In short
Odd Lots episode with Chicago Fed President Austan Goolsbee on whether monetary policy is restrictive enough, why inflation may be re-accelerating, and how AI-driven productivity and investment could affect the economy and Fed communication.
Guest backgrounds
Austan Goolsbee, chief executive of the Chicago Fed (Fed president), former academic (30 years).
Key claims
- Policy restrictiveness depends on the real rate (rate minus expected inflation) and where inflation is heading; he expects a long-run “landing spot” around 3% nominal rates, 2% inflation, 1% real.
- He’s “a little nervous” because inflation’s last six months haven’t looked good, especially services.
- He argues inflation dynamics are partly supply shocks (tariffs, oil/war) that should fade, but services inflation suggests deeper persistence risk.
- AI may raise productivity long-run, but near-term AI hype and data-center investment can overheat specific sectors and tighten labor/materials.
- Fed should emphasize “reaction function” (how it responds to data) rather than forward guidance that ties hands; he criticizes SEP/dot-plot-style predictions that can hurt credibility.
Notable examples
- Tariffs and war-driven oil shocks as “temporary” price shocks; services as the worry.
- Data centers in Iowa (Cedar Rapids) buying land, driving up prices, and making construction/HVAC/electricians scarce.
- 2022-23 inflation: he estimates roughly two-thirds supply, one-third demand; Fed action helped prevent losing the inflation “anchor” (TIPS implying ~2.3% CPI).
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Chapters
Tap a time to open that second in VOInterview with Austan Goolsbee
0:27 to 1:08
Hosts discuss monetary policy and welcome Austan Goolsbee of the Chicago Fed.
“For more information and support, see ibkr.com slash whyibkr.”
Interview with Austan Goolsbee
2:14 to 2:41
Hosts discuss monetary policy and welcome Austan Goolsbee of the Chicago Fed.
“Before Chairman Worsh's big speech, etc.”
Assessing Economic Conditions
2:41 to 4:04
Goolsbee shares insights on the current state of the economy and inflation rates.
“So, Austin, thank you so much for coming back on OnBlock.”
R-Star and Economic Theory
4:04 to 5:48
Discussion on the concept of R-Star and its relevance to monetary policy decisions.
“So I don't think you can really answer that without saying, I'm okay with waiting to see, but I'm a little nervous that the inflation side has, over the last six months, not been looking great.”
Inflation Drivers and Challenges
5:48 to 8:14
Goolsbee discusses factors contributing to inflation and recent shocks to the economy.
“I think it increases it because faster growth, you got to have a higher steady state interest rate.”
Uncertainty in Supply Chains
8:14 to 10:50
Exploration of how recent supply shocks impact central bank strategies and the economy.
“Some component of the increase in inflation is from those two parts, tariffs and one-time increase in price of oil, which hopefully should go away as inflation.”
AI's Impact on the Economy
10:50 to 14:00
Goolsbee discusses the implications of AI growth for the economy and resource allocation.
“should be contemplating at the least, what are you going to do if we're going to get more and more shocks.”
Inflation and Economic Growth Dynamics
14:00 to 15:00
Explore the relationship between economic growth, demand, and inflation pressures.
“So it doesn't feel like we're far from what is the sort of traditional excess demand and outputs above potential, and that's driving up inflation.”
Investment vs. Consumption in Economic Growth
15:00 to 17:49
Understand the differences between growth driven by consumption and investment.
“and now it's just, oh, it's the data center.”
Fed's Role in Inflation Management
17:49 to 21:31
Discuss how the Federal Reserve's actions influenced inflation trends post-COVID.
“I want to keep speculating about what the future is going to be.”
Show all 20 chapters
Fed's Role in Inflation Management
23:20 to 23:56
Discuss how the Federal Reserve's actions influenced inflation trends post-COVID.
“Some people treat ChatGPT like some kind of smart search engine, and some use it to get work done.”
Fed's Role in Inflation Management
24:02 to 24:35
Discuss how the Federal Reserve's actions influenced inflation trends post-COVID.
“Everyone's talking about how AI is transforming work, especially in sales.”
Current Trends in the Bond Market
24:35 to 28:00
Analyze the implications of recent movements in the bond market and their effects.
“So we're at this weird point in time in the bond market where like short term rates still pretty steady.”
Rethinking Communication at the Fed
28:00 to 29:09
The discussion revolves around whether the Fed's communication strategies, like press conferences and dot plots, are still effective in the current economic climate.
“Using that as a, ah, then that's what we should do, I'm less.”
Challenges of Forward Guidance
29:10 to 31:02
Exploring the Fed's challenges with forward guidance when interest rates are near zero and the implications for future economic decisions.
“And if you plugged into the formulas, what should the interest rate be?”
Fed's Reaction Function Explained
31:03 to 38:09
A deep dive into what the Fed's 'reaction function' means and its importance in guiding monetary policy amidst changing economic indicators.
“with rates at the zero bound in terms of communications.”
Fed's Reaction Function Explained
40:33 to 41:08
A deep dive into what the Fed's 'reaction function' means and its importance in guiding monetary policy amidst changing economic indicators.
“Some people treat ChatGPT like some kind of smart search engine, and some use it to get work done.”
Fed's Reaction Function Explained
41:16 to 41:47
A deep dive into what the Fed's 'reaction function' means and its importance in guiding monetary policy amidst changing economic indicators.
