Austan Goolsbee on How This Cycle Turned Out To Be So Different

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1:14Hello and welcome to another episode of the All Thoughts Podcast. I'm Tracy Alloway. And I'm Joe Weisenthal. Joe, how is your deep dish pizza? It was so good. You know, I actually don't know if I had ever really had a proper Chicago deep dish pizza before. But I went to this place, I think it was called Pequod's Pizza. Yeah, Pequod's. And they sort of burned the crust a little bit, which I really like. Highly recommended. It seemed pretty legit as far as I could tell. You definitely did the right thing because I just went back to the airport to hop on a flight. And I got to say, O 'Hare is kind of even worse than I remember it.

1:54But anyway, in case you haven't figured it out yet, we both just got back from Chicago, where we interviewed the Chicago Fed president, Austin Goulspeed. That's right. First of all, Chicago is so nice this time of year. I love visiting Chicago. You know, we could have talked to Austin over Zoom or something, I guess. But it was great to actually go there, go to the Chicago Fed headquarters and talk to the president of the Chicago Fed. And what I have to say is, I think, an extremely interesting sort of moment for macro right now. Oh, it is so interesting. I know people overuse the term turning points.

2:27Yeah. But I really feel like this is a very specific moment in time where we thought the labor market was weakening. The Fed cut by 50 basis points. And then we had that blowout jobs report. And I have to say, we recorded this interview with Austin on Wednesday, October 9th, which was the day before the latest CPI figure came out. Also, we recorded it right when the FOMC minutes came out. So not the best planning in terms of timing on our part. But since then, we've had CPI come in ever so slightly hotter than expected as well. Yes, that's right. So as you mentioned, we recorded this Wednesday.

3:12You're listening to this presumably on a Friday. But even with the fact that we couldn't talk about CPI, I think there's really two things that make this moment interesting. And it's always interesting because we live in a world of incomplete information and uncertainty. But the two things are really, and Austin talked about this in our interview, the Fed has changed focus, right? For a couple of years, it was about inflation and getting it down. And now the risks are balanced. So that's a key thing that happened. And I would say that Chairman Powell's speech at Jackson Hall in August officially marked that moment of the pivot starting there.

3:47And then the other thing is like, OK, maybe there's this pivot, but things right now are still really uncertain. And we really don't know what's going to happen. And you mentioned the hot inflation number and the strong jobs report and all this stuff. So we're at a moment where pivot meets new uncertainty. Yes. And who better to explain some of that uncertainty than Austin? So why don't we go ahead and take a listen? Here's Austin Goolsbee from the Chicago Fed. Thank you so much for coming back on Odd Thoughts. Welcome to where the magic happens. We are very excited to be in Chicago. I have to say, being in the Fed building, it's a gorgeous building, the architecture.

4:23Yeah, it's a landmark. It's great. Yeah. It's over 100 years old. I heard you were celebrating the 100-year anniversary this year, right? Last year. Last year. It was, yeah, last year. Also, we probably could have caught up with you via Zoom, but it's just such a great time to be in Chicago. Yeah, this is the moment. This is what all the hype is about. It's actually warmer in Chicago right now than it is in New York, which is kind of surprising. Okay, speaking of stuff that's warmer, we had a pretty hot jobs report recently. Nice transition. Yeah, thank you. I'm a professional. Okay, blowout jobs report.

4:57What does that mean for you? Did it cause you to take pause, maybe think about that 50 basis point cut? Well, look, you know my thing is always let's take the long arc and find the through line, not overreact to one number. It's 60 days before that, we got a disappointing number, and you had people going on publicly and saying by the time of the next Fed meeting, they need to have 150 basis point cut. Then we get a positive jobs number, and then we have a positive job number, and then people are saying, maybe we should raise. I don't fault the market. That's the market's business model. They got to react to every little Twitter and blip that happens.

5:43In my view, the Fed's not on a timetable like that. We got to take the broad view. So far, I think the broad view shows inflation come way down. The job market has cooled from overly hot to something like sustainable, full employment, where we would like it to be. And if we could freeze it right there, that'd be a lovely picture. And so then the question is, can you freeze it there? Or is it going to get worse? If we got multiple months that showed big positives, like what we just saw in the jobs number, I would alter my view. That would affect my view. But I don't think that – I think people can take that too far from one month.

