C. Peter McColough Series on International Economics With Austan Goolsbee

Austan Goolsbee of the Federal Reserve Bank of Chicago discusses the U.S. economy and monetary policy.

The C. Peter McColough Series on International Economics brings the world’s foremost economic policymakers and scholars to address members on current topics in international economics and U.S. monetary policy. This meeting series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.

FROMAN: Well, welcome, everybody, and thank you for joining us this morning. It’s a great pleasure to welcome Austan Goolsbee, president and CEO of the Chicago Fed, who I’ve known for a number of years. 

This is, by the way, part of the C. Peter McColough Series on International Economics. We’re grateful to the C. Peter McColough family for endowing this series. 

I think you all know that Austan started or became a national figure when he started advising former colleague at University of Chicago Barack Obama, who was a professor at the law school at the time, on economics back in 2003-2004. We met a couple years after that. What you may not know is that he has this hobby on the side of being a standup comedian. (Laughter.) 

And so, you know, I wanted to first ask you: The fed is this mysterious institution— 

GOOLSBEE: (Laughs.) 

FROMAN: —quite the black box from the outside. We can imagine from the outside there’s a lot of tension, there’s some disagreement. What’s your favorite economist joke that you used—(laughter)—to cut the tension at the Fed? 

GOOLSBEE: (Laughs.) Yeah. I’m not allowed to say what I said for five years. Then the transcript will come out. 

FROMAN: (Laughs.) 

GOOLSBEE: If there goes a meeting that you don’t see bracketed laughter, then I will have failed. 

FROMAN: Then you will—yeah, you will—(laughs)— 

GOOLSBEE: Yeah, I will have failed. 

FROMAN: OK. 

GOOLSBEE: I didn’t know where this was going to go, because Mike’s got a lot of dirt on me but I got just as much on him. So you better watch and give space. 

FROMAN: (Laughs.) You can give as much as you get. 

Let’s start with the U.S. economy. 2023, kind of a remarkable year. Inflation came down very significantly, from 5.5 (percent) to 2.5 (percent), its fastest reduction. Unemployment was only 3.7 percent. We continue to grow at over 3 percent. What’s going on? Is the Phillips curve dead? What would Bill Phillips say if he were alive today? 

GOOLSBEE: Look, the thing about 2023—and now it’s over, so nobody can say it’s going to jinx it—the Fed by law has a dual mandate, that Congress says to the Fed: You’re to maximize employment and stabilize prices. Dual-mandate terms, 2023, it was a very good year for the dual mandate. And we can still get into why are the vibes different or why do—why do people feel differently. The particularity, let’s call it, of 2023—which flies in the face of fifty, a hundred years of central bank history, which said to significantly get inflation down, more than 3 percent let’s say, you have to have a deep recession—that is kind of—as you say, the Phillips curve is just sort of floating around in there. I started saying—in a way, I will admit the error. I was not alone, but at the team transitory I was thinking that the supply shocks of that moment would make the inflation transitory, and that was wrong. And there was a lot of soul searching trying to figure out why was it wrong, you know, for that—for that six months. Why was—how could it be so off? And I feel like as part of that study process of figuring out why it was wrong is what led me to—last year I was saying—I was calling it the golden path, that there were particular things happening that were going to allow for a—for a potentially unusual year where you could get inflation down without the employment rate going way up or having a bad recession. 

And the first component of that, I think, was the supply shock would unwind. We had a negative supply shock from COVID, the most obvious which—of which was about the supply chain. 

But equally important, maybe more important, was the labor supply supply shock, and that has been unwinding, too. So you’re seeing record labor force participation, well higher than where it was expected, OK? And it’s one of these things where, yes, it’s down from fifteen years ago, but everyone knew it would be down because the population is aging. It’s actually well above where they predicted it was going to be at this time, and that’s been a benefit. 

And then the third part is I think the Fed’s credibility—that when it said we will get inflation back to 2 percent the world, the market, the public believed that. And if you look at measures of inflation expectations, they did not unhinge at all; they remained anchored at 2 percent. Even as actual inflation got up above 9 (percent), unlike previous episodes there wasn’t—the expectations didn’t go with the inflation. Inflation went up; expectation stayed—yeah, yeah, they’re probably going to get it back. 

And because of those three—combination—that’s what I think happened. I don’t think the Phillips curve idea is dead going in the future, but I think if you have that in your mind, the fact that the group of people who was correct at the moment that inflation started that the economy was too hot—the fact that they were right kind of bred a complacency in them that has, I think, led them to be wrong for the next eighteen months. And so you saw a lot of economists I respect that we work with, like Larry Summers, saying unemployment would have to go to 6 percent for five straight years to get inflation down. That’s the mentality that fundamentally what this was all about was overheating, and I don’t think that’s quite accurate. 

FROMAN: Well, I wanted to get to Larry because the Fed came under a lot of criticism, including by Larry—a former colleague and close friend of ours—for starting too late in terms of raising the rates. And I remember Larry saying a year or so ago that the chances of a soft landing when you start so late and inflation’s already so high is, you know, not zero but close to it. 

