Chicago Fed. Pres. Talks Inflation, Jobs and Nonpartisanship

>>> NOW, AS AMERICANS PREPARE FOR THE PRESIDENTIAL ELECTION IN NOVEMBER, THE ECONOMY IS THE BIGGEST DRIVER FOR VOTERS.

BUT THERE STILL APPEARS TO BE A DISCONNECT BETWEEN HOW PEOPLE FEEL AND THE ACTUAL FACTS.

AUSTAN GOOLSBEE IS PRESIDENT AND CEO OF THE FEDERAL RESERVE BANK OF CHICAGO.

IT'S PART OF THE UNITED STATES CENTRAL BANK, AND IT'S RESPONSIBLE FOR MANAGING MONEY POLICY AND REGULATING THE FINANCIAL SYSTEM.

FROM THE LABOR MARKET TO THE HOUSING MARKET, HE UPDATES WALTER ISAACSON ON THE ACTUAL STATE OF AMERICA'S FINANCES.

>> THANK YOU, CHRISTIANE.

AND AUSTAN GOOLSBEE, WELCOME TO THE SHOW.

>> THANK YOU VERY MUCH.

>> YOU KNOW, EVER SINCE 1977, THE FEDERAL RESERVE HAS HAD A DUAL MANDATE, IT'S CALLED, OF KEEPING INFLATION LOW, BUT KEEPING EMPLOYMENT HIGH.

IT'S SOMETIMES SEEN AS A TRADE-OFF.

TO WHAT EXTENT, HOW DO YOU SEE THAT TRADE-OFF PLAYING OUT OVER THE REST OF THIS YEAR WHEN IT COMES TO FIGURING OUT SHOULD INTEREST RATES COME DOWN?

>> YEAH, LOOK, THAT'S THE HARDEST THING, AND THAT'S THE RUB.

SOMETIMES IT IS A TRADE-OFF.

BUT OTHER TIMES, LIKE LAST YEAR IN 2023, IT WASN'T A TRADE-OFF AT ALL.

INFLATION -- THE INFLATION RATE FELL ALMOST AS MUCH AS IT'S EVER FALLEN, AND FOR REALLY THE FIRST TIME IN MODERN MEMORY, THERE WAS NO BIG RECESSION WHEN INFLATION WAS FALLING THAT MUCH.

I THINK WHAT EVERYBODY IS TRYING TO WRAP THEIR HEAD AROUND NOW IS WE'RE FINISHING OUT THIS YEAR AND GOING INTO NEXT YEAR IS THE BENEFICIAL THINGS THAT WE EXPERIENCED, THE HEALING OF THE SUPPLY CHAIN, THE RETURN OF LABOR FORCE PARTICIPATION AND WORKERS GOING BACK IN TO THEIR JOBS.

IS THAT GOING TO CONTINUE OR ARE WE BACK TO THE TRADITIONAL TRADE-OFF BETWEEN EMPLOYMENT AND INFLATION.

I, FOR ME, I STILL THINK THERE IS SOME BENEFIT THAT'S COMING DOWN THE PIPE.

IF ONLY BECAUSE THOSE -- THOSE IMPROVEMENTS TAKE SOME TIME TO WORK THEIR WAY THROUGH THE ECONOMY.

BUT THAT'S THE SORT OF THE CENTRAL QUESTION AS WE THINK ABOUT THE MACRO ECONOMY.

>> THE FED HAS ALWAYS BEEN CONSIDERED INDEPENDENT, NONPARTISAN, AND YET IN AN ELECTION YEAR, IF THE FED, FOR EXAMPLE, LOWERED INTEREST RATES RIGHT BEFORE THE ELECTION, THEN THERE WOULD PROBABLY BE PEOPLE ACCUSING IT OF PLAYING POLITICS FOR BIDEN, OR THE OTHER WAY.