6:30That all makes sense to me, but I'm going to try to attack the – present the same question and attack it in a slightly different way. We might have a few of these. If I think about Chairman Powell's Jackson Hole speech and I think about that 50 basis point rate cut in mid-September in totality, like the basic way I think about it is like you at the FMC, the Fed is trying to cut off the left tail of a hard landing. And things are in a good spot currently. The levels are good, but trying to cut off that hard landing outcome with a sort of strong beginning of the rate cut cycle by going 50. Does that strong jobs report change at all how you think about the risks today of a hard landing?

7:11I'm in the data dog caucus, one of the core members of the kennel. So I'm never going to ignore any data point. I want all the data that we can get. If you take a step back and look at the dot plot in the SEPs, they ask independently. We don't talk about it, but they ask independently everybody. And the mass bulk of the dots say that the FOMC members think inflation is going to keep coming in close to the 2 % target. They think unemployment is going to stay somewhere around full employment benchmark and that the Fed funds rate is 150, 200 basis points above where they see it settling down. So the broad mass of people think in the long run Fed funds would be two and a half to three and a half, you know, something in that range.

8:15And we're, even with the cut, we're well above that. So I kind of think that's by far the biggest information content. So the focusing too much on the short run, I was kind of teasing the market, but I guess I'll tease you. It sounds like you have the same, you have that same short run focus that whether it was 25 basis points at the first meeting versus zero or 25 versus 50 at the next meeting. And what does that mean for the meeting after that? That's smallish potatoes. The big picture is inflation is weighed down. Unemployment is up to a level that we're happy with. And the rates are well above what almost everyone on the FOMC is saying they think is the steady state.

9:09And as I keep saying, you just got to think about your restrictiveness. And that includes me. And you got to think about how restrictive you want to be. If you got the dual mandate where you want it, do you want to have rates be that much higher than where you think they're going to settle? or does that endanger the pretty picture? And so that's kind of where my head is. It's not even technical. There's a ticky tack argument that I would just remind people that, A, you know, we meet every six weeks. Okay. So we're constantly going back over the data and forecast of what's to come to try not to get behind the curve.

9:53Or if we get behind the curve, not to be too far behind the curve. It's why the Fed is the tip of the spear for economic stabilization. And there was a meeting where we had a meeting and there was no rate increase. Let's say it was between zero and 25. There are no 12.5s, but if there could be a 12.5, it was kind of a 12.5 meeting. And then we have a meeting where there's an argument in the market Are they 25? Are they 50? There's no 37.5 move. I think I've joked about that on this very podcast. Over two meetings, 12.5 and 37.5 is a 50-point move. Okay, so over some longer period, it doesn't feel like if you're trying not to fall behind the curve.

10:49We move in discrete increments. And so I still think this taking a long view is the right way to think about what's happening. And I don't know why we don't do 37.5. Why isn't it continuous? Why can't we pick like 33? Like, I don't know. What do I know? Is there a rule? Actually, I'm really interested in this question. Stock trading used to be in 16. So until the late 90s. And at some point, people realize that's ridiculous. So I don't know. I don't know how. But I think maybe some of the confusion comes around because the Fed has emphasized data dependency so much in recent years. And data, by its very nature, is backward looking.

11:30And then we could talk about that. But then you get to turning points in the business cycle. And now it kind of feels like you're shifting more into – you talked about being behind the curve. It feels like you're trying to get ahead of something. And so I think there's that tension. There is some tension between how much do you want to look back, how much do you want to look forward. You got to do both. If you want a soft landing, you can't be behind the curve. And the hardest thing, as I say, that the central bank has to do is to get the timing exactly right when there are moments of transition.

12:08It's why we meet every six weeks so that you don't have to make one decision and figure out the thing. My only objection to the characterization is that to be data dependent, I do not think means you commit, I won't make any forward-looking judgments. I only want to look backward. I think it's a mistake to do that. And especially because there are lags to monetary policy. And the lags, if anything, were even longer for this weird business cycle. And so if your decision rule was going to be, I'm just going to wait until we see, say, the job market start falling apart before positioning. Once we're in recession, we'll cut.

12:58No, exactly. By that point, it's too late to do anything about that. So I do think there's a risk management argument for being in a more nimble spot.

13:13Thank you.

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14:25EasyCater, your business tool for food. To learn more, visit easycater.com slash podcast. Since you mentioned lags, I want to ask you a question about that. When the Fed started jacking up rates aggressively. One of the theories for why it didn't have a sharper impact on the economy is that so many households and corporations had in, say, 2020, first half of 2021 turned out their debt. And so there was not a lot of sensitivity to debt. The flip side of that now, and people have been writing about this, is that even though the Fed has now commenced a cutting cycle, that the weighted average cost of debt is probably going to rise in 2025, basically just mathematically, right?

