Inflation, recession, and Trump’s attacks

Note: Transcripts are automatically generated from episode audio, and are not fully corrected for spelling, grammar, and formatting.

AUSTAN GOOLSBEE: 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, 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-100-year flood.”

BOB SAFIAN: That’s Austan Goolsbee, president of the Federal Reserve Bank of Chicago. I wanted to talk to Austan 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 and how the Fed may act under the new leadership of Chair Kevin Warsh. Austan 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. So let’s get to it. I’m Bob Safian, and this is Rapid Response.

[THEME MUSIC]

I’m Bob Safian. I’m here with Austan Goolsbee, president of the Federal Reserve Bank of Chicago. Austan, great to chat with you.

GOOLSBEE: Yeah, Bob, great to chat with you.

SAFIAN: 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 of a “working vacation.”

GOOLSBEE: It’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. So you’ve got all of these central bankers from around the world — the head of the European Central Bank, the head of the bank in Japan — and they’re all going to be traipsing out into these little cabins. So it’s good fun. 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, and 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.

Copy LinkWhy Fed decisions are built for uncertainty

SAFIAN: As an economist, you’re trained to assess this broad range of factors, right? Jobs, supply chains and prices, and you’re trying to integrate all that into this cohesive view, in some ways, where there’s always uncertainty. And I feel like right now things seem particularly uncertain with geopolitics and trade. Does it feel that way to you?

GOOLSBEE: Yeah, it always feels like that, and then it’s even worse sometimes, and now is just a really, really strange moment. But, Bob, that’s no different than business people and start-ups. 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 are 12 reserve banks from around the country, and there are seven political appointees, each of whom 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, is pretty important at times when you’ve 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.

SAFIAN: I was wondering, too, because your job is trying to create some sort of vision through the uncertainty, whether this kind of environment is exactly what you’re trained for, or whether you just can’t be trained for times like this.

GOOLSBEE: I thought you were going to say it’s exactly the kind of line of fire that AI is going to replace you in. 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 can 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’re driving to work, and there’s traffic, and you’re thinking, “I’ve been sitting here some time. Should I change lanes?” Sometimes you shouldn’t have changed lanes. Then when you switch, the other lane goes. But sometimes you drive by, and you’re like, “Oh, dang, there was a wreck in that lane. I would’ve just sat there for the whole day if I didn’t change lanes.” It’s exciting in the worst way, you know? We’ve got wars, we’ve got tariffs, we’ve 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 criterion of what’s supposed to drive monetary policy. It’s just two things. You’re supposed to stabilize prices and maximize employment, and that’s the whole job by law. Sometimes those two 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 — now you’ve got to make some trade-offs. Inflation is getting 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.

Copy LinkHow tariff shocks can entrench inflation

SAFIAN: These tariff wars that have erupted with Canada — did this catch you off guard? And how big a deal is it? With tariffs, in some ways, we could say, “We’ve seen this movie before with this administration.”

GOOLSBEE: A little of both. I should say at the outset, tariffs are a fiscal policy. 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.” 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. Then the court unwound some of the tariffs.

SAFIAN: Right.

GOOLSBEE: So it was like, “Hey, maybe the price is coming back down.” No, but now we’ve 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.

SAFIAN: Because it becomes self-fulfilling, right?

GOOLSBEE: 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 to increase 6%.” 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 raise prices 7%.” That kind of dynamic is extremely difficult to get out of. It’s probably impossible to get out of without a deep recession, so 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 you’ve 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.

SAFIAN: It’s business as usual. It doesn’t really—

GOOLSBEE: Business as usual. But the—

SAFIAN: Right.

GOOLSBEE: 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 take blame for the beginning part. But in an environment where we’ve been struggling to get the inflation rate down, and at some times it’s been coming down, it’s still, for almost five and a half years, been above where we wanted it to be. Now, if you start adding tariffs, wars, oil prices, computer chip shortages, competition with AI data center build-out — things that are driving up prices — it becomes so much more salient to people everywhere you go.

SAFIAN: Mm.

GOOLSBEE: I’m here in the 7th District of Chicago. It’s kind of the heart of the Midwest. I go around, and the number one thing that I hear is about affordability, about cost. If I talk to businesses, they say, “Our input costs are way up.” If you talk to the farmers, they say, “We’re getting squeezed on both sides. We can’t sell the stuff for very much, but the costs are jamming us, so our margins are lower.” In an environment where everybody’s attuned to that, getting shocks is even more dangerous. It could lead to a self-fulfilling prophecy.

SAFIAN: It’s such a confusing moment because those feelings that you’re tapping into — people worried about affordability — are totally real, right? And at the same time, the economy is relatively strong.

GOOLSBEE: It’s still strong.

SAFIAN: The job market is relatively strong.

GOOLSBEE: No, look, this is the conundrum.

SAFIAN: The stock market is crazy.