GOOLSBEE: Zero, close to it, yes. 

FROMAN: Now everyone’s talking about a soft landing. We’ll get to inflation in a minute, but it appears that a soft landing is in the offing. You guys feel pretty good about yourself now? 

GOOLSBEE: I wasn’t there when the critique of—that the Fed messed up. I wasn’t on the Fed then, but—(laughter)—the evaluation of the Fed is just on this dual mandate. And like I say, 2023 was an— 

FROMAN: Year. 

GOOLSBEE: —excellent year for the dual mandate. 

Now, part of the job, as you know, of central bankers is to be paranoid about everything. So if you say, like, are you worried about—aren’t you worried about this other—yes. Yes, worried about all of those. So it can definitely be derailed. Hard or—hard or soft landings—yes, more difficult soft landings than this one have been derailed by external shocks. But there is a possibility of this golden path that if you had in mind—if you came from the worldview of the Phillips curve and that fundamentally this was all about demand overheating, you missed a very important fact or summary, you know, something about the conditions that it’s a good thing we didn’t apply the straitjacket of, well, this is what always happened in the past because it would have led to an over-tightening in ’23. It would have said what actually happened in ’23 wasn’t possible, so we shouldn’t even try. 

FROMAN: Past performance is no guarantee of future— 

GOOLSBEE: Yeah. No, that’s the—that’s the lesson of this thing. 

FROMAN: So yesterday we had news about inflation that it was somewhat higher than expectations. Markets reacted. I gather the inflation was mostly in the services and the housing. 

GOOLSBEE: And housing. 

FROMAN: And housing. 

GOOLSBEE: Yeah. 

FROMAN: Less so in goods, or actual decline in prices of goods. What measures of inflation are the most—do you focus on in particular? Which—there’s so many different measures. And how do you ensure what happened— 

GOOLSBEE: There are many measures. But we can go—I can go as deep as you want about price indices. I assume you don’t—(laughs)—you don’t want me to. But the Fed has a 2 percent inflation target. That is on PCE inflation, not CPI. 

FROMAN: Right. 

GOOLSBEE: There’s a little—we can go through the differences. The major differences it turns out right now center on the very categories where things are acting weird, so there has been a bit of a gap between CPI and PCE inflation. 

As I always say about—especially about inflation, one month is no months. So let’s not get amped up when you get one month of CPI that was higher than what you expected it to be, just like in a previous month we had a period where the inflation rate is coming in at 1 ½ percent, so actually below the target. You want to measure in three-month, six-month, twelve-month increments. If you do that, it’s totally clear that inflation is coming down. We’ve had six, seven months in a row of the new flow rate of inflation has been very close to target or approaching the target. 

And the thing about core inflation—so we—the Fed tends not to look at energy and food prices, which drives my mom crazy. She’s like, what do you mean you don’t look at energy and food prices? Those are my only prices! (Laughter.) And—but it’s because they’re so variable that we feel like the better measure of what the trajectory is to look at this core inflation of PCE, and that’s three parts: services, housing, goods. Before COVID, we were at 2 percent, even a little below 2 percent, for an extended period, and that wasn’t 2 percent inflation in each of the categories. 

It’s important to remember that. Goods inflation was minus-1 percent deflation—if it’s minus, deflation— 

FROMAN: Minus-1 percent. 

GOOLSBEE: But 1 percent deflation. Housing was 3 to 4 percent, and services 2 to 3 percent on a steady basis. And those combined is how we got to 2 (percent). What we’ve seen now coming out of it, goods inflation back to—goods inflation back to deflation. Services, we thought was going to be extremely persistent, has actually come down. And the puzzle is that housing inflation has not come down as we expected yet. Now, we still think it’s going to, because if you look at the—it’s a slow-moving compilation of actual market rents, and if you go look at the market rents data that inflation is down. But this last—was it yesterday, two days ago, yesterday, the housing number was surprisingly large, and so we still—we still face that puzzle. And I’m—I cannot speak for anybody else on the committee, but I watch that housing quite a lot because that’s kind of the puzzle piece to get us—if we’re going to go back to what the composition of inflation was before, the part that’s the most out of whack now is still the housing. 

FROMAN: As I understand it, the 2 percent came from the great economic power of New Zealand, right? 

GOOLSBEE: (Laughs.) Yeah. Some guy sitting in his—(inaudible)— 

FROMAN: So New Zealand’s central bank governor— 

GOOLSBEE: —was, like, 2 percent sounds good. Yeah. 

FROMAN: —in the ’90s said 2 percent should be the goal, and everyone said, sure. 

GOOLSBEE: OK. (Laughs.) 

FROMAN: OK. What is magical about 2 percent? Or is it only because the Fed has stated that historically that it has to maintain it? 

GOOLSBEE: I was going to—I think that—I think it’s because we said 2 percent is our goal. OK. If once we say that the essence of the—so there was some argument among folks who did not believe that we could have a golden path type year. So convinced were they that the—that the last mile would be impossible that you’ll recall they said we should just change the target. 

FROMAN: Just go to 3 (percent) 

GOOLSBEE: Yeah. Just get— 

FROMAN: Well, there’s nothing wrong with 3 (percent), right? 