“While the landscape shifts, one thing remains the same, the thrill of closing a deal.”
Silent Dissents in Economic Meetings
42:45 to 48:27
Explore the concept of silent dissents among economists and the dynamics within the FOMC.
“I'm going to ask a weird question, but are silent dissents a thing?”
Anticipation for Fed Chair's Speech
48:28 to 51:05
Discuss expectations for the Fed Chair's speech and implications for inflation and the economy.
“I got to say, I know this episode is going to come out after Warsh's speech on Friday, but I'm so intrigued to see what he actually says.”
Transcript
Automatic transcript. May contain errors.0:00Over 90 % of publicly traded companies are listed outside the United States. So why limit your investing opportunities to one market? Interactive Brokers gives you access to stocks, options, crypto, prediction markets, futures, bonds, and more across over 170 markets in 29 currencies. The world is your market. Invest beyond borders. Join more than 5 million investors worldwide at ibkr.com slash invest. Restrictions apply. For more information and support, see ibkr.com slash whyibkr. Some people treat ChatGPT like some kind of smart search engine, and some use it to get work done. ChatGPT Work is a new way of working in ChatGPT that can take action across your apps and files, stay with a project for hours if needed, and turn a goal into finished work.
0:49It's designed to help you move from a chaotic starting point to a reviewable first version. So all the source materials, briefs, and scattered information that you have to grind through to turn into something useful can just become something useful. Put ChatGPT to work on your most ambitious ideas and projects. Get started at ChatGPT.com by selecting Work Mode, available on Plus and Pro plans. Healthcare doesn't always work great. If you've ever waited on a refill or couldn't schedule an appointment, you get it. That's the kind of stuff Optum is changing. They're using data and technology to integrate patient care, pharmacy, and everything else.
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2:02Tracy Alloway:Hello and welcome to another episode of the Odd Loss Podcast. I'm Joe Weisenthal. And I'm Tracy Alloway. Tracy's still here in Jackson Hole. We are recording this, what is it, the 27th. I think that's right. Before Chairman Worsh's big speech, etc. But when we're here in Jackson Hole, we have to talk to as many people as we can about the state of monetary policy, the economy, central banking, all the good stuff we love to talk about. Yeah, definitely. And we don't play favorites on this show, but one of our favorite Fed presidents. We don't play favorites. What? If we were to. That's right. We're going to be speaking with Austin Goolsbee of the Chicago Fed.
2:38Tracy Alloway:That's right. Literally the perfect guest, someone we've had on several times. So, Austin, thank you so much for coming back on OnBlock. Thank you for having me. I'm the chief moose at this time. No moose. I saw a bear.
2:49Austan Goolsbee:You saw a bear? I saw a black bear. Yeah, a little black bear. Along with some of our producers yesterday. It's very exciting. I've never seen one here before, so.
2:55Tracy Alloway:Hopefully not indicative of anything in the broader economy. There's so many places to start. How about a simple question? Right now, when you look at where the Fed has rates at, when you look at the curve, When you look at the state of the economy, would you characterize policy as restrictive right now?
3:15Austan Goolsbee:Depends what you think the underlying inflation rate is. Let's not forget what matters is the real rate.
3:23Tracy Alloway:Yeah.
3:24Austan Goolsbee:Rate minus expected inflation or actual inflation over some period. In the long run, where do we think it's going to end up? I loosely think 3 % rates with 2 % inflation and 1 % real is kind of an eventual landing spot. The real rate, if the inflation rate is 3 plus percent, the real race is a lot lower than if inflation is headed back to target. Yeah. So I don't think you can really answer that without saying, I'm okay with waiting to see, but I'm a little nervous that the inflation side has, over the last six months, not been looking great.
4:21Tracy Alloway:Got it. Not to get too technical. right at the jump of this conversation. But when we - Just jump right in. But when we talk about the restrictiveness of monetary policy, I mean, we're talking about where it sits next to R-Star and R-Star is unobservable at the best of times. Yes. And now we're in this environment where I don't think anyone would disagree that we have this huge structural change in the form of AI. Do we have any more confidence in the neutral rate of interest versus where we are in terms of restrictiveness?
4:50Austan Goolsbee:I love this. I love, you know, I was an academic for 30 years. So I love saying, let's get out of the world of theory. You know, let's get back. I always called our star, our Sasquatch. And you know, somehow it feels with this as a backdrop because you can never see it until after it was left. And you know, here was a footprint. And when I say that, it's because I don't think our star, while the concept exists, I don't find it helpful for me in determining, well, what should the next monetary policy move be? Because it's not observable. Even in the best of times, not observable. That said, I think if you start thinking longer run, what does an increase in the productivity growth rate do to R-star?
5:48Austan Goolsbee:I think it increases it because faster growth, you got to have a higher steady state interest rate. And I gave a speech last year, I mean, at the last Hoover conference that was kind of thinking about if you think AI is increasing productivity, it makes a big difference to what that means for the here and now R star, is this expected or is it unexpected? So if it's unexpected landing on you, then inflation goes down. And in a way, people aren't adjusting their behavior in the short run and rates can go down. But if the bigger the hype, the more we're about to have a giant bounty that's going to come from technology, you could easily overheat the economy in the short run and you have to raise the rates.