TO WHAT EXTENT CAN YOU ASSURE PEOPLE THAT -- I MEAN, INSTITUTIONS LIKE EVEN THE SUPREME COURT HAVE BECOME PARTISAN.

TO WHAT EXTENT CAN YOU ASSURE PEOPLE THAT THE FED IS NOT PARTISAN IN MAKING SUCH A DECISION?

>> YEAH, LOOK, THE FED IS NOT IN THE ELECTIONS BUSINESS, AND THE MOST IMPORTANT THING IS TO JUST REITERATE THAT COMMITMENT, THAT THE THING THAT DETERMINES WHAT THE FED CHOOSES TO DO AND WHAT THE INDIVIDUAL MEMBERS OF THE FEDERAL OPEN MARKET COMMITTEE VOTE TO DO ARE THESE DUAL MANDATE GOALS THAT COME FROM THE FEDERAL RESERVE ACT OF STABILIZE THE PRICES AND MAXIMIZE EMPLOYMENT.

AND THAT'S REALLY WHAT WE'RE LOOKING AT.

IF YOU GO BACK AND LOOK AT THE TRANSCRIPTS OR THE MINUTES FROM THE MEETINGS, THEY ARE RECORDED.

ELECTIONS ARE NOT THE SUBJECT OF DISCUSSION.

WHAT THE SUBJECT OF DISCUSSION AND DECISION MAKING IS THE ECONOMY.

AND WE JUST HAVE TO REITERATE THAT AT EVERY JUNCTURE.

AND YOU SAW CHAIR POWELL GIVE PUBLIC INTERVIEWS WHERE HE SAID THAT.

AND WE'VE BEEN SAYING THAT SUFFICIENTLY THAT NOW AS WE GET UP TO THE ELECTION, OUR DATA DPS, AND THAT WE'RE JUST LOOKING AT THE OPINIONS TO MAKE THE ECONOMIC DECISIONS.

THAT'S BY FAR THE PARAMOUNT THING ON OUR MINDS.

>> "THE WALL STREET JOURNAL" A FEW WEEKS AGO REPORTED ON DONALD TRUMP'S INNER CIRCLE SAYING THEY WANT TO CHANGE THE FED, THAT HE WANTS TO MAKE IT LESS INDEPENDENT.

HE WANTS TO HAVE PRESIDENTIAL CONTROL OVER IT.

IS THERE A GENERAL CONSENSUS OF PEOPLE IN THE FED AND THE ECONOMISTS THAT THAT'S A BAD THING?

AND WILL PEOPLE PUSH BACK ON THAT?

>> I READ THAT ARTICLE.

I DON'T HAVE ANY INSIGHT.

LIKE I SAY, I'M OUT OF THE ELECTIONS BUSINESS.

THEY LOOKED LIKE THERE WAS PUSHBACK IMMEDIATELY, EVEN WITHIN THE ARTICLE.

ALL I KNOW, AS I SAY IS THAT, A, THE FED, MY OBSERVATION OF HOW THE FED OPERATORS IS THEY TAKE THE DUAL MANDATE EXTREMELY SERIOUSLY.

AND THE PEOPLE THAT I KNOW ON THE FEDERAL OPEN MARKET COMMITTEE, IT'S NOT -- ELECTIONS ARE NOT THE SUBJECT OF THE FOMC DECISIONS.

IT IS ABSOLUTELY THE ECONOMY.

AND LOOKING AT UNEMPLOYMENT AND INFLATION AND TRYING TO FULFILL WHAT THE LAW REQUIRES US TO DO.

IF YOU LOOK AT THE ECONOMIC RESEARCH, AS I SAY, IT'S QUITE CLEAR ACROSS COUNTRIES AND ACROSS TIME EVEN IN THE UNITED STATES THAT WHERE ADMINISTRATIONS PUT THEIR THUMB ON THE SCALE AND TRY TO ORDER AROUND THE MONETARY POLICY DECISIONS, THE ECONOMIC OUTCOMES ARE WORSE.