GOOLSBEE: Declare 3 (percent) and then—and then we won. You can’t do that. You got to do your job before you start looking for a new job. OK. So that we said 2 percent means we have to get it to 2 percent. I think that 2 percent commitment was a heavy part of why the expectations never got unanchored when actual inflation went up to 9 (percent), because they were, like, well, the Fed said they’re going to get it to 2 (percent), so I don’t know how, but, like, we’re going to trust that they will. 

You don’t want it to be zero, I don’t think, because we will all remember how uncomfortable the zero lower bound was. And if you’re aiming for inflation that’s too low, you’re going to be more—it’s going to be much more frequent that you’re bouncing to the zero lower bound, where interest rates are at zero and you have no capacity to cut when stuff goes wrong. And wages tend to be sticky. So when you get into periods of adjustment, having a little 2 percent cushion is a decent way to operate on a flow basis. But I don’t think that—I might be wrong. I’d have to go check the history. But I don’t think that there was much more to it than that. 

And my only qualm, expressed before it was ever in the Fed system, about 2 percent is it, in a way, connotes too much precision. Then if you said, well, should the target be—what if we made it 2.1 (percent)? There would be a knock-down argument. No, it must be 2.0 not 2.1 (percent). Inflation’s extremely variable, so how would you know if you were at 2.1 versus 2.0 (percent)? I think there’s some practical considerations, but it’s mostly from a person’s pondering in a bathtub in New Zealand, you know, that they got 2 percent. (Laughter.) 

FROMAN: Great image. (Laughter.) So if 2023 was the year of the golden path, in 2024 what keeps you up at night? What do you see as the biggest risks to this benign outcome? 

GOOLSBEE: I guess still external shocks. And you know, we’re at the Council on Foreign Relations, so for sure geopolitical events. We know that if you drove up the price of oil or commodities, that’s a negative supply shock. We know very well what would happen. It feels like the—I should be asking you what’s happening in China. 

FROMAN: I’m about to ask you that in a minute, so. (Laughter.) 

GOOLSBEE: Oh, you’re going to ask me that? OK. 

FROMAN: So just a warning. 

GOOLSBEE: There is a sense in which there’s always a mechanical view of the U.S. economy that’s predominantly a domestic-driven economy, so the rest of the world doesn’t matter in some—in some mechanical sense. Say, exports. Let’s say the trade is 15 percent of GDP, let’s say. And China’s a third of our trade. And if it went down by, you know, 20 percent, 20 percent of 30 percent of 15 percent is not enough to do anything. I think it’s unrealistic that if the second-biggest economy had a huge recession that there wouldn’t be a risk of recession for the U.S., if only because through the freakout channel that a bunch of investment would go down. People would be—people’s confidence would be shaken. So I view that as a threat. 

FROMAN: So let me push you on that. So China at one point was accounting for about one-third of global growth. 

GOOLSBEE: Yes. 

FROMAN: And, as you said, we’re not as dependent on trade as our European partners, our Southeast Asian partners, and others. China’s having all these problems. Seems to be on a low growth path for them for the foreseeable future. Yes, your mandate is look at the U.S., but we’re not unaffected by Europe going into recession, or other parts of the world being affected by commodity prices and other issues. How worried are you about China’s impact on the rest of the world and how that could have a blowback impact here? 

GOOLSBEE: Worried? Yeah, I’m still worried. And there’s the same mechanical worldview would say of Europe, hey—you know, it all basically comes from trade isn’t that important to the U.S.? I don’t accept the mechanical view. And the analogy I’ll give, if you go—if you’re old enough to remember the 2001 recession, we now remember it all, oh, it was all about the internet, and the internet bubble popping. But if you go look mechanically, the Internet was this big. So there’s absolutely no way that the internet bubble popping, from a mechanical perspective, was big enough to cause a recession. And yet it did, because of the freakout channel. And people were like, whoa, and pulled back on the investment. 

FROMAN: Is that a—that’s an economics term? Is that—I don’t remember Alan Blinder teaching that to me. 

GOOLSBEE: Yeah. So the animal spirits—you know, but if business confidence collapses and there’s an investment pullback, that engineers a business cycle. And there’s a whole separate riff which we could go through of how strange the COVID recession was, because normally the seventh district, which is basically the heart of the Midwest where the Chicago bank is, like Wisconsin, Michigan, Indiana, Illinois, Iowa—heavy manufacturing, tends to be the tip of the spear of the business cycle usually. But this time, all of that durable goods manufacturing actually went up. People bought more TVs. They bought more durable goods, because that’s all they can spend their money on, and the recession was driven by recession-proof things, like going to the dentist, you know, and stuff like that. 

So I still think that the freakout business confidence and investment channel is real. And if China slowed more, such that they were in—their direct impact was a big negative, their indirect impact through Europe or other trading partners was a big negative, we would probably want to look at more than just the trade impact. We’d want to look at the investment impact. 