6:47Austan Goolsbee:And we kind of live that through the mid to late 90s.
6:52Tracy Alloway:Yeah, that's right. How about we maybe try to reverse, take the question from the opposite direction. So setting aside theoretical questions about R-Star, setting aside how we would measure restrictiveness. Let's just take your point. The inflation data is still warm. There are signs that it's going in the wrong direction, even if, you know, here, whatever. Why? How would you decompose the drivers of either persistently high inflation or the upward rate? That's what we're still trying to figure out.
7:19Austan Goolsbee:I was saying before, even before Liberation Day, as the tariffs came in, I warned, You'll remember. Let's be careful. We learned during COVID that if a supply shock that is supposed to be transitory, if it's big enough, can end up taking a lot longer than we initially forecast. And that was my fear that while one and done tariffs are supposed to be an increase to the price level, increase to the price level and a temporary inflation shock. Where was the evidence that that was true? We've been dealing with that. To add an oil price, war-driven price shock on top of it before that one went away, that's a dicier proposition.
8:19Austan Goolsbee:Some component of the increase in inflation is from those two parts, tariffs and one-time increase in price of oil, which hopefully should go away as inflation. But if you look at services, that's not really caused from tariffs. That's not really caused from oil prices. That's a deeper level of concern. So in my, is it a decomposition? I'm hopeful that much of it came from those temporary slash transitory factors I'm giving myself hives even using that word. And if so, then we should see it. It should go away. It can't be that each quarter we say, ah, yes, it's about to go away, just not yet, you know, three months from now.
9:18Austan Goolsbee:And so that's why I was okay with if we get one or two readings of inflation that are moderating, it's perfectly fine to say, let's wait a meeting or two meetings or whatever. Let's see if this is the heralded introduction of the temporary party. So in a normal world, these shocks are supposed to be, again, using the dreaded T word, transitory, like one-off levels to the price, and then they kind of fade away. I think it's fair to say in recent years, we've seen shock after shock after shock. Do you think that the central bank needs to start incorporating that kind of uncertainty into its mandate?
10:03Just assume that the world's more uncertain. Sorry, not into the mandate, into its thinking.
10:08Austan Goolsbee:Yeah, into its thinking, yes. I think that you're honest. It does feel like we're getting more supply shocks. The traditional world shocks aren't the main thing happening. It's not commodity prices. Normally, the grubby reality of the business cycle, demand driven, unemployment goes up when inflation goes down. inflation goes up, when unemployment goes down, when both of those things are moving together, like what happens with these supply shocks, there's not an automatic playbook of what to do. I do think that we at the Fed and the central banks all around the world should be contemplating at the least, what are you going to do if we're going to get more and more shocks.
11:00Austan Goolsbee:That's a slightly different, you kind of, you raise a second point, which is with the tariffs and with the war here, I think that has piled this uncertainty on top of itself. And I think that's what's led in the labor market to this kind of high, low hiring, low firing, which is not a normal combination. I think it's a combination that characterizes uncertainty. So yeah, we should start thinking that way.
11:38Tracy Alloway:Just on AI real quickly, look, none of us know what AI as a technology will mean for productivity. Hopefully great things happen. In the here and now though, there's another factor that people talk about which is just there's an extraordinarily high amount of spending going on in the build out of it. And I'm curious on both the maybe like theoretical level, but also in a conversations that you have with businesses in your district level, does that show up? Does it feel like, okay, if we look at supply chains, they are getting tighter because companies that are building this out are competing for real resources, whether we're talking about labor, materials, commodities, parts, and so forth?
12:20Austan Goolsbee:Yes. And you hear it from business executives. But in some ways, I feel like maybe too much.
12:29Tracy Alloway:Interesting.
12:30Austan Goolsbee:That if you look at the price pressures coming from AI data centers, the build out of very high investment, this isn't the first time that there's been high investment as an indicator of economic growth. But the overall overheating of the economy is kind of the deeper question. Sectoral AI is going up and some other industry is competing for electricians and construction and complaining bitterly about that. That's not the same thing as the economy is overheating. It has to get out of its lane of just direct competition and drive up wages, drive up prices outside of just its lane. Because if this one going up leads this one to go down in the aggregate, in a way, the national unemployment rate and the national GDP growth rate tell you a lot about where you are in the aggregate economy.
13:39Austan Goolsbee:That said, you hear it. You go around the Midwest, the Chicago district is kind of hard to the Midwest. We're in Iowa, we're Cedar Rapids, Iowa. I'm like, what's the biggest problem? And they're like, the data centers are buying up all the land. They're driving up the prices. Nobody can construct, can do any construction. You can't get, you can't get an HVAC person. So it doesn't feel like we're far from what is the sort of traditional excess demand and outputs above potential, and that's driving up inflation. And if it does, back to your first question, then we're not restrictive enough. If that starts happening in the aggregate, we're not restrictive enough.
14:30Austan Goolsbee:I don't know how to say, is this restrictive or not restrictive? Everything's relative to something. And if inflation starts going the wrong way, driven by just old fashioned investment is so high and growth is so high that that we're getting that impulse, then I think it's not restrictive enough. It is true that people complain about not being able to get contractors all the time, and now it's just, oh, it's the data center. Exactly. So that is what I mean. That's filled into the boogeyman is if you can't find an electrician. I half expect people to be like, I need to go to the dentist. They can't see me for three weeks.