THAT'S HOW THE FED AND THE OTHER CENTRAL BANKS AROUND THE WORLD MOVE TO THIS INDEPENDENCE POSITION.

IT'S NOT TO SAY THE PRESIDENT APPOINTS AND THE SENATE CONFIRMS MEMBERS TO THE BOARD OF GOVERNS, THE CHAIR AND THE OTHER GOVERNORS SO THAT THERE IS OVERSIGHT, BUT IT JUST -- IT'S A BAD IDEA FOR ECONOMIC PERFORMANCE IF A SITTING ADMINISTRATION IS IN THE BUSINESS OF THE FED TELLING THEM HOW THEY WANT THE MONETARY POLICY TO BE CONDUCTED.

IT'S JUST NOT A GOOD IDEA.

AND YOU CAN LOOK IN EPISODES OF U.S. HISTORY WHERE THAT HAPPENS, IT'S PROBLEMATIC.

IT LEADS TO HIGHER INFLATION AND MORE PERSISTENT INFLATION, IF YOU DO THAT.

YOU TEND NOT TO PUT IN SOME THINGS, INCLUDING FOOD AND ENERGY PRICES, AND YET MOST OF US, WHEN WE LOOK AT PRICES, EGGS AND A GALLON OF GAS AT THE STATION, WHY DO YOU ALL DO THAT?

>> YEAH, LOOK, THAT DRIVES MY MOM CRAZY.

WHAT DO YOU MEAN YOU DON'T PAY ATTENTION TO ENERGY AND FOOD PRICES?

THE REASON WHY WE LOOK AT THE SO-CALLED CORE INFLATION IS BECAUSE ENERGY AND FOOD IN PARTICULAR ARE EXTREMELY NOISY AND VARIABLE.

SO THEY GO UP, THEY GO WAY DOWN, AND THE HISTORY SUGGESTS THEY DON'T GIVE AS FULSOME A PICTURE OF WHAT'S THE UNDERLYING CORE INFLATION RATE IN THE ECONOMY.

SO THAT'S WHY WE KIND OF EXCLUDE THOSE.

AND TO GET EVEN MORE INTO THE WEEDS, PEOPLE ARE MOST FAMILIAR WITH THE CONSUMER PRICE INDEX AS A MEASURE OF INFLATION.

BUT ACTUALLY, WE USE A DIFFERENT MEASURE, THE PERSONAL CONSUMPTION EXPENDITURE MEASURE.

IT'S JUST A DIFFERENT MEASURE OF INFLATION THAT IS A LITTLE BIT BETTER AND MORE REPRESENTATIVE OF THE ECONOMY.

BUT THAT'S WHY WE DO THAT.

WE WANT THE THING THAT IS THE MOST REPRESENTATIVE OF WHAT'S THE UNDERLYING TREND.

AND THAT'S WHY WE DON'T THINK ABOUT THE ENERGY AND THE FOOD IN THE SHORT-RUN.

>> THE UNEMPLOYMENT RATE IS ABOUT WHAT, 3.9% NOW?

AND THAT SEEMS PRETTY GOOD.

BUFF WE'RE IN REALLY WEIRD TIMES.

AND IT WOULD IT SEEMS TO ME JUST FROM THE SIDELINES THAT THINGS ARE DIFFICULT TO MEASURE.

PEOPLE HAVEN'T REALLY RETURNED TO WORK, OR PEOPLE WHO ARE WORKING REMOTELY OR HAVE JOBS IN THE GIG ECONOMY.

IS THERE SOME FUNDAMENTAL CHANGES IN HOW EMPLOYMENT IS HAPPENING?

AND HOW DO YOU FACTOR THAT IN WHEN YOU'RE IN THE FED?

>> YES, THERE HAVE BEEN FUNDAMENTAL CHANGES.