FROMAN: You may have noticed we’re in a political year this year. There are elections here and elsewhere. China is an issue. Is it in our interest that China get out of this slump and grow again? Or there’s a lot of argument about how this is an opportunity for the U.S. to gain competitiveness at China’s experience? 

GOOLSBEE: I’m always, especially in election year but, like, in all years, my thing is: I’m a Fed man now. So if that’s not in the dual mandate, it’s not my business. 

FROMAN: It’s to yours? OK. Fair enough. 

GOOLSBEE: And so a little bit I kind of feel like that. I think it’s worth thinking long term. Look, we’ve been having this discussion for more than a decade now. I still think that the tensions in the economic relationship between the U.S. and China are naturally going to lessen over time, because if you look at the Chinese economy as they’re getting rich I think their economy is going to look more like the economies of other rich countries. Which is to say that three spaces—three or four spaces that they’re way lower are health care, education, leisure and entertainment, services. They’ll likely shift more into that. And that is naturally more domestically driven. And so as that happens, in a way, it becomes a little less fraught. Maybe I’m just being hopeful. But I kind of feel like if we come back in twenty years, maybe the economies would be in a different place, and it wouldn’t be as tense. 

FROMAN: We are at the Council on Foreign Relations. Would love to ask you about how you see the evolving geopolitics effecting the U.S. economy. We’ve got wars in Europe and the Middle East.  

GOOLSBEE: We got the world experts sitting right here, why are you asking me? 

FROMAN: No, no, no, no. We have tension— 

GOOLSBEE: Just write down your opinion. Like, give the opinion. 

FROMAN: Tension with North Korea. 

GOOLSBEE: We got tension all over. Many sources of tension. Many of the locations of sources of tension, like North Korea, is a not— 

FROMAN: Is irrelevant to the economy. 

GOOLSBEE: Is irrelevant to the world economy, unless, you know, it breaks out in active hostilities or something. Others, like the Middle East, as I say, just from a purely economic perspective, haven’t had the impact that they could have because it hasn’t spiraled into a commodity price story. But that’s kind of the—that’s kind of where my head is on the geopolitics. If we get back into escalating trade war, I think the data show what the negative implications were for the U.S. economy. And that that could be back too. So that’s one I think about, but only indirectly.  

The impact on dual mandate—inflation, unemployment—is there for some of these events. But it’s not as big as some of the some of the others might be. 

FROMAN: Does the imposition of tariffs help or hurt your dual mandate? 

GOOLSBEE: Look, you know, I was twenty-eight years an economics professor, University Chicago. So, like, nobody’s going to out free trade me. (Laughter.) I think it increased prices. So that part of the dual mandate—inflation was higher because of the trade war. 

FROMAN: Good. We were talking in the green room before that we’ve launched a new initiative here on reimagining American international economic leadership. One pillar of that is around the economic security questions, and particularly the role of the dollar. How use of sanctions, discussion of seizing Russia’s reserves, how that might affect the incredible position the dollar has as the reserve currency of the world, and the benefit that we get from that potentially. That’s at least the argument. 

GOOLSBEE: As the French describe, our exorbitant privilege, yeah. 

FROMAN: Our exorbitant privilege. So how worried are you about the role of the dollar in the world? Do you see any alternative currency or basket of currencies playing a significant role to replace it? 

GOOLSBEE: I kind of don’t see much of an alternative. I definitely do not see cryptocurrency as an alternative. But we could go into a whole riff about that. The thing to remember is the dollar, for all the discussion about the dollar going away as a reserve currency, if you just back up and say: OK, over the last fifteen years how much has market share fallen for the dollar? It hasn’t. It actually went up. And there’s important work done by Gita, Gopinath and others that shows that a really surprisingly large amount of international trade in the world, not involving the United States, is also conducted in dollars. Between two other countries, they’ll use dollars because they consider it safe and stable. And that share of non-U.S.-related trade that uses dollars is not going down. It’s, if anything, going up. So the job is to be paranoid about everything. I am worried about it. But it’s not in my top—that’s not in my top five worries.  

FROMAN: So is—related to that—is the deficit and the increasing debt in your top five worries? And everyone says it’s ultimately unsustainable, the path that we’re on, as long as you don’t pick a level or a time. (Laughter.) So, you know, maybe you can tell us today what level and what time it’s going to be unsustainable. How worried are you about it? 

GOOLSBEE: The thing is, I always go back to the dual mandate. And I say—it’s like our Midwest motto, in Chicago, is there is no bad weather, there’s only bad clothing. And will you tell me—you give us the conditions, and our job is to react to what the conditions are. So I’m not going to weigh in on any fiscal policy, whatever. Congress got to decide that. It doesn’t seem like a sustainable path. That said, to the argument is the U.S. Greece, which was kind of the— 

FROMAN: Greece is doing pretty well, right? 

GOOLSBEE: Yeah, Greece is doing pretty well. I kind of think that misunderstands the circumstance. So the problem of debt and deficits, in my view, is not the risk of fiscal crisis. It is that you have to pay back the money. And so it will displace—future generations will have a higher share of their lifetime income that they’ll pay in taxes than the people born and, you know, whatever, 1960 had to pay.  

