's the when you come to the FOMC meeting and it's deciding among the hardest things the central bank has to do is figure out when the transition moments are.

4:26and try to get the timing right. And that's what that first rule of the data dogs is. Sometimes sniff for more information, and sometimes you have the information. It's time to start walking. The second rule of the data dogs is sniff every piece of data that hits the floor, because it might be food. And times like this, where either A, you can't get the data, or B, even before there was a shutdown and they stopped sending the data, big tentpole important numbers like the monthly payroll jobs number have a bunch of question marks because, A, the survey response rates have gone down, so we get bigger revisions now and there's more corrections, and a bunch of other things are happening, like immigration policies changing, so the population growth is smaller.

5:15You got the baby boom in the heart of their retirement and the speed at which that happens is going to affect the monthly payroll number. So go sniff everything. If it's actually a turning point, you should see it in a lot of different series. And so far, you're not. Well, talk to me about some of those other pieces of food laying on the ground. I'm thinking about the ADP private payroll providers report. Where are you looking if you can't necessarily, if you don't have the government data or if it's not necessarily as reliable as it once was? What I would encourage everyone to look at, if you're into this sort of thing, and I feel bad for you, if you're one of us and you're into this sort of thing, that says something about you.

5:55But if you are, just be careful with raw numbers, okay? Aggregate numbers, including the ADP, we saw in 2023 and 2024 were not accurate indicators of business cycle. You'll remember there were people saying when we were getting these big jobs numbers, 180 ,000 a month. In 23, over 200 ,000 a month. There were people saying, you can't be this high, that so far above the break even point, we must be about to reignite inflation. But it didn't. Inflation didn't reignite. It kept coming down over that whole period. So the answer to your question of what to look at, I encourage you to look at rates.

6:37So 23 and 24, the unemployment rate, the vacancy rate, the hiring rate, the layoff rate, those were the four horsemen of the truth. They gave you a much better indicator where we were in the business cycle. They're a little bit of a mixed picture now. Some of them are worrying. The hiring rate is very low. You see that in the data and you see that in college graduates and new entrants to the workforce. Everyone complaining, it's really hard to find a job. But the layoff rate is also really low. And it's just worth noting, that's unusual. Usually, if the hiring rate is low, they start laying people off.

7:15And that's the sign that you're going into a recession. Now, the hiring rate looks like recession. The layoff rate looks like boom. And now they're not giving us the data. So it's definitely frustrating. It's tough. How much of the labor market weakness, especially in the entry level sphere, do you attribute to AI? Is there any way of knowing? I mean, that's another confounding variable here that we have artificial intelligence sweeping the country and the globe. How much do you think it's impacting the labor market? I don't think a ton. On a sector-by-sector basis, the fact that the unemployment rate of computer science graduates went from being the lowest of all the majors to now among the highest of all the majors, there's probably something to that.

7:59But objectively, the unemployment rate of computer science graduates remains pretty low. The things that AI is replacing so far are nowhere near the majority of the job market. Not even close. It's an edge case. So I don't think that the AI explains the hiring rate for the whole nation. Just holistically, one term we've used to describe this labor market is low hire, low fire. Is that something that you would agree with? Is that two terms or one term? I guess it's a phrase. Yeah. I totally 100 % agree with that phrase. Just look at the data. This low turnover is unusual. That's an unusual environment to be in.

8:40You know, before we got to this, everybody would say, ah, there's so much uncertainty, it gives everyone pause. You would kind of think if you were running a business and there was a lot of uncertainty, you wouldn't want to get rid of the people you have. It's hard to bring them back, but you wouldn't be bringing on new people. You'd just be kind of waiting it out. So that might be contributing to that environment. So data dogs, they look at all types of data, like qualitative data and quantitative data. And part of your job is talking to business leaders. You're the president of Chicago Fed in the Midwest.

