Fed is nearing a point when it is not a matter of raising rates, but how long to keep them high, says Chicago Fed CEO Austan Goolsbee
Fed is nearing a point when it is not a matter of raising rates, but how long to keep them high, says Chicago Fed CEO Austan Goolsbee
We’re two weeks away from the September meeting of the Federal Open Market Committee, the Federal Reserve panel that sets the federal funds rate, which influences interest rates across the U.S. economy. Austan Goolsbee, president and CEO of the Federal Reserve Bank of Chicago, is a voting member of that committee for the year.
“Marketplace” host Kai Ryssdal spoke with Goolsbee, who also chaired the Council of Economic Advisers under Barack Obama, ahead of the interest rate decision to get his view on inflation and whether the economy is headed toward a recession. The following is an edited transcript of their conversation.
Kai Ryssdal: So look, I want you to situate us in this moment. You have said “we are on a golden path” to getting inflation taken care of without ruining the job market. What does that mean?
Austan Goolsbee: I said, it’s possible we could get on the golden path, it’s not a guarantee. But the golden path would be almost unprecedented to get inflation down a lot without having a serious recession. That will be a triumph, the Fed and other central banks around the world have virtually never been able to do that. But I do think at this moment, we might be able to. Monetary policy’s working, that’s certainly what we’re trying to shoot for.
Ryssdal: All right, so look, if you’re saying it’s possible to get on the golden path, I have to ask you how much more you need to see because inflation has come down precipitously, the job market, as you know, is still strong, some signs of it weakening, which is what you guys want to see, the economy is growing. What more do you want to see?
Goolsbee: Yeah, all yay to all of those. We’re getting more supply and demand more back into balance. And we’ve seen a lot of components of inflation coming down. But the overall level of inflation is still above where we want it to be. And you would need to see this continue with some persistence, to really be feeling like we’re making the golden path, we’re gonna get all the way down it. There’s clearly risks. I mean, if you look at China, if you look, we might, we could have a government shutdown, there are a whole series of bumps in the road that we will have to navigate. And we have seen inflation start coming down before, and it was a bit of a false dawn and inflation started to come back. So all of those are things we got to keep an eye on.
Ryssdal: There will come a point, though, where you’re gonna have to declare victory. And I guess I and everybody listening to this in corporate America and everybody wants to know what you have to see. And it can’t just be we need to see more of this happening because that leaves us hanging, going, what are you even talking about?
Goolsbee: Fair enough. I’ve tried to as we’ve gone along here, true to my data dog roots as an economist, let’s identify what are we looking at, what information is the most informative that we should see? I think it’s the monthly inflation, the new month’s numbers of core inflation, especially goods and especially housing. We know that services are a little more persistent. So we want to see progress on those. And we have started to see that. And I think that the expectations in the marketplace about where do they think inflation is going, it’s a little bit circular, but it has a major influence on is there anything pulling inflation down? The thing that I would pay a little bit less attention to? I don’t think wages and wage growth is that good of an indicator for where inflation is going, so I would pay less attention to that one.
Ryssdal: Right. And we talked about that last time. So look, I hate to sandbag you like this. But, and maybe you’ve seen it, and you knew this question was coming. But there’s a new note out from the Chicago Fed, from the economists in your building, if you want to look it up, it’s Chicago Fed letter No. 483, September 2023. And I’m gonna just gonna quote the relevant line here. And it says, “According to the model’s forecasts,” and your researchers and economists have described the model above, but “the policy tightening that’s already been done is sufficient to bring inflation back near the Fed’s target by the middle of 2024 while avoiding a recession.” So this is people in your building, saying, look, you’ve done what you need to do, Fed.
Goolsbee: These are and they’re not just in this building, they’re great economists. Yeah and I recommend Fed letter 483 and the 482 Chicago Fed letters before that. That is an embodiment of the thing I’m saying. I believe there is a golden path opportunity that is unusual, in recent modern Fed history, to be able to get inflation down without having a recession. And if you look at expectations in the marketplace, there’s a growing confidence that we can pull it off. The only thing I want to caution you is that it’s not a guarantee. It hinges on us remaining attentive to the data. And I do think that one of the lessons that’s coming out of this Chicago Fed letter is that we are very rapidly approaching the time when our argument is not going to be about how high should the rates go. It’s going to be an argument of how long do we need to keep the rates at this position before we’re sure that we’re on the path back to the target?