But that said, the starting point of debt in the U.S. is below that of many countries as a share of GDP, of advanced countries. Those countries already have income tax rates higher than the U.S. rates. They already have 20 percent national VATs that are in place. Their demographics are worse than the U.S. So when the market looks at a situation like that, they kind of say what is—what is the Plan A? You know, not what is Plan B. And the curse—is it a—it’s a cursed blessing or a blessed curse or something—that we get to choose our own path on that. And we can do it with spending cuts, and we can do it with revenue, or we can do it with some combination. And so far everybody’s, like, yeah, you’re right. Let’s wait and see.  

FROMAN: You know, we’re the prettiest house on an ugly block. 

GOOLSBEE: Yeah, prettiest house on an ugly block. 

FROMAN: Yeah. Great. Let me open it up to questions. Yes, this woman in the red. I think it’s red. I’m colorblind. (Laughter.) 

Q: Robyn Meredith, Bank of New York Mellon. Thanks for being here. 

I wanted to ask you about productivity. Ed Yardeni has been talking about how it’s been increasing and sort of, in his argument, beginning of a long glide, you know, positive, which—I just was wondering how you think about it. 

GOOLSBEE: It’s super, and there’s nothing more important than the productivity growth rate. And we have had, really for a year, shockingly good productivity growth. And that’s absolutely been part of the golden path landing of how could wages be growing at some high level and inflation is staying at this low level? Well, the answer is the difference between those is going to be productivity growth rate. The only thing is what we don’t know, is this a sustained thing? It was crummy for a while at the beginning of COVID. And now it’s been faster than trend for a year. If it continues at faster than trend, long-term trend, it will definitely change our thinking about the economy overall.  

But in monetary policy specifically, we’ll be back to the 1990s. I mean, this was the—this was the centerpiece discussion for Greenspan in the ’90s, of what are the implications if productivity growth is higher? So I got my fingers crossed that that continues. But you also—you got to take the real possibility that it went down, now it’s rebounded rapidly. It may just settle back into what it was before. But in a way, that’s OK. I mean, when it was going down there were a lot of people concluding we were in for permanently lower productivity growth. So we go back to productivity growth, what it was pre-COVID, in a way that’d be a big success. 

FROMAN: The gentleman right next door. 

Q: Thank you very much. Paul Sheard. 

I’d like to ask you about the lessons learned from the Fed’s inflation forecasting era. 

GOOLSBEE: Inflation forecasting error? 

Q: Era. So 2023 was a great year for the Fed’s dual mandate. But 2021 and 2022, and the Fed was not alone, that was a terrible year for inflation forecasting. So my question, Austan, is: What kind of process of reflection, debate has been going on within the Federal Reserve System? And what sort of lessons have been learned from that period? And what, if anything, has changed in the way the Fed thinks and does inflation forecasting? 

GOOLSBEE: It’s an important area. And I will again reiterate, I don’t speak for anybody else on the committee and I don’t speak for the staff and the FRB/US model builders and maintainers that are at the board of governors. I went through a very intense period of soul searching, how could I have gotten that six months—that first six months as wrong as I did? And I appreciate that you started the question by saying the Fed were not the only ones who got it wrong. To me, the puzzle was, yes, there’s a big increase in stimulus and increase in demand. And that was the motive for the people who were saying they predicted inflation, it was based on that.  

The part that I could not wrap my head around is in the traditional Phillips curve, inflation is not supposed to skyrocket when the unemployment rate is above 6 percent. And that is what happened. So to me, that looked like prima facie evidence, no, that, look, something’s going wrong on the supply side. And you looked at labor supply, and you looked at the supply chain, and that is why team transitory, if they had called themselves team supply shock, it kind of would have been OK. It was that we added this thing of if it’s a supply shock, it’s going to go away rapidly. And it didn’t go away rapidly. 

I will admit also that, in a way, we got fortunate in 2023. You didn’t emphasize there was actually an error in the forecasting too. The actual inflation has been far better than we forecast that was going to be in in ’23. Where that, “we” is the Fed as a whole. My own forecasts were a little more accurate than the average for ’23, because, I think, of this reflection period of going back and looking. So I think the major lesson is the cautionary danger of relying on historical precedent for not—really historically unprecedented events. So it might not have any bearing on what the inflation forecast should be on in 2026, but the fact that the golden path was possible in ’23 comes out of looking hard at the supply side and how long does it take the supply side to heal, and how long does it take demand to shift back from—we went from services to goods, we’re going back from goods to services.  

There’s no historical precedent. So everybody was guessing. And some of those guesses were right. And some of those guesses were wrong. But I kind of think we should—we’re going to have to digest that still a little bit. And hopefully, if we ever faced similar types of supply shocks or weird demand transformations of that way, this will at least be a data point that we can update on.  

FROMAN: Why don’t we take a question from one of our virtual participants? 

OPERATOR: We’ll take our next question from Lawrence Meyer. Mr. Myer, please accept the unmute now button. Looks like we’re having some technical— 

Q: Hello, Austan. I’d like to ask you—this is Larry Meyer— 

GOOLSBEE: Yeah, hey, Larry. 