9:14So what are you hearing from them as you go talk to business leaders across the Midwest? Running April 2nd came Liberation Day. They announced the tariffs. The district of the seventh district that Chicago Fed is the base of is most of Iowa, Wisconsin, Illinois, Indiana, Michigan. It's like heart of the Midwest. We have the highest manufacturing intensity of all the districts and by far the highest autos. There was a ranking of all the states tariff exposure and of the seven most exposed states to tariffs. Four of the seven are in the seventh district because we've got a lot of agriculture. We've got a lot of manufacturing.

9:54Their hair was absolutely on fire in April, freaking out. If the rates are going to be this big, we're going to die. What are we going to do? It exceeds our entire margin. They just did not know what was going to happen. Then we sign a couple of deals. we exempt USMCA compliant goods they kind of phased down the rates and the biz a lot of the businesses were less freaked out than they were in April they said it would probably be okay now we're coming back to the beginning where we're inching them back up and as I always say It's worth remembering imported goods are only 11 percent of GDP in the U.S.

10:41So if it stays in its lane, it doesn't have to be a macro massive impact. But how it jumps out of its lane, one of the ways is if you start applying big tariffs to intermediate goods and parts and supplies and components and stuff like that. Now you just transformed a tax on imported goods into a tax on domestic production. That's kind of started happening. We're going to up it on steel and aluminum. We're going to get in a bunch of retaliation on rare earth metals and magnets and things that go into the supply chain. Feels like a lot of business getting back nervous again. And normally, if you're trying to figure out where are you in the business cycle, you would kind of go look at the rate-sensitive sectors and say, hey, if restrictive interest rates set by the Fed are driving slowdown, then the people who are most interest rate-sensitive, they will probably be suffering the most.

11:46Kind of the three big ones are business investment, consumer durables, and housing construction. Those are three of the most rate-sensitive. Business investment is booming. Now, that's probably because of this AI and the data centers and stuff that has nothing to do with the interest rate. OK, so that one's confusing, but it doesn't look like trouble. Consumer durable, surprisingly resilient. And so one of the things that when we're out talking to the auto companies, there was a bunch of front running of the tariffs. And they thought then it was going to drop off, but it kind of hasn't dropped off.

12:23Consumer spending, as you know, has just kept chugging along. and then housing construction's been weak. So of the three rate-sensitive ones, two of them don't look like there's much trouble and one looks like there is some trouble. So again, it's a little confusing. You got a tough job. There's a lot of variables there. Shifting gears a little bit, one of the other big storylines of this year has been about the pressure the administration has put on the Fed from going after Lisa Cook to calling on Jerome Powell to step down. Fed independence has long been kind of the bedrock of the U.S. financial system.

12:56Why hasn't the market reacted more to some of these threats? You got to tell me why the market reacts the way it does to all kind of stuff. I've been in the Fed a little, it's going to be three years in January. Before I was ever at the Fed, I agreed with the virtually unanimous of all economists that you will ever talk to that central bank independence from political meddling and interference when setting the interest rate is extremely important. Every rich country of the world has that feature, and a lot of poor countries of the world do not have that feature. And that's not a coincidence. The unanimity of economists in favor of central bank independence from meddling is rooted in just look at the places where they don't have it, or times even in this country where they don't have it.

13:51Inflation comes roaring back. And it's easy to understand why. If the sitting government can set the interest rate, they have incentives that are different than trying to prevent inflation from getting out of control. We're gonna take a quick break and come back with more Austin right after this. You know that saying, more money, more problems, Toby? Of course. Why do you think my life is so chaotic? Sure. Well, with startups, it's more like more money, more security. Big enterprise deals usually come with even bigger security and compliance requirements. Yeah, the right kind of security posture doesn't just protect you.

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15:41That's ads.instacart.com. So a lot of people listening to this hear us talk about the Fed meeting. You know, it happens a couple times every year, and you all vote on an interest rate decision to make other economic forecasts. But it seems like such a black box to all of us. So if you could, I would love for you just to paint a picture of in two weeks. Of what it is. Yeah, what is it like? I had never been there. Okay, but you guys, I'm like you. I'm an econ nerd my whole life. I got to tell you, it's about the coolest thing in the entire world. You go in, there's a giant room, a huge table, biggest table I've ever seen.