GOOLSBEE: 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 then it’s like the flood has got to be getting bigger and bigger.

Copy LinkWhy the Fed Chair wants “fewer explicit promises”

SAFIAN: Your job is to try to help avoid, as you say, deep recessions. But you also know the way cycles work. They’re going to happen.

GOOLSBEE: That’s the message. 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’ve 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?” And I say, “Yeah, we don’t think about gasoline prices, and we don’t think about grocery prices when we’re thinking about inflation.” She’d be like, “That’s the only thing I think about.”

GOOLSBEE: 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. An even bigger majority say they may not know what the Federal Reserve does, but they think it’s doing a bad job.

SAFIAN: There is all this armchair discussion about whether the Fed will raise rates or lower rates. You’re sort of in the middle of the action in some ways in this job, which I guess could be fun, but it’s also kind of torturous because you can’t always say exactly what you think, and not everyone’s going to interpret what you’re doing the way you’d ideally wish they would.

GOOLSBEE: There are two sophisticated logics in that question. There’s a tension between wanting to be clear to the public, to the markets, to the world about how you see the economy transpiring and what you’re going to do, and not wanting to be so explicit that you tie your hands. Chairman Warsh has been impatient with that. Before he was the chairman, he thought there was a little too much forward guidance. That’s what the central banks and economists call giving explicit statements like, “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. He wants fewer explicit promises. Let’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. That can add more volatility, so we’ve got to balance those off.

SAFIAN: You and Kevin Warsh, the new Fed chair, were foxhole buddies, I think is the term he used during the global financial crisis.

GOOLSBEE: Oh, yeah.

SAFIAN: Are there things that you expect to shift with his leadership that we haven’t necessarily seen all of yet?

GOOLSBEE: 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 fewer expressions of the committee’s forward guidance.

He 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 he named very high-profile, smart people — many of whom are close friends of mine — to be the heads of these task forces. We’re still waiting to get the output from those task forces. I think they’re going to give us suggestions and recommendations. I have no doubt that once we get those five reports, we will have a big discussion about whether we should change our behavior. If we do, I think these would be kind of signature things for the chairman.

SAFIAN: 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.

GOOLSBEE: It seems like that.

Copy LinkWhy Fed independence matters under pressure

SAFIAN: You mentioned earlier that the Fed is constructed to sort of avoid political pressure. In the last few years, you’ve faced more overt political pressure than ever. I mean, charges from the White House about specific Fed figures — Jerome Powell, Lisa Cook. Does that make everyone more cautious?

GOOLSBEE: It puts me on edge. There are two components of it. One is the attacking of individuals, from criminal investigations of Chair Powell to attempted firings, et cetera. The other is explicit browbeating, saying, “You should lower the interest rate.” That’s in the space of 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 — are talking about. It is independence from political interference when setting the interest rate.

GOOLSBEE: If you just look at countries where they don’t have that, or you look at times in the United States when 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 are totally different from the central bank and the economic timetable.

SAFIAN: Yeah.

GOOLSBEE: That’s why they designed the system in the United States, the Fed, to be as separated from the political sphere as is possible in a democracy. My experience at the FOMC is that the 19 people sitting around the table, some are economists and some are market people, some are businesspeople, have a lot of different backgrounds, and they take the job really seriously. You’re out of the elections business when you go to the Fed.

SAFIAN: You were part of the Obama administration. You chaired the Council of Economic Advisers.

GOOLSBEE: Back in 2009 and 2010.

SAFIAN: You’re not a Trump guy.

GOOLSBEE: I started as a Democrat, but like I say, when you’re at the Fed, you’re out of the elections business.

SAFIAN: I just want to be clear about it for folks, because Trump has been particularly aggressive, with Powell and Lisa Cook being directly challenged.

GOOLSBEE: Look, in the environment where 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, and I think any economist would say that’s a problematic circumstance.

SAFIAN: I appreciate Austan’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.

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Before the break, the Fed’s Austan 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. Let’s dive back in.

Copy LinkHow AI hype can overheat the economy

I’m curious what you’re hearing about AI’s actual impact, whether it matches what we read in the financial press.

GOOLSBEE: People are all over the map, and it partly depends what sector you’re in. I talked to the head of a major arbitration agency who said AI is already as good as, or better than, arbitrators. They can feed all the reports in and all the facts of the case. That’s one where it sounds like high productivity immediately, 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 waiting to see if this turns into robotics or some kind of automation, where it would have a bigger impact. Right now, they’re still looking for the use cases, what the best use cases are. And you do hear a little blowback that 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 in the productivity growth rate, which may be tied a bit to the use of technology, machine learning first, then AI. But now we’ve had six months or so where the productivity growth rate hasn’t been that impressive. So you’ve got some people saying maybe that argument was a blip. Just back to what the day job of the Fed is, to try to prevent overheating and stop inflation, it’s not exactly about whether, if we come back in 20 years, this will have revolutionized society. The more hype there is, the more chance there is that it overheats things today, that everybody says, “I’m going to massively build data centers today. I’m going to 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, it could actually drive up the interest rate in the short run, not drive it down. I’m not saying nobody has any use cases that work. There are many use cases. The question is, how long is it going to take before we have so many examples that it’s a rising tide lifting productivity growth for all the boats?