Q: —ask you a couple of related questions that affect your views of monetary policy. So the first is, you talk about supply and demand. I’m the anti-Larry Summers. From the beginning, I say it’s all supply, not demand. Demand got us from zero to 2 (percent), OK? How do we get above 2 (percent)? It has nothing to do with the Phillips curve, as we understood it before. It’s about those supply shocks that affected prices in core. That’s important, because—do you agree with the chairman that the way to get back to 2 percent requires a period of below-trend growth to raise the unemployment rate and increase slack? OK. 

Second, you didn’t answer the question about whether the Fed was too late. They were too late. Of course they were. They were too late because they were required to be too late by the new guidance. They clearly—they couldn’t—they couldn’t raise rates— 

GOOLSBEE: That wasn’t in the form of a question. 

FROMAN: I don’t think—no, that wasn’t a question. 

Q: —couldn’t raise rates until they got to maximum employment. It didn’t matter whether inflation was 3, 4, 5 percent. That’s what the forward guidance said. 

GOOLSBEE: OK, now, wait a minute. Was that a question? That wasn’t a question. So the first one— 

FROMAN: Feel free to comment. 

GOOLSBEE: So thank you—thank you for asking, Larry. Though I tend to always agree with the chairman. You know, that that was one of the questions, do you agree with the chairman? Yes. (Laughter.) But what you attributed—what you attributed to the chairman, I don’t—I don’t know—I didn’t take that as his public comment, that that we would—we passed the point where they said Phillips curve-esque, there must be pain to get inflation down. That was the thing that—your insight about supply, whether it’s a hundred percent, or 75 percent, or some—the supply curve, the fact that output is strong and prices are coming down, if they’re going in opposite ways—if price and quantities are going in opposite ways, that strongly suggests something’s happening with supply. 

When you have overheated demand, you’re getting inflation is going up, and the quantity numbers are strong. So it’s why I’ve been saying in moments where supply is moving, be extremely careful concluding from quantity data something about the overheating of the economy. Because you kind of can’t do that. And so if you find yourself, ah, the GDP number comes in surprisingly strong, there is one worldview that says that means that there’s a danger that inflation is about to reignite. Be super careful about that in a moment like this, where we’ve kind of reflected on what’s been happening. If supply is moving, which it really feels like supply is moving. You look at labor supply, you look at the supply chain healing, you can’t do that. You can’t look at GDP growth rates and say that’s a sign of overheating. 

So I think that puts me 75 percent in your same camp, Larry. Which is, supply is a major driver. And I think we want to be careful with the Phillips curve-type argument, that we must have pain in the quantity side to see inflation come down. You definitely did not, in 2023, need to have that. GDP growth was very strong. The job market—it’s worth remembering it’s not that long ago that people said full employment, the minimum that the unemployment rate can get to, is 4 percent. We brought inflation down, rivaling the biggest drop in inflation in fifty years, with the unemployment rate staying at 3.7 percent. And so something is very unusual for this moment than in previous moments. 

FROMAN: Michelle? 

Q: Thank you. Thanks for doing this, Austan. 

GOOLSBEE: Hey, Michelle. 

Q: Hello. Michelle Caruso-Cabrera, long-time journalist. 

There is someone running for president—if we could dig down into tariffs a little bit more—who says that if elected, he is going to raise tariffs on everything, on all imports by 10 percent, and everything from China by 60 percent. You mentioned generally that that would be inflationary, but has the Fed modeled out in any way what kind of impact that would have on GDP and what to be done about that if it were to occur? 

FROMAN: Well, not—I did not plant that question. (Laughter.) 

GOOLSBEE: Yes, look, as I say, we put on jackets. I’m not—I’m not weighing in on any fiscal, foreign policy, presidential campaign. We got a dual mandate—this is not going to do it. 

FROMAN: This is about inflation. 

GOOLSBEE: This is about—(laughs)—about inflation. If we see inflation, we will get inflation back to 2 percent. That I can guarantee you. 

I don’t—I also do not speak for what the Fed has modeled. We have some fabulous international economists at the Chicago Fed, and there has been a lot of public research, and by the NBER and others about what the impact of increasing tariffs have on inflation—the level versus the changes. It’s worth thinking that through a little bit. If you maintain tariffs at the level they’re at, that shouldn’t contribute to the inflation rate because the inflation rate is a chain. 

FROMAN: I’m tempted to have chairman’s prerogative here of—yeah, we’ve been talking about inflation; that is, obviously, your mandate— 

GOOLSBEE: Yeah, yeah. 

FROMAN: —but the difference between inflation and cost of living. And people are feeling like things are more expensive. 

GOOLSBEE: In the vibes and whatever. And they—look, they are expensive. 

FROMAN: And you know, you said goods are coming down a little bit last month. 

GOOLSBEE: They are. OK. Yes. 

FROMAN: But you know, this gap between how people are feeling based on the cost of living versus the inflation rate. 