Ryssdal: Without asking you to be specific, spitball it for me. I mean, is it a year that they have to stay high? Is it three years?
Goolsbee: If you look at the, I can’t speak for and I don’t speak for anybody else on the FOMC, but the FOMC puts out the statement of economic projections, which is the collective dot plot wisdom of what people think is going to be appropriate. And it’s not an immediate issue. You see, collectively, our forecast is that rates are going to have to remain up for some relatively extended period. But that the deep question of is there going to be a lot more increase in rates? Increasingly, the data’s coming in saying, the argument should be more about what’s the persistence.
Ryssdal: I don’t want to get too technical and weedy on this one. But it has been suggested on this program and elsewhere that maybe what you guys ought to do is just change the target rate, since you’ve had historically a really hard time hitting 2%, either on the way up, or now on the way down. Why not make it 3 and call it a day?
Goolsbee: You know, I’m happy to join any weed party that you want. We’ll sit out in the lawn and get as deep as we need to. My basic view has been, you can’t change your target until you’ve hit your target. So I just think that making a hypothetical decision of “If in two years we were in this position, then what would we do?” We don’t know what the circumstances are. My basic view of the Fed is when they announce “Cleanup needed Aisle 2,” they’re calling the Fed. The Fed’s job is to come out and clean it up. And if it’s ketchup or it’s salsa or it’s like some kind of a chutney, it doesn’t matter. The Fed’s got to go clean it up. And we said that we had a target of 2%. So we got to get to the target and retain our credibility, in my view. All the discussion about philosophy and “Could it be 3? Could it be 2.2?” A, it’s a little overprecise for my tastes, I don’t think that we can, that we can narrowly manage in that fine of a tuned dimension. And I just think you’ve got to do your job before you can start talking about you want a different job.
Ryssdal: All right, I want to get back up to the risks and the bumps. I got two more questions and then I’ll get out of your hair. The first is we are not going to hear from anybody in the Fed starting the day after tomorrow until after the meeting, you enter your quiet period. But there are things that are happening in this economy that are going to bear on your decision.
The one I want to talk about is the possibility of a UAW strike. You have pointed out that the Chicago Fed, your district, is the most susceptible to that strike. And I wonder how challenging that would be for you and your fellow members of the FOMC if that happens while you’re in your quiet period.
Goolsbee: Look, indeed, you’re quite right, that that matters a lot to the 7th District and potentially matters a lot to the U.S. economy. We saw through COVID that things that happen to automobile prices can have an outsize impact on overall consumer inflation. And we’ve seen what all the supply chain issues can do to the manufacturing sector. It depends critically, of course, if there’s an auto strike, how long does the strike go? And how widespread is this strike? Nobody knows. Nobody knows will there be a strike, but it would definitely be material to our decisions about both sides of our mandate — what’s going to happen to consumer price inflation and what’s going to happen to output unemployment and that side?
Ryssdal: All right, last one. Our new intern asked in our morning meeting this morning, a question that I should have known the answer to but don’t. Then my boss said, “Well, look, why don’t you ask Goolsbee because he will know?” We had given her the assignment yesterday to go through the Beige Book and pick out choice anecdotes, right? And her question was, when you guys were around that long table in the Eccles building on Constitution Avenue, or wherever you are now that it’s being renovated, talking about interest rates, does anecdotal data from the Beige Book come up? Or are you guys all data data as you know, the data dog talk all the time?
Goolsbee: No, no, no, it definitely comes up and applause to your intern. We got to get that intern over here at Chicago Fed. We have elaborate efforts, every reserve bank talks to many businesspeople, community leaders. And that information, you can go back to the transcripts. We’re not allowed to talk about anything that was said in the FOMC meetings within the last five years. But after five years, you can look at the transcripts. And you will see many bank presidents at every meeting talk about our contacts are telling us this, the data shows “A” but the business leaders in that industry don’t agree with the data. They think it’s out of date. So the Beige Book is actually quite important. And just that idea of data comes out with a lag. So any real time information you could get is extremely valuable.
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