PARTLY OVER TIME, LONGER TRANSDEMOGRAPHIC, TRANSTHE AGING OF THE WORKFORCE, LABOR FORCE PARTICIPATION.

AND THEN THE SHORT-RUN, COVID, THINGS WENT CRAZY.

WE'D NEVER SEEN ANYTHING LIKE THAT.

NOW WE'VE REBOUNDED TO LOOK SOMETHING MORE LIKE NORMAL, BUT WE STILL ARE GRAPPLING WITH THESE ISSUES OF WORKING FROM HOME AND HYBRID WORK.

AND AS YOU RAISE THE GIG ECONOMY.

I'M STRUCK BY THE RESILIENCE ON THE JOB MARKET.

THE STRONGEST PART OF THE ECONOMY BY FAR IS THE STRENGTH OF THE JOB MARKET.

BEYOND WHAT WE EVEN WOULD HAVE PREDICTED, BEFORE THERE WAS EVER COVID, THEY WERE MAKING PROJECTIONS OF WHAT WOULD BE LABOR FORCE PARTICIPATION IN 2024.

AND WE'RE ABOVE WHAT THEY THOUGHT IT WOULD BE HERE BEFORE COVID EVER CAME.

SO THAT'S THE STRONGEST PART.

AND THE WEAKEST PART, EVERYONE KNOWS IS THAT THE PRICE LEVEL IS HIGHER, AND INFLATION GOT WELL UP ABOVE WHAT WE WERE COMFORTABLE WITH.

AND SO WE'RE JUST STILL TRYING TO GRAPPLE WITH THESE ISSUES.

IT'S NOT JUST IN THE LABOR MARKET WHERE SOME WEIRD THINGS HAPPENED.

IT'S ALSO IN DIFFERENT SECTORS OF THE ECONOMY.

WE HAD A -- WE HAD A RECESSION THAT WAS DRIVEN BY A BUNCH OF INDUSTRIES THAT WE NORMALLY THINK OF AS BEING RECESSION PROOF LIKE SERVICES AND HEALTH CARE AND THINGS LIKE THAT.

AND NOW AS WE COME OUT OF COVID, THOSE SERVICES ARE IN A WAY BOOMING BACK.

AND HOUSING, CONSUMER DURABLES, THE KIND OF CYCLICAL INDUSTRIES THAT NORMALLY MAKE UP THE BREAD AND BUTTER OF THE BUSINESS CYCLE ARE IN A WAY NOT IN THE DRIVER'S SEAT.

AND SO WE'RE STILL TRYING TO GRAB WELL THAT A LITTLE BIT.

>> COMING OUT OF THE PANDEMIC AND THE POST PANDEMIC RECESSION, U.S. GROWTH HAS BEEN TWICE AS GOOD AS A LOT OF ITS -- MOST OF ITS PEERS.

AND INFLATION HAS BEEN BAD, BUT NOT NEARLY AS BAD AS SOME OTHER PLACES.

OUR ECONOMY, IS IT FUNDAMENTALLY REALLY IN GOOD SHAPE NOW?

OR ARE PEOPLE RIGHT WHEN THEY WORRY ABOUT THE ECONOMY?

>> KIND OF BOTH.

BUT I THINK OVERALL, FOR SURE NORMED BY HOW THE EXPERIENCE HAS BEEN AROUND THE WORLD, WE'VE HAD A STRONG RECOVERY POST-COVID.

AND I THINK ONE OF THE LESSER SUNG -- I WON'T SAY UNSUNG, BUT LESSER SUNG ELEMENTS OF THAT HAS BEEN AN INCREDIBLE INCREASE OF BUSINESS DYNAMISM, OF PEOPLE STARTING NEW FIRMS, THAT THAT HAD BEEN DECLINING OVER SOME TIME.

AND YOU HAVE REALLY SEEN POST-COVID A REBOUND OF THAT ENTREPRENEURIAL SPIRIT, LET'S CALL IT, OF THE AMERICAN ECONOMY.