GOOLSBEE: Yes. I kind of think two things about this. First—and I just keep saying it over and over—we’ve got a dual mandate. The dual mandate is about the actual numbers, so on one sense, if I say 2023 was a good year for the dual mandate, there is a natural thing that my mom or others would be like, how can you say it’s a good year— 

FROMAN: Still spending a lot for eggs. 

GOOLSBEE: Yeah, it still costs a lot. OK, it’s—people can have any vibe they want. Our job is to get the inflation rate down to 2 percent and maintain maximum employment in the actual numbers.  

Now, we do think about vibes because historically the vibes—consumer sentiment and business sentiment—have been good predictors of consumer spending and business investment. So we always paid attention to that, and the only thing I’ll observe is that the predictive power of those variables has degraded substantially over time. So there are a lot of people now who say they think the economy is bad, and they’re spending a lot. And in the old days, if you said you thought the economy was bad, you stopped spending. That’s why we paid attention to it. 

So its predictive power going down has made us less attuned to it, and the past would tell you the vibes tend to lag the actual conditions. So I don’t know what it—that ’23 the conditions improved, that might start getting reflected in the vibes as you go into ’24. I don’t know. But I do know our thing is about the actual unemployment rate and the actual inflation rate. And we don’t have a price-level target. It’s important to remember that. We’re not trying to get the price level back to what it was in 2019 or some previous period because, of course, to do that, you’d have to have very substantial deflation, and you would likely—deflation has a bunch of other problems associated with it. You’d probably have to tank the economy to do it. So that’s not—our mandate is to get the inflation rate back to 2 percent, and we’re going to—and we have. If you look at the last seven months, we’ve been at 2 percent, OK? So we’re likely to—we need to be on a path to 2 percent gradually, even if—so the Fed puts out the Summary of Economic Projections—the SEP—once a quarter, and that’s not decided on by the committee. They go to each—you don’t know what the other people are going to submit, and you make kind of a projection. I hesitate to call it a true forecast, but it is sort of a forecast. What do you think inflation’s going to be? What is the rate going to be? What do you see the unemployment rate going to be over this year, next year, year after? 

The median SEP the last time it came out said that inflation for ’24 was projected to be 2.4 percent and that there would be three rate cuts in this year. Now note 2.4 percent is higher than what we’ve been having for the last six months, OK? So if you see inflation go up a little bit, that doesn’t—I’m going to have too many negatives in this. If you see that it goes up, it doesn’t mean that we’re not on the target to get to 2 percent. There’s a gradual—we can still be on the path even if we have some increase and some ups and downs. There is nothing wrong with that. So let’s not get too flipped out, you know, if you see, oh, inflation yesterday was higher than what we thought. I’m of two minds on that because there’s one aspect: hey, don’t make too much out of one month; but the other is there’s something fundamentally healthy about when the market moves. If it’s moving based on data, that’s better than if what’s driving the market is moving just because of statements from Fed officials. My dream world is the market understands the Fed’s reaction function well enough to know that when the data come out, here is how—here is what that means for the market, and that when the Fed officials are speaking, it’s not conveying brand-new information that they’re surprised. 

FROMAN: And you could cut rates even if it’s at 2.4 percent. 

GOOLSBEE: Yeah. The median SEP says there are going to be multiple rate cuts with inflation at 2.4 percent. 

FROMAN: Rory MacFarquhar. 

Q: Thank you. Rory MacFarquhar from Gemsstock. 

Could you talk a little bit about the effects that your rate increases have had and the extent to which you are concerned that the resilience; in fact, the very impressive growth that we saw in 2023, might start to be affected—maybe even suddenly affected by the increasing real interest rates that we’re facing with lower inflation? 

GOOLSBEE: So this is an important question. Let’s call it how restrictive are we right now, and what’s the lag of the impact of monetary policy. So to raise rates five hundred basis points in a kind of a one-year period is almost historically unprecedented. I mean, it is a very rapid tightening. 

I think we’re quite restrictive right now. To me, at 5 percent, if you just look at the real rate of fed funds rate minus inflation or short-run expected inflation, it’s around plus-three, and that’s very high by historic standards in recent memory. I mean, in the pre-COVID times, we’re negative. We got rates at zero and inflation around 2 percent.  

So in my view, you want to—you must get inflation down to target, and you want to do that in as efficient a way as possible and not more. You don’t want to be overly restrictive, and I’ve been saying since I got to the Fed, cautioning people of overinterpreting data like wage growth. There was—there is an argument that, if wage growth is at some level, that’s not consistent with 2 percent inflation and so we must see wage growth come down before we can get inflation down. And I think there’s a mistake in that logic, which is wages are stickier than prices, so when things happen, prices tend to move first and then wages. So wages are not a leading indicator of price inflation. 

In the long run, steady state, yes, wages got to be consistent with inflation. But you want to be super careful making predictions like, ah, three months from now, inflation cannot come down because wage growth this quarter was whatever it was. That’s the long way to say you don’t want to remain this historically restrictive for too long. If you do, you’re going to have to start thinking about the employment side of the mandate. So far we’ve mostly just been thinking about the inflation side of the mandate because the employment side is looking great. If you’re too restrictive for too long, you’re going to—you’re going to definitely need to think about that. 