15:18Austan Goolsbee:Thanks a lot, data centers. That's right. Well, OK, what's the difference when it comes to Fed policy between an economy that's growing mostly because of consumption versus an economy that's mostly growing because of investment? Like, how do you treat that difference? In the short run, it's probably not that different. Just in the business cycle sense of there are many different ways you could go. We've seen overheating from housing construction getting out faster than the economy can handle. We've seen consumer spending, savings rate go to zero, consumer spending is faster than economy can handle.
16:00Austan Goolsbee:We're seeing a business investment driven threat to more than economy can handle. In the short run, if it's demand driven, I kind of think it's not. Fed has a very unsophisticated tool. We can raise the interest rate, lower the interest rate. What makes it work is that usually the most cyclical industries are the most interest rate sensitive industries. So it kind of does make sense that the Fed be the tip of the sphere.
16:34Austan Goolsbee:If by that question you're asking the deeper thing of, well, what does it mean long run, you hope that the investment will enhance potential output in the future. So then it would be different down the road, five years, 10 years, if productivity growth remains high. But then we're also sort of back to our discussion of, well, what does that mean for rates long run? I actually think rates could be higher if the growth rate is higher. for all the best reasons. I mean, that's the manna from heaven, productivity growth.
17:13Tracy Alloway:That was the normalization that people wanted for a year. We would love that.
17:16Austan Goolsbee:We would love that normalization if we could grow 3 % a year and incomes are growing without inflation because of productivity growth. At the same time, let's be a little wary. I've been, from early on, highlighting maybe some of this technology is raising the productivity growth rate, but we've now gotten six months in a row of pretty crummy productivity growth. So let's not all conclude before it's actually manifested that we've had a change of era.
17:52Tracy Alloway:I want to keep speculating about what the future is going to be. That's the best kind. I want to ask one more question about the past, actually, because we've actually had a few different, over the years, we've had a few different versions of this conversation, this question, which is inflation has come down quite a bit from its peak in the post-COVID era. But there's this question of why, right? Because the unemployment rate never took off. It was kind of immaculate, except there has been significant housing cooling. In a different era, they used to say the housing market cycle is the business cycle.
18:26Tracy Alloway:That hasn't been the case in several years from now. It's totally disconnected. Do you have any, sitting here in August 2026, and you look at housing continue to be soft, you look at where inflation is, maybe signs of it gathering steam again from an elevated level. Do you have any theory of the case of the last few years of the relationship between what the Fed did, the hikes, and what they really did to the economy and how much they contributed to taking the economy off the boil in 2022, 2023? rate.
18:57Austan Goolsbee:Idrit, I thought you were going to go a different way back to the old, how much was supply and how much was demand in the rise up in inflation.
19:05Tracy Alloway:Yeah, no, but I'm sort of talking
19:06Austan Goolsbee:about what you did, the aggressive rate of rate hikes. I think - What's the story? The aggressive rate hikes, the shoe that did not drop, I think that supply was a major driver of the run up to inflation and the healing of supply eventually was a major component of the drop to inflation. As long as you say that, as long as you're not trying to have it both ways and both sides, it feels like in that debate, want to have it both ways in the sense they want to blame the run up on fiscal policy, say, but then the fiscal and monetary policy, that it was all about stimulus. And then they would say, well, why did it come down?
19:56Austan Goolsbee:Then they want to say, no, no, they don't deserve any credit for that. That was all from supply chain healing. I think it was loosely two-thirds supply and one-third demand then. I wasn't there when it went up, so you can't blame me. But I do think that the Fed's aggressive action permitted the one shoe not to drop that was hugely important. And that is, side note for Odd Lots listeners, you will know that historically, CPI of 2.3%, we kind of think correlates with a PCE of 2.0%. Even as CPI was pushing close to 10 % inflation, if you looked at inflation compensation in the tips, it remained steadily at 2 .3 % CPI.
21:03Austan Goolsbee:So exactly 2 % inflation target. To me, that was a piece of evidence that having a 2.0 % inflation target was exactly the anchor that its advocates said. And I think it was critically important that the Fed not lose control. If they had lost the anchor, I think we would have had a heck of a time trying to get rid of the inflation. So I think the Fed deserves a lot of credit at that moment. And then if you had plugged into chat GPT or some AI, trained on all the data through history, and said inflation is double, triple the target, what should the Fed do? It would have said, jack the interest rate up to 20%.
22:01Austan Goolsbee:and have a huge recession because that's the only way you ever get rid of inflation. And I do think the Fed's understanding that there was a component that was not going to be permanent and that the much maligned or mocked immaculate disinflation was in fact possible. I do think that the Fed deserves credit for recognizing that too. On the other side, they were slow out of the game. You can't look back and say they weren't. They clearly were.
Read the full transcript
23:00Tracy Alloway:crypto, prediction markets, futures, bonds, and more across over 170 markets in 29 currencies. The world is your market. Invest beyond borders. Join more than 5 million investors worldwide at ibkr.com slash invest. Restrictions apply. For more information and support, see ibkr.com slash whyibkr. Some people treat ChatGPT like some kind of smart search engine, and some use it to get work done. ChatGPT work is a new way of working in ChatGPT that can take action across your apps and files, stay with a project for hours if needed, and turn a goal into finished work. It's designed to help you move from a chaotic starting point to a reviewable first version.