15:04Because eventually that'll have to be refied at higher rates and so forth. How do you think about that dynamic now when you're thinking about these lags? You're starting a cutting cycle, but at the same time, probably cost of debt is actually going to rise for a fair number of economic actors in this economy. You have remarked on this subject and thought it through, in my world, that goes into the economic conditions. And there are many things that have made this a hairy, strange time for central banks because the business cycle, both down and up, looked almost nothing like historical precedents.

15:48This is one aspect of that. We've analyzed this specifically thinking about mortgages. Okay. So if I had told you the premise of your question, I 100 % agree with. Six years ago, if you said the Fed is going to raise 500 basis points in a single year, what is going to happen? I think most all economists would say, Yikes, there's going to be a major contraction. And it's going to be concentrated autos down the tubes, consumer durables, bye-bye, business fixed investment, construction, all going to collapse because they're very interest rate sensitive. We didn't really see the economy go into the steepness of collapse that you would have expected.

16:42And so that brings us back to this question. it's kind of a twofold. Is there something about this unusual business cycle that makes economic activity less sensitive to the interest rate? Or is there something strange about this moment that the lag effect is longer? And it can be both and they can run together. But in the case of mortgages, one of the things that has made monetary policy transmission less direct is the fact that a vastly higher share of mortgages are 30-year fixed mortgages now than they were in 2005, 2009, whenever you want to look at. And so, when they change the interest rate, in some countries, virtually all mortgages are adjustable rate mortgages.

17:34So, when their central bank raises rates. They bring out parents onto TV. The central bank is killing us. Our mortgage payment went up. In the US, if everybody's on a 30-year fixed, in a way, that's just a delay, but it's a 30-year delay. So I do think that notion that there are companies that don't have a lot of debt, so they aren't as especially sensitive to the interest rate, that the term structure of their debt may be such that the average rates they're paying might even be higher as the Fed cuts. I think that's not a problem. That's just a fact. And we just need to understand it and see what the magnitude is.

18:24Let me ask you the same question in an extremely simplified Yeah, but my question is going to be ultra simplistic. Can you explain to us in excruciating detail what exactly you expect happens in the economy now as you cut interest rates? How does that cut get transmitted? Okay. As a general matter, the Fed has only one tool really, which is a screwdriver that can tighten or can loosen. And I always say, if your problem is a loose fender, that's great. If your problem is, can you make breakfast? No, you kind of can't do that with a screwdriver. So the main channels of monetary policy impact on the economy, I think, are on the real economy side, and they are on interest rate sensitive parts of the economy, like consumer durables, business fix, investment, construction, things like that.

19:28Now, there are other channels of monetary transmission where there's a lot of argument, how important are they? And they are, well, if you change the value of assets, like the value of housing, the value of stocks, et cetera, is there a wealth effect so that consumer spending might go up as the asset values go up? Or if you contract and asset values go down, would that limit spending? There's a dollar channel that if rates in the U.S. are moving relative to how rates are moving in other places can affect the currency and that could affect imports and exports. Those are probably a lot of the main channels.

20:15And it's always in the counterfactual, what would be happening if we didn't do this? So to the extent that there's already a debt structure or to the extent that we went through a business cycle that for the first time ever was not driven by cyclical industries, but was driven by services because nobody could spend money on that. And services aren't especially interest rate sensitive. That's another reason why you might think monetary transmission, the monetary transmission mechanism, which is actually a whole bunch of different transmission mechanisms, just looks different this time than before.

21:00Now, everything that looks different is not bad. In a way, this is frustrating that monetary policy doesn't have the same impact. But at the same time in 2023, we hit what I called the golden path. Inflation came down almost as much as it ever came down in a single year, and there was no recession. And that never happened before. And so, the unusualness of this thing sometimes is good. Well, this gets to my question, and I sort of wonder whether us in the media or you in economics are going to be cursed with debating the transitory versus non-transitory debate of 2022 for literally the rest of our lives.