FROMAN: Let’s go to another question from our virtual audience, please. 

OPERATOR: We’ll take our next question from Fred Hochberg. 

Q: Hello, Austan. Hello, Michael. 

FROMAN: Hey, Fred. 

Q: You talk about things you worry about. We seem to still have a housing shortage, particularly amongst affordable housing, and then we have an energy transition that’s expensive as we transition to more renewable. We have climate change that’s impacting food production. There seems to be less globalization, less immigration.  

Are these things not worrisome on your list of things you worry about to impact the economy and inflation? 

GOOLSBEE: Yeah, look, Fred, you know I don’t—you worry about everything. Yes, I’m worried about everything on that list. 

Q: But they seem low on your list.  

GOOLSBEE: Well, I just want to—we’ve got to prioritize the threats of doom: short run, medium run, longer run, OK? 

In the short-run fight against inflation, some of those are more immediately pressing, and some are longer-run in nature. The immigration story, just in terms of labor supply, if not fully solved, dramatic improvement. If you just look at the labor force expansion numbers from immigration, immigration drops basically to zero during COVID—very low. It has now rebounded on a flow basis to be close to what it was before. It’s still not enough to refill the hole, but that one strongly rebounded, and I do think that that will—that will have beneficial spillover effects on inflation. 

The issues of climate, energy transition, and stuff like that might influence longer-run price levels and policy. I don’t think that’s—I don’t think that’s as impactful over the next quarter of what the energy inflation rate is going to be, and I already told you, we’re pissing everyone off by not—we’re not looking at the energy prices when we’re thinking about core inflation to start with. But I take Fred’s point that the broad—at a broad level, productivity growth rates, overall investment rates, and the productive capacity of the economy—of which all of the things he described are quite tied to those long-run growth areas—they dominate everything even though in the next three months they dominate very little. And so we will have to think about those. 

FROMAN: Great. The woman in the back, please. 

Q: Hi there. Lenan Wen (ph) from Reuters News. 

So I have a question about New York Community Bank and the flashbacks that maybe its sparking in markets over the last couple of weeks. What’s the Fed doing to monitor the situation, and what are any potential kind of red flags, any deposit movement so far? 

GOOLSBEE: Obviously, I’m at the Chicago Fed. I’m not going to speak to any individual institution or anything like that. 

On the broader question of commercial real estate or what are the impacts—you know, when we came out of Silicon Valley Bank—there’s still a question mark to be sorted out: how much are people going back to the office, how much are people going to be attracted to the big metro areas versus the medium-sized metro areas, and a lot of those are still up in the air. I mean, you don’t know what the profile is going to be of commercial real estate on the office side. There’s a lot of commercial real estate that remains quite robust. Commercial real estate is not one thing; it’s a whole bunch of things. 

So I would say the particular question was what does the Fed monitor—I don’t know about the Fed. The Chicago Fed—we have real expertise on commercial real estate. We have banking supervision of our institutions, and not all the commercial real estate—even the segment of commercial real estate where there’s problems, not all of those loans come due in one year. So these broader questions of what is going to be our level of restrictiveness, and what are going to be the interest rates two years, five years, eight years from now become quite relevant to questions of what are the implicit losses, you know, and stuff like that. 

FROMAN: Last question, yes. (Pause.) All the pressure is on. 

GOOLSBEE: Yeah.  

Q: Thank you very much for being here. Joseph Gasparro, Royal Bank of Canada. 

In 2020 you co-authored and co-edited a fantastic book called Innovation in Public Policy, where you gave first-order mechanisms to increase innovation, increase economic prosperity. It’s four years later. You’re now a Fed president. What subjects are top of the mind? Is it AI regulation? Funding for electric vehicles? Immigration reform? R&D credits? Thank you. 

GOOLSBEE: OK, so you said top of mind. Top of mind: the dual mandate. 

FROMAN: The dual mandate. (Laughter.) All right. 

GOOLSBEE: That’s my top of mind. 

FROMAN: He’s on message if nothing else. 

GOOLSBEE: That’s what I’m thinking about. But this issue that we talked about—the productivity growth rate and is productivity growth, at least in a temporary period, going to be higher than trend—that’s absolutely top of—that should be top of mind for all of us, of what is happening. If that’s what’s happening, it’s going to be amazing. 

I’m skeptical that that could be happening from AI because it’s not big enough yet to have to that aggregate impact of this magnitude, but that said, if AI could raise the productivity growth rate of service sector industries, that would be so fundamentally important that it’s at least worth going down that flight of fancy to think what it could be. And so I guess I would put that one on the long-run top of mind. 

FROMAN: Austan, thanks so much for spending time with us, and I think we’ve gotten some very clear messages here.  

GOOLSBEE: (Laughs.) 

FROMAN: It’s about the dual mandate. (Laughter.) But we’ve also learned some important economic terms like the vibe index and— 

GOOLSBEE: The vibe. (Laughs.) The freakout channel, yeah. 

FROMAN: The freakout channel. So thank you for sharing that with us. Please join me in thanking Austan. 

GOOLSBEE: Thank you. (Applause.) 

(END)