Thus far, it’s been more hyped than 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 they’re going to be giving that away free. So either it’s going to be real expensive, or the valuations they’re premised on are way too high.

SAFIAN: You did extensive research about the dot-com era and bubble, as I recall. Is that research you kind of call on when you look at today’s AI era?

GOOLSBEE: There are interesting parallels between now and the origin of the dot-com era. But also, look, the internet did change the whole world. It just took far longer than the biggest proponents thought it would, and that’s another lesson we should think about.

SAFIAN: There’s a CEO I spoke with who said 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 catastrophic, or they’re wildly overvalued, in which case we’re in for a big stock market correction, which is going to lead to other problems and other job implications.

GOOLSBEE: Then they’ll lose their jobs, too, as a business type. That’s kind of interesting. I guess that executive’s got the world split into two parts. 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 the valuations are justified, I just can’t get past the lump-of-labor fallacy, as we call it, which is that 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 been wrong every time it’s been claimed, and the AI people should learn a little Bayes’ 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.

SAFIAN: This time is different.

GOOLSBEE: Yeah, this time is different.

SAFIAN: Yes.

GOOLSBEE: But I’ll take the under on the chance that we come back in 20 years and the unemployment rate is 95 percent, and there are six people who own the AI companies that have all the wealth in the United States. That’s unlikely.

SAFIAN: You almost sound optimistic, Austan. They call economics the dismal science, which always sounds downbeat.

GOOLSBEE: No. Yeah, look, I guess I’m a grim optimist. I’m not trying to make light of it. There are many episodes of general-purpose technologies that have been disruptive, and it’s traumatic as people transition. But 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 human beings 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 like that is going to make us rich by current standards, 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’m kind of a grim optimist, with some disruptions.

Copy LinkWhat signals matter most in today’s economy

SAFIAN: As you look at the economy overall right now, how concerned are you?

GOOLSBEE: Just in the immediate term, concerned. But look, I do think mostly I would characterize the economy as stable, but it hasn’t necessarily been good. It has been stable. And back to your original formulation, there’s a lot that’s confusing, OK?

SAFIAN: Yeah.

GOOLSBEE: So the job market has been stable by almost every measure, but several of 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 that low hiring, low firing is an extremely unusual environment. OK, so normally the business cycle goes one of two ways: You either have a great deal of hiring and very low layoffs, or you have a lot of layoffs and very low hiring.

If you have the latter, you’re kind of in a recession. If you have the former, 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’ve got war in Ukraine. We’ve got war in the Middle East. The price of oil is elevated by recent historical standards, and every three months something happens that could make it go up again. In an environment like that, I’m already going to be on edge. Everybody should be on 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. We better be mindful, because if inflation starts going up again, it’s very hard to get rid of it.

SAFIAN: The immigration environment has reduced the number of people coming into the country, so there are fewer people to be working. Does that come into what you’re calculating?

GOOLSBEE: 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 jobs-created number. That might be your best number.” OK, but that’s not your best number at a time when there’s 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 a 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. Let’s look at the rate-based numbers: the unemployment rate, the vacancy rate, the hiring rate, the termination rate, a variety of rates.” And those ones show stability. I think they’re better measures.

Copy LinkWhat business leaders should watch on rates

SAFIAN: 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?

GOOLSBEE: My read, and I’m only allowed to speak for myself, is that when I’m looking at the inflation picture, I see some things that are disturbing. We’ve been above the target for five and a half years, and we went through this period where we stopped making progress. Then for the last year, it’s actually been going the wrong way. That was driving my thinking about what Fed policy reaction needs to be.

If you look at the three-month inflation, it doesn’t look terrible. We’ve seen a little bit of movement back toward improving. And from my perspective, if you can give me evidence that we’re on a path back to 2% inflation, I’m perfectly comfortable, and have been since I got to the Fed. If we’re on a path to 2% inflation, then I 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.

I loosely think a 3% interest rate with 2% inflation, 1% real, to me that’s kind of a loose target of where things are headed. But all of that hinges on inflation having to head back to 2%. So if you’re a very interest-rate-sensitive industry, I would tell you: Watch the data. Get a sense of where you think inflation is going, because that’s going to be heavily influential on the thinking of people like me who are 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 sitting around the table, we’re thinking about the real economy and inflation. What the stock market says is kind of a secondary consideration. So don’t overweight that.

SAFIAN: Well, Austan, this was great. Thanks for sharing what you could.

GOOLSBEE: Bob, what a treat. This was fun. Anytime.