16:23Everybody sits around this table. Shades come down. There's no good. Nobody can spy. You can't bring in a phone. You can't bring in. It's like being back in the situation room or something in the White House. And first day is about the economy. Second day is about the rates and the vote. Jay Powell's going to be like, here's what I think about the economy. And Governor Waller, he's going to say, here's what I think about the economy. And they're going to go around the table. And you can see the background of the people sitting around the tables, very different. Business people, economists, lawyers, market people, there's a bunch.

17:02And it's fascinating. It's really fun to hear their view of the economy. I try to bring a little, I don't know, a little regional taunting to the things. So I'll usually start by, here's why the 7th District is the greatest district in the nation. Eventually, you'll be able to see word for word. We release not just the minutes, but the actual transcript of what everyone said. And you'll see it is a little formal, but it's extremely, people take the job extremely seriously. Everybody speaks their piece, whether you're voting that meeting or not voting. It's all about the economy, the economic outlook, and how they see the world.

17:48It's not about elections. It's not about politics. It's not about outside pressures. Everybody takes that job really seriously. I say in this, in 21st century, I think that's the world's greatest deliberative body. You can judge for yourself. People are very thoughtful. How does the actual voting mechanic work? We were kind of joking that everyone puts their head down and put their thumbs up. Yeah, no, I should see if we can innovate that. What happens is on Raids Day, everybody gives their opinion and then they call the question. There will be they will have outlined three alternatives, alternative A, B and C.

18:29And they're loosely kind of a dovish alternative, a hawkish alternative. And then the alternative B, which is what we vote on. And they just call out whoever are the voters. they'll be like, Governor Bowman, and they say yes or no. President Goolsbee, yes or no. President Daley, you know, and they call out the 12, and that's the mechanic. And if somebody dissents, they'll just say no. And then I think there's some process of giving a rationale if you dissent. Have they been more tense recently? Because there has been sort of disagreements between the Fed officials about how much we should cut rates, whether we should not cut rates at all.

19:12There was a double dissent a few meetings ago. So has that translated to maybe some more tense meetings recently than in your three years in this position? The vibe of the room is not tense. It's like I say, people are there, have historically taking the job extremely seriously, and it's all about content. And if people disagree, I mean, you can see just from the public comments that the members of the committee make, they're coming from very different places. You know, they're of different worldviews. But Chair Powell has been very good at, is it diplomacy? At kind of navigating a course that almost everybody can agree with almost all the time.

20:04And that's pretty impressive in an environment where we've had a lot of major things happen to be able to do that. I haven't detected it to be tense. And what's he like as a leader? Like, is he someone who's more vocal or is he just, you just kind of understand where he's coming from? Is he very data-driven? I have found him very data-driven. I didn't know him that well before I got to the FOMC. I've been really impressed. I mean, I said I thought he's the first ballot Hall of Fame Fed chair. And I have pretty high standards because I was Paul Volcker was my friend and mentor. And I worked through the financial crisis in 2008, 2009 with him.

20:44I'm not the rules of the FOMC communications policy. I'm only supposed to speak for myself on monetary matters, not for the Fed, not for the for anybody else or what they think. But I'll just say the guy's very easy. I found him very smart and persuasive, and he's had excellent intuition at several points along the way. It seems like a Tim Duncan kind of guy. Yeah, just Tim Duncan. Would you agree? The big fundamental. The big fundamental. I grew up a Lakers fan, so I can't praise somebody that much for being a Tim Duncan-like character. Speaking of Fed communication, Fed officials have to be very careful with their wording because what they say or even hint at has the power to move trillions of dollars in markets.

21:31So you're forced to adopt this Fed speak where you say something, but not really. Do they teach you how to speak Fed before you join? No, I'll probably get myself in trouble anyway. But it can be overblown a little bit, especially the closer the argument gets to, well, the Fed needs to do X because that's what the market expects. And you can't disappoint the market from their expectations. Volcker used to tell me the Fed's job is to act. The market's job is to react. And let's not get the order mixed up. And I kind of agree with that. I'm usually trying to just say, here's what I think. and I'm just one of 19 people sitting around the table so the world can make of that what it wants.