23:42So all the source materials, briefs, and scattered information that you have to grind through to turn into something useful can just become something useful. Put ChatGPT to work on your most ambitious ideas and projects. Get started at ChachiPT.com by selecting work mode, available on plus and pro plans. Everyone's talking about how AI is transforming work, especially in sales. While the landscape shifts, one thing remains the same, the thrill of closing a deal. Whether it's a gong or a confetti machine, every team has its celebration rituals. Adio is designed for that moment. It's the agentic CRM that turns customer signals into actionable insights, helping you close deals faster with revenue agents and automations working around the clock.
24:26You'll have everything you need to scale your go-to market efforts. Elevate your wins with Adio. Start your free trial at adio.com slash iHeart. So since you brought up tips, we should talk about the bond market, right? So we're at this weird point in time in the bond market where like short term rates still pretty steady. The longer term yields have been going up. Tips haven't really been pricing in that much inflation. So when you look at bond yields at the moment, especially at the long end of the curve, what is that telling you?
24:56Austan Goolsbee:If you're a central banker or you're one of the Fed heads, don't get into every blip in Twitter of the bond market. I kind of think you need a little bit of time to sort out what's driving it. Long yields going up. Could be people are expecting inflation. Could be people think that the Fed is going to have to be on a path that rates will be higher. Could be there's a lot more competition in issuance and just more bonds getting put out. And it's probably some combination of all of those. I don't put that much credence on the argument that there's a general freak out about the credit worthiness of the United States.
25:46Austan Goolsbee:Because if you really think that a country is going to experience default, the rates aren't whatever, 5%, 5.25%. That's just a historically pretty normal rate. So I think, look, we're watching that. It does have an impact on the economy, but whenever you're looking at market reactions, you got to think a little bit about this reflection problem, that part of it is what do they think the Fed is going to do? And so I don't like, but Paul Volcker used to tell me, our job is to act and the market's job is to react and let's not get the order mixed up. And that's kind of where I start. This is exactly what I was going to ask you next, because Kevin Warsh has gone on the record saying that he thinks there should be less forward guidance from the Fed and that the market should be playing more ball versus being the referee.
26:42So he's suggesting that the bond market can send a useful signal through yields.
26:47Austan Goolsbee:I think you learn a lot from bond markets. As you know, the rules, I don't speak for anybody else or weigh in of what somebody else's message is. Personally, I'm speaking only for myself. I agreed with the, and I think it's healthy in a general way to refresh every once in a while what any organization's doing and have a rethink. But on the specific thing of should we have less forward guidance of saying here is where we think rates are going in the next six months. If X thing happens, then I promise I'm going to vote for an increase, a cut, a blah, blah, blah. I think that adds to volatility and threatens to get us into a tying of our hands that I don't think is healthy.
27:35Austan Goolsbee:So I have embraced this. Let's engage in last forward guidance. That's different from should the market tell us what to do? I'm not a fan of it. The Federal Reserve Act says by law what we're supposed to look at. Maximizing employment, stabilizing prices. It doesn't say anything about the stock market. It doesn't say anything about the bond market. So gathering information from them, I'm totally for. Using that as a, ah, then that's what we should do, I'm less.
28:09Tracy Alloway:Well, speaking then of communication technologies, the thing that always makes me feel very old is reminding people that press conferences, dot plots, and so forth are very recent innovations. Yeah, right. And they were brought in because the Fed had a specific problem in 2008, 2009, et cetera. They solved the problem, perhaps, at the time. As we think, what is suitable for this new era? Could it say, maybe it doesn't make sense to have press conferences. Maybe dots have outlived their usefulness. Maybe we don't need as many meetings as we used to have or something like that. Should all these things be on the table in terms of like -
28:48Austan Goolsbee:Yeah, look, you've seen the table. I always say the biggest table I've ever seen in my life is the FOMC table. There's room for plenty of stuff on that table. All of that should be on the table. We have this outside task force headed by outside folks that's contemplating a lot of these issues about communication. I think it's healthy. Let's rethink all of those. You're right to remind the history. We were at zero. The interest rate was at zero. And if you plugged into the formulas, what should the interest rate be? It was like 96%. And so the Fed at that time was facing unprecedented challenges.
29:33Austan Goolsbee:And they were trying to, what do you do when the interest rate is already zero? And giving forward guidance in an environment where you're at the zero lower bound, where you're like, not only is the rate not going to go up, it's not going to go up for years. It's not going to go up until the unemployment rate comes down.
29:54Tracy Alloway:All of those things can work at a time. The Evans rule, the Evans rule,
30:00Austan Goolsbee:that each of those is kind of a creative solution to a problem that they were facing. We're in a totally different environment. And so we should look, we should think through all of those. Joe, do you remember, I think when the feds first started the dot plot, we were both at Bloomberg. Do you remember? No, wait.
30:20Tracy Alloway:We were not at both at Bloomberg. Oh, were we not? No, it was early. It was definitely earlier than that. Here, go tell. You need to be like, you weren't at Bloomberg. No, no, we were not at Bloomberg. I was at Bloomberg. It wasn't, we were not at Bloomberg. Well, I genuinely, but I remember there was like this all-hands committee at one point to try to like figure out a way to display the feds dot plot. This part is true. Yeah. As it became clear that this became a thing, there was a lot of efforts to sort of like formalize the presentation of the dot plot in graphical fashion.