21:39But at this point in, I guess, October 2024. Okay. And we talked with you when you first started talking about the golden path and that looks great. It's even more golden today than it was at the time we were talking. It's beautiful. But like, why? Like how much credit, like for, you know, it's like, how much credit do you give yourselves at the Fed versus like how much of it was things were weird and then got normal? I think mostly things were weird and then got normal. We made the mistake. And look, I made the mistake. I was in the declare. I wasn't on the Fed at that time. But team transitory, I, like many people in the market, thought it would be transitory.

22:18If we had it to do over, I think you would call it team supply shock. Okay. And therein lies the— Take the victory just with a slightly different name so that it doesn't apply. Yeah, I get it. Steve Leisman said, well, it turns out Team Transitory was right. And there is a sense in which the language should have been about what's the nature of the shock that's happening, not the how long is that going to last. I was wrong. I thought if you get a supply shock, that's going to heal itself pretty quickly. It didn't. It lasted, the supply shocks we learned lasted a lot longer because if the ports are messed up and the chips are not getting produced, then they can't get cars.

23:07But then the people who are buying the cars to use for delivery, they're delayed. And so this supply chain having more steps in it ended up being a bigger deal. Just real quickly on this point, though, if this is the story, then does that mean labor market strength now does not necessarily pose renewed inflation risk? Yes, does not necessarily. I agree. So, let me finish two thoughts. One, did the Fed have anything to do with it? That's kind of the question. If it was all supply shocks, then the Fed didn't really, yes, the Fed can't be blamed for the inflation going up, but then the Fed shouldn't take credit for it coming down.

23:49There is some component that as supply shocks heal, you get immaculate disinflation. I do think that the fundamentally different thing that happened this time than the last time we were getting supply shocks, like at the end of the 70s, is that the market expectations of inflation basically never went up. In the 70s, as actual inflation went up, the expectations went up. And part of what made the Volcker experience so hard is you didn't have to just slay the inflation dragon. You had to go convince everyone that we will hold this thing underwater for as long as it takes until it surrenders. And that's a brutal process.

24:45I do think that the expectations stayed, even as actual inflation was almost double digits, stayed exactly at PCE 2 % as the inflation target said, was fundamentally the Fed making a promise it may look bad, but we're going to get it back, and that the market de facto believed it. And that is to the Fed, is about Fed credibility, and I do think it made a big difference. I want to ask one more question on the golden path and the interview we did with you about, I guess it was almost a little over a year ago, right? Like a year and a half. Yeah. In that conversation, you talked about housing costs coming down being essential to the golden path scenario.

25:35And yet here we are, as we discussed earlier, mortgage rates aren't really coming down. In fact, some people expect them to, you know, either stay where they are or go higher from here. Shelter costs in CPI still, you know, kind of high. How did we manage to get here without housing costs really substantially coming down? Okay. Now I'm afraid you're remembering, you know, each thing I said back from over a year ago. But my emphasis was about the shelter costs and the inflation aspect. And to our previous discussion, I had just given this speech at the Peterson Institute in which I said we were getting a series of very strong jobs numbers.

26:20Yet inflation was coming down. And I was arguing, don't lose sight of if you're getting positive supply shocks, labor force participation coming back after a severe drop, that is a supply shock. If you see the supply chains healing, all of those would be reasons. And I wasn't fully cognizant of the impact of immigration that it was going to have at that time. But all of those supply shocks mean don't just take at face value. If you've got a big aggregate GDP growth number, or you've got a big monthly payroll job gain number, that doesn't have to mean that the economy is overheating. And if you're seeing inflation falling while that's happening, and you know there are supply shocks, tone it back a little in the argument that it's demand overheating because this is just the inverse of the thing that made it so strange on the way up.

27:22That lesson I kind of think is a little bit applicable now too, potentially. And the question that you asked, how do we do that if inflation housing didn't come down? You said it was essential. Housing inflation has come down a bit, but the real answer is services inflation came down even more than we thought it would be able to. And goods inflation has come down and stayed down into the mild deflation that it was before COVID. And I kind of think that's how we did it. And the market rents say that it did happen. The inflation rate of shelter in the market is down to something like what it was before COVID.

28:09It just hasn't yet been fully reflected in the CPI, which I think it is, but every month it's not. We again say, what in the world is happening? We've been hearing that those Zillow market rent indices are going to feed through in the next three months for about two years now. For two years. I know some people have figured out the math. I'm still trying to use them to negotiate with my landlord. I can say it's been mildly effective. Yeah. How did it work? Did it work? A little bit. I think I managed to negotiate like a 10 % increase down to a 5 % increase. So I guess that's a win for New York.