I THINK THAT'S BEEN A BIG PART OF WHY THE GROWTH RATE HAS BEEN HIGHER.

BUT THERE IS NO QUESTION THAT THERE -- IT'S NOT PARADISE.

AND THERE ARE DEFINITELY BOTH INDUSTRIES, GEOGRAPHIES, AND INDIVIDUAL PEOPLE WHO ARE HURTING.

AND THE PRICES BEING AS HIGH AS WHAT THEY HAVE BEEN, YOU SEE THAT IN PEOPLE'S SENTIMENTS AND IN THE VIBES, DISSATISFACTION WITH SOME PARTS OF THE ECONOMY.

>> ONE OF THE STATISTICS THAT STRUCK ME IS THAT THE AVERAGE WAGE NOW, HOURLY WAGE IN THE U.S. AFTER THE PANDEMIC IS UP 22%.

IS THAT A LARGE NUMBER?

AND IS THAT A SENSE THAT MAYBE THAT WILL RIPPLE THROUGH AND THINGS ARE GETTING BETTER?

OR IS THAT AN INFLATIONARY PROBLEM?

>> YEAH, SOME OF ALL OF THAT.

I KIND OF THINK OF THE QUESTION OF IF THE INFLATION RATE COMES DOWN, WHICH IS TO SAY PRICES CONTINUE TO GROW, BUT THEY ARE GROWING AT A SLOWER RATE THAN THEY WERE BEFORE, IS THAT ENOUGH OR SHOULD THE FED BE AIMING TO GET THE PRICE LEVEL BACK DOWN TO WHAT IT WAS IN 2019.

NOW THE ONE THING IS THAT'S NOT THE FED'S TARGET.

THE FED'S TARGET IS 2% INFLATION GROWTH OF PRICES, AND IF YOU WERE GOING TO TRY TO HAVE DEFLATION TO GET THE PRICE LEVEL TARGET, YOU WOULD REALLY HAVE TO CRUSH THE ECONOMY TO TRY TO GET THAT KIND OF DEFLATION.

EVEN IN THE DEPTHS OF THE GREAT RECESSION, YOU DON'T SEE WIDESPREAD DEFLATION.

IT'S REALLY ONLY IN THE GREAT DEPRESSION THAT YOU SEE THAT KIND OF DEFLATION.

SO THE NORMAL WAY THAT WE WOULD BE VIEWING A HEALTHY ECONOMY WOULD BE TO COMPARE THE WAGE GROWTH LIKE YOU SAY TO HOW MUCH THE PRICES ARE UP.

AND IF WE'RE SEEING REAL WAGE GROWTH, THAT IS WAGE GROWTH FASTER THAN PRICES, THAT'S A POSITIVE.

THAT'S WHERE REAL INCOMES ARE GETTING HIGHER, AND IF YOU BACK THROUGH THE CHAIN, HOW MUCH REAL INCOME GROWTH CAN YOU HAVE WITHOUT GENERATING MORE INFLATION, THE ANSWER DEPENDS VERY MUCH ON THE GROWTH OF PRODUCTIVITY.

AND WE HAVE -- WE HAD FOR ABOUT A YEAR VERY ROBUST PRODUCTIVITY GROWTH, WHICH MADE A LOT OF PEOPLE MORE OPTIMISTIC.

MAYBE THIS IS A SCENARIO BACK LIKE WHAT WE HAD IN THE LATE 90s OR SOMETHING LIKE THAT.

BUT IT'S A NOISY SERIES.

AND THE THINGS GO UP AND THINGS GO DOWN.

AND IN THE LAST ONE, THE PRODUCTIVITY GROWTH RATE SLOWED A LOT.

SO WE'RE JUST GOING TO HAVE TO KEEP AN EYE ON THAT ONE TO SEE HOW MUCH IT CAN GO UP.

