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

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1:34If you're going to have tariffs and then the war in the Middle East begins, so the price of oil goes up before the tariff shock went away, you've got to keep a very close eye on how the inflation is going to transpire. But I don't want to be the guy who says, this is a once in a hundred year flood. That's Austin Goolsby, president of the Federal Reserve Bank of Chicago. I wanted to talk to Austin as the Fed heads into a big gathering today in Jackson Hole, Wyoming to get an insider's perspective on the state of the U.S. economy

2:10and how the Fed may act under the new leadership of Chair Kevin Warsh. Austin shares eye-opening insights about what business leaders may be misreading about inflation, AI impacts, and the future of employment. And he talks directly about how the Fed operates in the face of pressure from the Trump White House. While he calls himself a grim optimist, his presence is certainly energetic, and he shares practical on-the-ground advice for navigating an uncertain environment.

2:43So let's get to it.

Economic uncertainty and the Federal Reserve

2:45I'm Bob Safian, and this is Rapid Response. I'm Bob Safian. I'm here with Austin Goolsby, president of the Federal Reserve Bank of Chicago. Austin, great to chat with you. Yeah, Bob, great to chat with you. There's a big Fed meeting in Jackson Hole this week. I was wondering how much of what goes on there is theatrics versus substantive engagement. Lots of conversations trying to cajole folks to see things your way or more, quote, working vacation?

3:18It's put on every year by the Kansas City Fed because Jackson Hole, Wyoming, is in the Kansas City Fed district. But it's rustic. And so you got all of these central bankers from around the world, you know, the head of the European Central Bank, the head of the Bank of Japan, and they're kind of drapesing out into these little cabins. So it's good fun. And I wouldn't call it theatrics, but there's a lot of learning, for me at least. They're bringing in top people who are giving papers on various subjects.

3:53And there is substantive work, I think, that gets done, but it's not an FOMC meeting where we're making any decisions. And, of course, everybody's sitting on the edge of their seat. They want to know what the chair thinks, and the chair often gives the meaningful speech. I mean, as an economist, you're, you know, you're trained to assess this broad range of factors, right? Jobs and supply chains and prices. And you're trying to integrate all that into this cohesive view in some ways, which there's always uncertainty in.

4:25And I feel like right now things seem particularly uncertain with geopolitics and trade. Does it feel that way to you? Yeah, it always feels like that. And then it's even worse sometimes. And now it's just a really, really strange moment. But that's no different than business people and startups. In every venue, we're always trying to make decisions under time pressure and without full information. And that's true at the Fed, too. And so that's why I actually think this committee character that it has, where there's 12 reserve banks from around the country and there's seven political appointees, each of which is on a 14-year term, staggered so that you kind of try to get this as far out of the realm of political interference as is possible.

5:23I think that 19 people sitting around the table, each one with a different worldview, is pretty important at times when you got this much uncertainty because at least we're not thinking the same way. We can yell at each other, get mad at each other. But my colleagues can change my views or how I interpret the data. And I think that's one of the more important aspects of how they have it set up. I mean, I was wondering, too, because because your job is trying to create some sort of vision through the uncertainty, whether this kind of environment is like exactly what you're trained for or whether like you just can't be trained for times like this.

6:01It's exactly going to be in the line of fire that AI is going to replace you. So I appreciate that you said it was what I was trained for. Yes, kind of. But that doesn't mean that we can't make terrible mistakes. You know what I mean? Yes, you could be trained for it, but you could convince yourself that inflation is temporary. And then it turns out it's not. The analogy is, you know, you're driving to work and there's traffic and you're kind of, I've been sitting here some time.

6:35Should I change lanes?

6:37Sometimes you shouldn't have changed lanes. Then when you switch, then the other lane goes. But sometimes you drive by and you're like, oh, dang, there was a wreck in that lane. Like I would have just sat there for the whole day if I didn't change lanes. It's exciting in the worst way. You know, we got wars. We got tariffs. We got a bunch of stuff that's driving up inflation. And we're trying to figure out, are these persistent inflation shocks? Are they one and done and they're going to go away? And the law, as you know, the Federal Reserve Act lays out a simple sounding criteria of what's supposed to drive monetary policy.

7:18It's just two things. You're supposed to stabilize prices and maximize employment. And that's the whole job by law. Sometimes both of those things are not conflicting. So at the same time you're trying to maximize employment, you're not worried that you're overheating the inflation side. But when you start getting things that are stagflationary, that is, they're making both sides worse at the same time. So now you've got to make some tradeoffs.