22:18Are the rumors true? Did you actually teach a class at UChicago on your wedding day in a full tuxedo? I did. It was a Saturday. I had a Saturday. They made me. They assigned me the class. It was really low. It was only my second year. It actually ended up working out okay because there wasn't that much for the groom to do on the morning of the wedding except just get nervous. There's a picture of me teaching the thing, and I always say you can tell who's the University of Chicago people from not. A normal person looks at the picture and is like, you're teaching class in a tuxedo? And the Chicago people are like, that's the Monopoly markup formula because that's what the, that's what it was like the learner index formula.

23:04And we had a real class. Like we did it. Well, they say you Chicago's where fun goes to die, but I did go there for one weekend and I had some of the best nights. It's where fun was born. It's where fun was born. At least for the small group of people that I was hanging out with. So Austin, thanks so much for joining us. What a treat. Thank you for having me. Learned so much and good luck with everything in this data blackout. And we'll be following you and the rest of the Fed officials movements over the next few weeks. Great to see you. Well, I never met someone as married to the game as Austin.

23:35I tell you what, I will not be potting in my tux on my wedding day. Hope you all enjoyed that interview as much as we did. Now let's sprint to the finish with some final headlines. Up first, big banks have clearly been hitting the gym because amidst all the uncertainty around tariffs and in the economy, they just keep getting swoller. Across earnings calls from J.P. Morgan, Bank of America, Goldman Sachs, Wells Fargo, and Citigroup, the through line was clear. We're doing all right. The investment banking divisions of Goldman had a great quarter because higher policy volatility can actually accelerate the sort of corporate wheeling and dealing that earns it fees.

24:13Citigroup had a 16 % increase in profit. As it said, the spending habits of consumers is holding up strong. Morgan Stanley had an especially standout quarter thanks to its stock traders with revenue from that division jumping 35 % to$4.1 billion, topping Goldman Sachs in the business that it traditionally dominates. Finally, Wells Fargo reported a 9 % boost in profit on the backs of increased spending among its most affluent clients and lower-income customers. But two truths can coexist here. Quarterly profits can be strong as stock trading and deal-making resurges, but risk lights can also be blinking under the surface.

24:49Neil, some bank leaders are feeling uncomfortable with, one, the sheer length of this bull cycle, and, two, some of the shenanigans going on in the private credit world where we've seen a couple of high-profile collapses. I think I know what bank leaders you're talking about. And it's Jamie Dimon, JP Morgan CEO, who's always ruffling some feathers. So the context here is we had two major blowups in the credit markets recently, two auto companies, First Brands and Tricolor. tricolor. And there's been a little bit of spookiness around whether this portends further collapses or some shakiness around capital markets.

25:24So Jamie Dimon, during JP Morgan's earnings call, goes up to the mic, goes up to the earnings call and says, my antenna goes up when things like that happen. And by that, he's talking about these two big blowups. I probably shouldn't say this, but when you see one cockroach, there are probably more. And this mention of cockroaches within the financial system attributed to private equity companies. Got a lot of pushback, and you saw asset managers and private equity giants from Apollo to Blackstone to other smaller companies push back on Jamie Dimon's comment, saying, look, you guys were involved in the deal, too.

25:59I think you need to look at your own books and not ascribe blame to us if you want to squash more bugs. So Jamie Dimon always, you know, creating conversation. He always has a pretty dour outlook compared to the rest of the big bank CEOs. But overall, besides the cockroach comment, the six largest banks raked in almost$41 billion in profits in the past three months, which was up 19 percent from a year ago. They say that everything's pretty much smooth sailing on the economy besides perhaps a few cockroaches we need to kill. All right, over in the AI world, everyone is talking about OpenAI's announcement on Tuesday to allow, quote, erotica for verified adult chat GPT users, essentially meaning they can sext with the chatbot.