30:46Austan Goolsbee:I thought you were going to say this is like my mom's generation. Everybody remembers where they were when John F. Kennedy. You remember the day the dot plot came out. I remember where I was when the BOE retired the fan charts. I was really sad about that, but that's it. Wait, so, okay, you talked about the Fed was trying to solve a problem with rates at the zero bound in terms of communications. What is the problem that you think the Fed is trying to solve now in terms of comms? Why have the task force, other than there's a new Fed chair and he wants to do this now? The new Fed charity wants to think through some of these issues.
31:20Austan Goolsbee:I think we're not anywhere near the zero lower bound. So some of the logics of the communication tools that existed before, we should revisit. And I've been on public record for years about the SEP. I don't like any time the members of the Fed are making or writing down what they're interpreting as predictions that don't turn out to be true. I think you pay a little price in terms of credibility that people can go back and look and say, wait, aren't you the bozos who said that by now, whatever, inflation would be 2%, the unemployment rate would be something. So that it asks about one year, two years, three years ahead and the long run, do we really need all of that?
32:16Austan Goolsbee:That was my expressed starting point. And in the dot plot itself, I find it can use a purpose. I think it's important that the world be able to understand something like the reaction function, worldview of the members of the committee. And in a way, the dot plot could serve as that, except the assumptions are not tied to the rate of the dots. So to quote the median inflation and the median rate, but that's not necessarily the same person. And so it doesn't actually serve as a reaction function. So I think there's a lot of things you could do with the SEP.
33:09Tracy Alloway:I'm actually glad you brought up reaction function as a distinct thing from forward guidance, Because I feel like when people talk about the Fed, they are distinct and they often get conflated. Agreed. And so people say, like, we don't want forward guidance. And they say, oh, we're not going to hold the market's hand. We're not going to say what we're going to do with the next two minutes. It's like, great. There's no reason for the central bankers to be pre-committing what they're going to do. Nonetheless, it strikes me it's still valuable to have some understanding of how the central bank is thinking about its tools in relation to the data.
33:41Austan Goolsbee:And what do you see in the world? That's where my head is. So when I say forward guidance, I mean literally of the form. Here is what I intend to do with rates. Here is what I think is the appropriate rate move at the next meeting. And it's the tying of hands. That's different from, here is how I see the economy right now. What am I looking at? I'm looking at inflation. I really want to see that inflation is not persistent that we are coming into that. They're related, of course, but they're different.
34:18Tracy Alloway:But I think, so for example, in the 2010s or coming out of the GFC, it was important for the Fed to communicate that if you get a hot inflation print here or there, we're not going to react too much because right now - Here is the way we see the economy. It's important for us to get the employment right down. Then comes 2022 or 23 and the Fed needs to communicate, you know what? We might get a little labor market softness, but we got to smash that inflation down. And that is our thing. To my mind, that's reaction function.
34:45Austan Goolsbee:I agree with you. And I'm curious. And I'll give you a tiny microcosm. When I first got to the Fed at the beginning of 2023, there was a lot of public discussion about the, can inflation come down? And people said, no, it can't come down because look at how fast wage growth is. And wages are the lion's share of costs and services. So inflation can't come down until you see wages come down. I don't think that's correct, but I think that gets the dynamics wrong. They're forgetting that wages are stickier than prices. So when shocks hit, it tends to be prices go up first. You see the price inflation, then the wage inflation, and then it comes down and then the wages come down.
35:35So in the short run, this is a reaction function.
35:40Austan Goolsbee:Call it reaction function, but it's just, here's my worldview of what I'm watching in the economy and why I don't, if I see wage growth as high, that doesn't make me nervous that inflation can't come down.
35:54Tracy Alloway:So just the last part of this question, Chairman Warsh's press conference have been different so have been different from his predecessors, that say, the Ford got in here, it's coming to an end, fine. I don't feel like I have yet to establish a handle on what his reaction function is right now. And I'm curious if you in the committee feel like you have a fear.
36:15Austan Goolsbee:You're constantly trying to get me in trouble. Yeah, of course. That's my job. I'm not allowed to talk about somebody else's reaction function. No, no, but you have like, okay, well. And you're like, no, no, okay, don't ask. What do you think his reaction function is? I'm not gonna tell you. what the chairman's reaction function is. Go ask him what his reaction function is. I'm telling you mine. Every sell-side analyst note that has come into our inbox for the past five or six weeks has been talking about the need for clarity on the Fed's reaction function or something about the reaction function.
36:48Austan Goolsbee:How would you... You want me to speak for the committee. I'm not allowed to. I can tell you, here's what's the Goolsby reaction function. We'll settle for that. What I'm looking at is especially tuned to the inflation side. I thought front loading of rate cuts. The reason I dissented, I'm not a voter this year. I was last year. The reason I dissented in the last meeting of the year when they cut rates was I'm not comfortable front loading the rate cuts, counting on this inflation to be transitory and go away. I want some evidence that it is going away, that we are headed back to 2%. And if we get that, then I'm totally fine.