7:50Inflation's in and out of control. Well, the only tools we have to slow inflation involve driving up the unemployment rate. In a world like that, it gets more tenuous and more difficult.

Tariffs and persistent inflation risks

8:01These tariff wars that have erupted with Canada, did this catch you off guard? And like, how big a deal is it? I mean, with tariffs, in some ways we could say, oh, we've seen this movie before with this administration. A little of both. I mean, I should stay at the outset. Tariffs is a fiscal policy. That's the administration and the Congress can decide whatever they want. And I always say, look, we're in Chicago. Our motto is there's no bad weather, there's only bad clothing.

8:32And you tell us the conditions and we'll go figure out what's a jacket and hat combination to deal with that. But the thing is, tariffs are supposed to be a one and done impact on prices. They drive up prices, but they're not supposed to keep driving up prices. It's supposed to just be a one-time thing. But that's only true if it's one and done, not if you keep adding new ones. And so we're in this environment where we've had a tariff and the prices went up and then another tariff and the prices go up and then another tariff.

9:07Then the court unwound some of the tariffs. So it was like, hey, maybe the price will come back down. No, but now we got some new ones. So that's a complicated environment because you're trying to figure out, is this actually a temporary thing or is this a permanent thing? If people become convinced that inflation is going to be with them for an extended period, the job of the Fed becomes 100 times harder.

9:38That's what in our language. Because it becomes self-fulfilling, right? Yeah, it becomes self-fulfilling. We call that the unanchoring of inflation expectations where everybody says, if prices are rising 5% a year, I need wages of 6% increase. And the employers are like, wow, if wages are going up 6% a year and our costs are rising, we're going to have to rise prices 7%. That kind of dynamic is extremely difficult to get out of. But it's probably impossible to get out of without a deep recession.

10:09So we absolutely don't want that to happen. It's what I said was also the danger. If you're going to have tariffs and then the war in the Middle East begins, so the price of oil goes up before the tariff shock went away. Now, again, you got to keep a very close eye on how the inflation is going to transpire. And part of that is a failure on the Fed's part too, which is we're now coming on six years that we've been above the official 2% inflation target.

10:46It's business as usual. It's business as usual, but we've been making progress at various points along those six years. I wasn't there the whole time, so I'm not going to accept blame for the beginning part. But in an environment where we've been struggling, struggling to get the inflation rate down, and sometimes it's been coming down, but it's still for almost five and a half years been above where we wanted it to be.

11:17Now, if you start adding terrorist wars, oil prices, computer chip shortages, competition with AI data center build out, things that are driving up the price, people, it's so, so much more salient. Everywhere you go, I'm here in the 7th District of Chicago is kind of heart of the Midwest. I go around the number one thing that I hear is about affordability, is about cost. If I talk to businesses, they say, ah, our input costs are way up.

11:49If you talk to the farmers, we're getting squeezed on both sides. We can't sell the stuff for very much, but the costs are jamming us, you know, and so our margins are lower. So, in an environment where everybody's attuned to that, then getting shocks is even more dangerous that it could lead to the self-fulfilling prophecy. I mean, it's just such a confusing moment because those feelings that you're tapping into people worried about affordability, it's totally real, right? And at the same time, the economy is relatively strong.

12:23It's still strong. The job market is relatively strong. The stock market is, like, crazy. It's confusing. But I don't want to be the guy who says, this is a once-in-a-hundred-year flood every year. It's possible that it's a once-in-a-hundred-year flood every year, but it's like the flood's got to be getting bigger and bigger. Your job is to try to help avoid, as you say, you know, deep recessions, but, like, you also know the way cycles work, they're going to happen. Who wants that as the message?

12:54You know, and it's like with inflation, too. If I tell you when the Fed looks at inflation, we tend to look at core inflation because energy and food prices are extremely variable. So, we have convinced ourselves that doesn't tell you what the underlying inflation is. So, we exclude it. And then, as I say, my mom is like, what do you mean you exclude it? Yeah, yeah. We don't think about gasoline prices and we don't think about grocery prices when we're thinking about inflation.

13:29She'd be like, that's the only thing I think about. When I first started at the Fed in 2023, I went and looked up the polling. A large majority of Americans say they are familiar with the Federal Reserve, but they do not know what it does. And an even bigger majority say that they may not know what the Federal Reserve does, but they think they're doing a bad job. There is all this armchair discussion about will the Fed raise rates or lower rates. It's like you're sort of in the middle of the action in some ways in this job, which in some ways I guess could be fun, but it's also kind of torturous because you can't always say exactly what you think.