>> WHEN PEOPLE LOOK AT INFLATION, THEY'RE IN THE FOOD PRICES, BUT IT'S ALSO IN HOUSING.

HOW DO YOU GET HOUSING PRICES DOWN?

>> LOOK, THERE IS TWO PARTS TO THE HOUSING.

IT'S NOT EVEN A PUZZLE.

THERE IS TWO PARTS OF THE HOUSING PROBLEM.

THAT IS THE FED HAS A 2% INFLATION TARGET, BUT IT'S IMPORTANT TO REMEMBER THAT DIDN'T MEAN THAT THE PRICE AND THE INFLATION OF EVERYTHING WAS 2%.

BEFORE THERE WAS COVID, HOUSING WAS ABOUT 3.5%.

SERVICES WERE ABOUT 2.5%, AND PHYSICAL GOODS WERE ABOUT MINUS 1%.

AND COMBINED, THAT WAS WHAT GOT US TO 2%.

WE THEN GO THROUGH A STRANGE PERIOD OF COVID.

ALL OF THOSE INFLATION RATES GO WAY UP.

AND WHAT WE'VE SEEN IS GOODS INFLATION BACKED DOWN TO SOMETHING LIKE MINUS 1% AS IT WAS BEFORE.

SERVICES STILL ELEVATED, BUT APPROACHING THE LEVELS THEY WERE BEFORE.

AND THE BIG OUTLIER HAS BEEN HOUSING INFLATION.

AS YOU RAISED.

AND IT'S DOWN FROM ITS PEAKS, BUT IT'S STILL WELL ELEVATED COMPARED TO WHERE IT WAS PRECOVID.

AND I'VE BEEN SAYING I THINK IF WE DON'T GET THAT INFLATION RATE BACK DOWN TO SOMETHING LIKE WHAT IT WAS BEFORE, WE'RE GOING HAVE A HARD TIME GETTING TO 2%.

NOW THERE IS A MECHANICAL WAY IN WHICH MARKET RENTS FLOW THROUGH WITH A LAG INTO THE OFFICIAL MEASURES OF INFLATION.

AND IT HASN'T DONE THAT AS FAST AS WE THOUGHT IT WOULD.

I'M STILL OPTIMISTIC THAT IT'S GOING TO.

BUT THERE IS MORE THAN THE MECHANICAL.

BUT THEN THERE IS THE DEEPER ISSUE WHICH IT SOUNDED LIKE IS KIND OF THE PREMISE OF YOUR QUESTION.

WHICH IF YOU RAISE RATES A LOT IN A SHORT PERIOD OF TIME, AND YOU HAD BASICALLY ZERO PERCENT INTEREST RATES FOR A LISTENING PERIOD, PEOPLE GOT MORTGAGES VERY LOW, AND NOW MORTGAGE RATES ARE MUCH HIGHER.

AND SO THERE IS -- IT'S NOT JUST DEMAND THAT GOES DOWN WHEN YOU RAISE THE INTEREST RATE, IT'S ALSO A BUNCH OF PEOPLE WHO SAY WELL, I DON'T WANT TO SELL MY HOUSE BECAUSE I HAVE A CHEAP MORTGAGE.

AND IF I MOVE TO A NEW HOUSE, I'M GOING HAVE AN EXPENSIVE MORTGAGE.

I'M GOING TO JUST WAIT.

AND YOU HAVE SEEN OVER AN EXTENDED PERIOD THE WILLINGNESS OF EXISTING HOMEOWNERS TO PUT THEIR HOUSES ON THE MARKET, HAVING A STRANGE IMPACT ON PRICES AND ON SUPPLY IN THE HOUSING MARKET.

SO THE FED IS HAVING TO BALANCE THAT OUT A LITTLE BIT AS WELL.

>> AUSTAN GOOLSBEE, THANK YOU SO MUCH FOR JOINING US.

>> GREAT TO SEE YOU AGAIN, WALTER.