37:34Austan Goolsbee:Look, let's strap put on the seatbelts. We're headed back to the 3, 2, 1 that we talked about before. It not only did our progress, we were making substantial progress on inflation. Then it stalled out. Then it started going the wrong way. And now we've had a, not a blip, but a bit. We've had a bit of easing of inflation, but it's still iffy. And so my reaction function is heavily geared toward, I need evidence that inflation, that this inflation shock is not going to be persistent. and i'm okay with waiting as as we're getting that but if the evidence starts coming back especially on services that it's high it's going the wrong way we're not making progress then i'm going to be nervous wait can i ask a personal question you gotta wait until you i might not answer that's fine but yeah that's what's your right but what's it like when you descent like is does it make you i was afraid like oh are they gonna come be like the goons are gonna come punch me they didn't really they it was i i wasn't alone um and people are people i found them respectable i had laid out my criteria i i was expressing multiple times.
39:18Austan Goolsbee:Hey, okay, we're doing this, but I'm really uncomfortable with front-loading too many rate cuts. And if you remember, that was the meeting where the government was literally shut down and we didn't even have the data. So my thing was, let's not just keep cutting. We don't even know what's in the data. Let's at least get some data before we act. So I didn't get any mean and nasty calls from the chairman or the other committee members. So plenty of in the public, you jerk. But it's a deliberative body, as we've talked about many times. And people take the job real seriously. And everybody comes there with a worldview.
40:03Austan Goolsbee:And it's okay. You know, we've seen a little more dissents lately than in the immediately preceding period. But by historical standards, there's still way fewer dissents nowadays than there were in the U.S.
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41:47Tracy Alloway:If you like YouTube, you'll love YouTube Premium. It's destroying athlete, creator, and YouTube Maxer. YouTube Premium enhances how I use YouTube with awesome features like offline downloads so I can download my favorite training videos before I hit the gym. So no Wi-Fi doesn't turn leg day into loading day. Plus, I get ad-free videos, background play, and so much more. YouTube Premium is like YouTube got some extra gains. Try YouTube Premium for two months free at youtube.com slash premium. Hey, what's up, guys? It's Haley Bailey. Okay, I need to tell you about something. I just got YouTube Premium.
42:22It's got tons of awesome features like offline downloads, so I can download my favorite videos before I travel and watch them whenever I don't have Wi-Fi. Because we all know airplane Wi-Fi is the worst. I get ad free, I get background play, and there's like a ton more in there. You should try it. If you like YouTube, you'll love YouTube Premium. So try YouTube Premium for two months free at youtube.com slash premium. Trial eligibility varies. Terms apply. Cancel anytime. That's a mouthful. I'm going to ask a weird question, but are silent dissents a thing? And the reason I ask is because I saw a Goldman Sachs analyst note where they were talking about like, oh, sure, there were three official dissents at the last meeting, but what about all the silent dissents?
43:01And we don't know what number those are at. And it's kind of funny to think about, you know, there's economists out there trying to count up something that's not happening.
43:09Austan Goolsbee:The thing is, there's not happening and then there's not happening, which is to say not everybody gets to vote at every meeting. So to that extent, there are silent dissents. If there are people sitting around the table who if they were a voter, they would be dissenting. They just have no way to express dissent except to go out and say in public, here's what I think about the economy. so to that extent of course there are silent dissents it sounded like a little bit they're making an argument though there's people voting differently than what than what they think like that'd be a different type of silent dissent I don't that hasn't been my experience um but look the minutes come out you see you know basically what everyone says and and in a couple of years, you'll start getting the word for word transcripts.
44:06Oh, yeah.
44:06Tracy Alloway:I know. We just have to wait five years. I can't wait. Yeah. That'll actually see. Well, this actually leads to my final question. No, it's four years, nine months. Oh, okay. That's right. Yeah. Well, but this is actually good for my final question, which is that, I think last year here at Jackson Hole, one of the questions I asked you, and it had to do with descent, was the sort of like, why are descents generally rare? And is it because you generally see - That was a good question. I remember. Did you see the thing similarly, or is the chairman particularly good at more or less corralling the FOMC?
44:36Tracy Alloway:Does it seem like right now - And I said both. Okay. But I think you primarily said that you credited Powell -
44:43Austan Goolsbee:Chair Powell was quite good at that. So we'll read these transcripts in four years and nine months.
44:48Tracy Alloway:But in the FOMC, does it feel any different than it did under the Powell era? It feels very different.
44:56Austan Goolsbee:I mean, just personally, it feels very different. And of course, when there's a different chair, who kind of does the chair always gives us kind of a summary at the end or, you know, where the chair's head is. It's always different. I only was there for one chair. It is kind of unusual that the former chair has now just kind of moved his seat over a couple of spaces. So he's still there. But I think it feels different. Interesting. And it's the chair's new. I mean, you can see in the press conference. Yeah, he's just bringing, there's no snacks. The snacks are outside with the phones. You can't bring, you're not supposed to bring the snacks in there.
45:40Austan Goolsbee:He just has a different worldview. I mean, you could see it in the press conferences. You could see it in the talks. He just has a different worldview. And he's wanting to rethink a bunch of the issues. He's publicly said he would like to get a little more, stir up a little more debate. I think there was debate before. And if we're going to have more, change the format of the meetings or stuff like that, I'm open to thinking those through.