14:10And, you know, not everyone's going to interpret what you're doing maybe the way you would ideally have them wish they would.

Leadership changes under Chair Kevin Warsh

14:17You have two sophisticated logics in that question, which are there's a tension between wanting to be clear to the public, to the markets, to the world about how do you see the economy transpiring and what you're going to do. There's a tension between that clarity and being so dependent that you – and Chairman Warsh has been impatient before he was the chairman.

14:52He kind of thought there's a little too much forward guidance. That's what the central banks and the economists call giving explicit, here's where we think interest rates are going to go. If X happens, then we will cut the rate. If this happens, we will raise the rate. That's forward guidance. The chairman doesn't like forward guidance. Let's do less explicit promises.

15:23Let's not tie our hands. Now, the other tension is if you don't give some explanation about how you react or what you're seeing in the economy, then people are going to fill in whatever they want it to be. Now you can add more volatility, and so we've got to bounce those off. You and Kevin Warsh, the new Fed chair, you were foxhole buddies, I think is the term you used during the global financial crisis.

15:57Are there things that you expect to shift with his leadership that we haven't necessarily seen all of yet? I do expect it to shift, but I don't know what that's going to be yet. When he first came in, the world knew he didn't like forward guidance. You saw reflected a change to the statement. Whenever the Fed makes a decision, they put out a little statement. Here's what we did, and here's why we did it. And the statement got a lot shorter and had a lot less expressions of the committee's forward guidance.

16:32He also set up these five task forces, one of which is about inflation, one of which is about AI and productivity, one of which is about the balance sheet. And named very high-profile, smart people, many of whom are close friends of mine, to be the heads of these task forces. And we're still waiting to get the output from those task forces. I think they're going to give us suggestions, recommendations. I have no doubt that once we get those five reports, we will have a big discussion about should we change our behavior?

17:15And if we do, I do think these would be kind of signature things for the chairman. He's exploring different tools and different kinds of information that those of you in the Fed would use in making the decisions you make about interest rates. It seems like that.

Political pressure on central bank independence

17:35You mentioned earlier that, you know, the Fed is constructed to sort of avoid political pressure. And in the last few years, you know, you face more overt political pressure than ever. I mean, charges from the White House about specific Fed figures, you know, Jerome Powell, Lisa Cook. Like, does that make everyone more cautious? It puts me on edge. There's two components of it. One are the attacking of individuals, criminal investigations of Chair Powell to attempted firings, et cetera.

18:09The other is explicit browbeating, saying you need to lower the interest rate. That's in the space of the traditional Fed independence. It's a very narrow type of independence that all economists – before I was ever at the Fed, I joined the virtual unanimity of economists saying central bank independence is really important. It is independence from political interference when setting the interest rate.

18:41If you just look at countries where they don't have that or you look at times in the United States even where we relatively did not have that, where the sitting administration can interfere and tell the Fed, here's what we want you to do with the interest rate, inflation comes roaring back. Their incentives and their timetable is totally different than the central bank and the economic timetable. So that's why they have designed the system in the United States of the Fed to be as separated from the political sphere as is possible in a democracy.

19:23My experience at the FOMC is that the 19 people sitting around the table – some are economists and some are market people, some are business people. They have a lot of different backgrounds. They take the job really seriously. You're out of the elections business when you went to the Fed. You were part of the Obama administration. You chaired the Council of Economic Advisors. Back in 2009, 2010. You're not a Trump guy. I started as a Democrat, but like I say, when you're at the Fed, you're out of the elections business.

19:57I just want to be clear about it for folks, you know, because Trump has been particularly aggressive, Powell and Lisa Cook being directly challenged. Look, in the environment, if a sitting administration is trying to remove Fed officials to get interest rates down or to influence interest rate decisions, that's a problematic circumstance.

20:28And I think any economist would say that's a problematic circumstance. I appreciate Austin's willingness to be candid about the pressures on the Fed, even if he can't always be quite as explicit as he'd like. So what's real and what's mirage about AI's impact on the economy right now? And are we headed toward a dot-com era-like market bubble? We'll talk about that and more after the break. Stay with us.

20:58Stay with us.

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22:47I hope to see you there Before the break, the Fed's Austin Goolsbee talked about the U.S. trade war with Canada inflation risks and what new Fed Chair Kevin Warsh is changing Now he talks about AI's impact on the economy and why it might be different than a lot of news reports suggest plus the risk of a dot-com-like stock market bubble and the metrics that matter most for business leaders to track

23:17Let's dive back in

AI impact and productivity realities

23:19I'm curious what you're hearing about AI's actual impact whether it matches what we read in the financial press People are all over the map and partly it depends what sector you're in I talked to the head of a major arbitration agency who said AI is already as good or better than arbitrators They can feed all the reports in and all the facts of the case

23:51That's one that sounds like high productivity immediate with the technology we have We have the most manufacturing of all the districts in the Fed In manufacturing, there's still a little more If this turns into robotics or some kind of automation it would have a bigger impact Right now they're still looking for the use cases what are the best use cases And you do hear some blowback a little

24:24that says we've invested heavily in this The tokens are expensive now and we're not yet seeing it It's kind of like we want people to use it We want to find the productivity application but so far we're not seeing it You've seen over the last two and a half years an uptick of the productivity growth rate which maybe was tied a bit to the use of technology machine learning first and AI

24:56But now we've had six months or so the productivity growth rate hasn't been that impressive So you got some people saying maybe that argument was a blip And then just back to what's the day job of the Fed is to try to prevent overheating stop inflation It's not exactly like if we come back in 20 years will this have revolutionized society

25:26This aspect that the more hype there is the more chance there is that it overheats things today that everybody says I'm going to go massively build data centers today I'm going to go massively spend out of this newfound wealth from my IPO that's premised on future productivity bounties You could easily overheat the economy in the short run And so in the day job sense of the central bank

25:58it could actually drive up the interest rate in the short run not drive it down I'm not saying that nobody has any use cases that work There are many use cases The question is Are there going to be How long is it going to take before we have so many examples that it's rising tide lifting productivity growth for all the boats And thus far it's been more hyped

26:29than what it has delivered in a lot of sectors Your intuition I think should tell you If a group of companies are spending trillions of dollars to build out data centers they can't think that they're going to be giving that away free So either it's going to be real expensive or the valuations that they're premised on are way too high You did extensive research about the dot-com era

27:01and bubble as I recall Is that research that you kind of call on yourself when you look at today's AI era? There are interesting parallels between now and and the the origin of the dot-com era but it also the internet did change the whole world It just took far longer than the the biggest proponents thought it would and that's that's another lesson we should think about

27:31there's a CEO that I spoke with who said you know either the valuations of these tech companies make sense in which case there's going to be so much efficiency that we're going to lose so many jobs that it's going to be you know catastrophic or they're wildly overvalued in which case we're in for like a big stock market correction which is going to lead to other problems and other job you know implications and it's like it's bad news either way

28:01business type that's kind of funny that's kind of funny not actually it's not funny at all it's kind of it's kind of interesting I guess in that that executives got it split the world split into two parts and one is there's overvaluation and the bubble's going to pop if the bubble is justified then everyone will lose their job I think even in the world where it's not a bubble and they are justified

28:32I just can't get past the the lump of labor fallacy we call it which is all of labor is just a lump that can't move and as soon as AI is better than this lump those people will be out of jobs and they won't be able to find any new jobs I think that's that's been wrong every time it's been claimed and the AI people should before they just learn a little

29:02Bayes rule which is if you're going to say that the lump of labor argument is true this time I just want you to acknowledge there have been a lot of people who have said that in the past and been proven wrong now it's possible that it could be true this time this time is different this time is different but I'll take the under on the chance that we come back in 20 years

29:32and the unemployment rate is 95% and the there are like six people who own the AI companies that that have all the the wealth in the United States that's unlikely you almost sound optimistic Austin you know they call economics the dismal science which always sounds downbeat yeah look I guess I'm a grim optimist look I'm not I'm not to make light of there are many episodes of general purpose technologies that have been

30:03disruptive and it's traumatic as people transition but the overall for the economy I don't see how you can look at the last 150 year history of per capita income in the United States and look at all the technological disruptions and job replacements that happened over that period and truly be a pessimist and think the human

30:33beings will not figure out a way to continue this upward march of incomes I kind of think that's rooted in productivity growth it's worth at least remembering something something like that is going to make us rich by current standards you know that high productivity is going to turn into high income that's how we got to be the richest major economy in the world so I think I'm kind of a grim optimist