46:16Tracy Alloway:Powell's still there, any sort of like two popes tension? Like, you know. I don't know.
46:22Austan Goolsbee:Again, now you're trying to get me in trouble on a different role. I'm not allowed to say what happens at the end. We'll read about it in the transcript. I just feel like the tone is there's a new person, there's a new leadership. He's trying to do it different ways. He's clearly getting his, bringing it into his own of how he wants to run this stuff. We're going to stop trying to get you into trouble, and I'm not going to ask what you think Warsh is going to say tomorrow. And again, we're recording this ahead of the speech, but like, what should we be looking out for? What would make you sit up in your seat and go like, oh, wait a second, this is different.
47:01Austan Goolsbee:Well, this is different than what? Than previous Jackson holes, previous Fed shares, something to take notice of. I'm going to be paying attention to broadly defined reaction function. You know, how do you see the economy as the chairman? And I'm hyper-focused on this question of, is inflation going to be transitory or is it going to be persistent? Because if inflation is going to be persistent, then it's going to force action by the Fed or by any central place. if it's going away on its own, or if you even feel like it could go away on its own, then it puts us in a very different circumstance.
47:53Austan Goolsbee:So I think we're all going to be looking out for that.
47:57Tracy Alloway:All right, Austin Gillespie, thanks for playing ball with us. Thanks for letting us try to get you into trouble. Really appreciate you coming back on OzLabs.
48:17Tracy Alloway:Tracy, that was a lot of fun. I always love talking to Austin. Yeah. I appreciate that he doesn't mind our efforts to get him into trouble, to try and cause a little bit of tension. He plays along. He plays along. I appreciate it. I got to say, I know this episode is going to come out after Warsh's speech on Friday, but I'm so intrigued to see what he actually says. And now I'm kind of thinking, wouldn't it be funny, but not really, if you just spoke about financial innovation and payments for 40 minutes. Everyone is waiting for the chairman to say something about the state of the economy where the rate hikes are necessary.
48:49Tracy Alloway:And he's like, oh, I'm going to talk on theme. And I'm going to talk about the state of - Stablecoins and FedNow for 40 minutes. Exactly. That would be extremely funny. Although I guess we'll see. I'm glad we got into this point with Austin about the distinction between reaction function and forward guidance. Yeah. Because I actually do think there's a lot of sloppy discourse about it. And people allied the two. And I think it makes it, you know, if you go back to the green Spaniel, there weren't dots in those days, there weren't press conferences, etc. The statements were a lot shorter. Their statements were, it's very clear that the Fed is capable of operating with far less sort of like, both literal communication and quote, handholding about what it's going to do.
49:31Tracy Alloway:I do think the deeper question is still what we got even with Austin, which is, OK, right now, as Austin said, he's more anxious about inflation. That's the sort of the burden is on the inflation side to improve. And otherwise, that would probably call for higher rates. And that is the reaction function question. And that is what we really haven't got yet from the chairman, at least as of the 27th. Well, I also think it's funny. I remember under PAL when the Fed deviated from some of its forward guidance, and people were writing, this is the death of forward guidance back then. And now suddenly everyone's like, oh, it's dying again.
50:07Tracy Alloway:I think this phrase was always kind of bad. And I think this actually gets to the point that maybe we didn't need those dots forever. They served a purpose. Were there press conference or any of it? And it was helpful to hear Austin describe it. He's like, yes, you plug the conditions of the time post-GFC into a Taylor rule and it gets you to negative 6%. That's impossible. The Fed can't do that. So then layers on all these other things. We've got to talk about it. We've got to do whatever. Maybe these things really did not need to exist for as long as they did. And again, if maybe the task force says we really don't need all this talk and dots and all this stuff, that might be totally wise.
50:51This is the other question about tomorrow, because Warsh could talk about findings from the task forces, right? It's an early indication. So I guess anything and everything from stable coins to Fedcoms is up for grabs. But shall we leave it there for now?
51:04Tracy Alloway:Let's leave it there. All right. This has been another episode of the All Thoughts Podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Jill Weisenthal. You can follow me at The Stalwart. Follow our producers, Carmen Rodriguez at Carmen Ehrman, Dashiell Bennett at Dashbot, Kale Brooks at Kale Brooks, and Kevin Lozano at KevinLloydLizano. And for more Outlots content, you should check out our daily newsletter. You can find that at Bloomberg.com forward slash Outlots. You can chat about all of these topics 24-7 in our Discord, discord.gg slash Outlots. And if you like this conversation, if you enjoyed the video, then please like or leave a comment, or better yet, subscribe.
51:40Tracy Alloway:Thanks for watching or listening.
51:50Thank you.
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From the publisher
Inflation remains high and the 2% target is farther away than it was this time last year. There are signs all over that the economy is overheating — the strange labor market where hiring and firing remains low, while GDP is growing, but mostly due to AI and the data center buildout — and Chicago Fed President Austan Goolsbee is worried about how uncertain central bankers are about what to do to cool the economy. The next shock, he tells us, could be around the corner. In this conversation, recorded at the Jackson Hole Economic Symposium, Goolsbee explains why he is skeptical of metrics like r*, why he is embracing Kevin Warsh's philosophy around reducing forward guidance, the purpose of the new Fed task forces, and the economic indicators that influence his thinking around reaction function.
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