31:03with some disruptions

Current labor market stability and interest rate outlook

31:04as you look at the economy overall right now how concerned are you just in the immediate term concerned but I do think mostly I would characterize the economy as it's been stable but it hasn't necessarily been good but it has been stable and back to your original formulation there's a lot that's confusing okay so the job market it's been stable by almost every measure but several

31:36of the measures are pointing in different directions so when people throw around this phrase it's a low hiring low firing environment it's worth just taking a beat and recognizing low hiring low firing is extremely unusual environment okay so normally the business cycle goes you either have a great deal of hiring and very low layoffs or you have a lot

32:06of layoffs and very low hiring if you have that you're kind of in a recession or the other you're in a boom what we've got is very low layoffs like it was a boom and very low hiring like it was a recession so then you say well what does that mean does that mean we're going down or we're going up we got war in Ukraine we got war in the Middle East the price of oil was elevated by recent historical standards and

32:37every three months or something happens that it could go up again in an environment like that I'm already going to be on the edge everybody should be on the edge and I would say my biggest fear in the short run continues to be that inflation is not under control and so we hear a lot about affordability and we better be mindful because if inflation starts going up again it's very hard to get rid

33:07of it the immigration environment has reduced the number of people coming into the country so that there are fewer people to be working like is that does that come into when you're calculating it does in an important way there was a time when if you said you can only pick one number what number do you want to pick as the most informative there'd be a decent case some people would say take the monthly job created number that might be your best number

33:37okay but that's not your best number at a time when they're having an immigration crackdown we saw that number go way down monthly job creation has fallen dramatically and that led some people most of last year to say whoa this is what a recession looks like this is how recession starts i said let's stop looking at that number as a primary indicator when we don't know what's happening to population and labor supply

34:07let's look at the rate based numbers the unemployment rate the vacancy rate the hiring rate termination a variety of rates and those ones show stability i think they're they're better measures for the business leaders who are listening to this show they're making real-time decisions in part based on the fed's direction and choices what can you tell them about the rate environment over the next 12 months my read

34:38and i'm only allowed to say for me when i'm looking at the inflation picture and i see some that is disturbing like we've been above the target for five and a half years and we went through this period where we stopped making progress and then for the last year it's actually been going the wrong way that was driving my thinking about what fed policy

35:09reaction needs to be if you look at the three month inflation it doesn't look terrible we've seen a little bit back toward improving and from my perspective if you could give me evidence that we're on path back to 2% inflation i'm perfectly comfortable and have been since i got to the fed if we're on path to 2% inflation then

35:39i think we should be heading more to in our language what we call r star where rates are going to settle where we think they're going to settle down and i loosely think a 3% interest rate with 2% inflation 1% real to me that's that's kind of a loose target of where things are headed but all of that hinges on inflation has got to be heading back to 2% so

36:10so if you're a very interest rate sensitive industry i would tell you watch the data look you get a sense of where do you think inflation is going because that's going to be heavily influential on on the thinking of people like me we're sitting around the table don't get so hyped up about what the market says because that's not in the law when we're in there sitting around the table we're thinking about

36:41the real economy and the inflation what the stock market says is a kind of a secondary consideration so don't don't overweight on that well

Concluding thoughts on economic leadership

36:52Austin this was great thanks for sharing what you could that's a fun anytime Austin was never going to openly read the tea leaves on upcoming rate changes but he did give us some pretty specific insights the contradictory signals in the economy are real and that's confusing even for the smartest most informed economists but but there's also stability despite all the changes and even if he is a grim optimist as Austin puts

37:22it he's still optimistic I keep coming back to his comments about AI and how much narrower the on the ground business impact has been so far outside of the AI ecosystem itself it's a reminder that our attention often follows the most intense action and we may miss that the broadest deepest impacts may still be a bit farther off that doesn't mean today's changes aren't a watershed but taking a pause every now and then to orient ourselves is both grounding

37:53and prudent I'm reminded that for those running the Federal Reserve their ideal is to actually do nothing to have the economy stable enough that rates don't need to shift at all so what moves are we making out of reflux rather than consideration staying calm amid a storm of course that's what leadership is all about I'm Bob Safian thanks for listening Rapid

38:29Response is a wait what original I'm Bob Safian our executive producer is Eve Trow our senior producer is Alex Morris and our associate producer is Masha Macutonina mixing and mastering by Aaron Bastinelli and Brian Pugh our theme music is by Ryan Holliday for more visit rapid response show dot com d

39:02one and m and m and the m and m and