The economy is strong, prices are still too high, and the job market is sending mixed signals. The Federal Reserve is navigating all of it while fending off the most overt political pressure in its modern history. Ahead of the central bank’s closely watched meeting in Jackson Hole, Wyoming, the president of the Chicago Fed, Austan Goolsbee, gives his most candid read on what’s actually going on. He explains why tariffs, war in the Middle East, and six years above the 2% inflation target make this the most dangerous inflation environment he’s seen, what Kevin Warsh’s new leadership means for how the Fed operates, and why he’s a “grim optimist” on AI even as the hype keeps outrunning the results.
This is an abridged transcript of an interview from Rapid Response, hosted by the former editor-in-chief of Fast Company, Bob Safian. From the team behind the Masters of Scale podcast, Rapid Response features candid conversations with today’s top business leaders navigating real-time challenges. Subscribe to Rapid Response wherever you get your podcasts to ensure you never miss an episode.
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.
It’s good fun. Of course, everybody’s sitting on the edge of their seat. They want to know what the chair thinks. And the chair often gives a meaningful speech.
It’s just a really, really strange moment. But we’re always trying to make decisions under time pressure and without full information. I think that 19 people sitting around the table, each one with a different worldview, is pretty important at times when you got this much uncertainty, because at least we’re not thinking the same way. We can yell at each other, get mad at each other, but my colleagues can change my views or how I interpret the data.
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.
Kind of, but that doesn’t mean that we can’t make terrible mistakes. Yes, you could be trained for it, but you could convince yourself that inflation is temporary and then it turns out it’s not. The analogy is you’re driving to work and there’s traffic and you’re kind of . . . “I’ve been sitting here some time. Should I change lanes?” Sometimes you shouldn’t have changed lanes. Then when you switch, then the other lane goes. But sometimes you drive by and you’re like, “Oh, dang, there was a wreck in that lane. I would’ve just sat there for the whole day if I didn’t change lanes.”
It’s exciting in the worst way. We got wars, we got tariffs, we got a bunch of stuff that’s driving up inflation. And we’re trying to figure out, are these persistent inflation shocks? Are they one and done and they’re going to go away? And the law, as you know, the Federal Reserve Act lays out a simple sounding criteria of what’s supposed to drive monetary policy: You’re supposed to stabilize prices and maximize employment. And that’s the whole job by law. Sometimes both of those things are not conflicting.
These tariff wars that have erupted with Canada, did this catch you off guard? And how big a deal is it?
Look, we’re in Chicago. Our motto is there’s no bad weather. There’s only bad clothing. And 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. 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.
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. Now, if you start adding tariffs, wars, oil prices, computer chip shortages, competition with AI data center build-out, things that are driving up the price, people, it’s so much more salient.
I’m here in the Seventh [Federal Reserve] District of Chicago’s heart of the Midwest. I go around, the number one thing that I hear is about affordability. If I talk to businesses, they say, “Our input costs are way up.” If you talk to the farmers, “We’re getting squeezed on both sides. We can’t sell the stuff for very much, but the costs are jamming us, and so our margins are lower.” So, in an environment where everybody’s attuned to that, then getting shocks is even more dangerous that it could lead to the self-fulfilling prophecy.
There is all this armchair discussion about will the Fed raise rates or lower rates. It’s like you’re in the middle of the action in some ways in this job, which in some ways I guess could be fun. But it’s also torturous because you can’t always say exactly what you think. And not everyone’s going to interpret what you’re doing maybe the way you would ideally have them wish they would.
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 Chairman Warsh has been impatient before he was the chairman. He thought there’s a little too much forward guidance. That’s what the central banks and the economists call giving explicit, “Here’s where we think interest rates are going to go. If X happens, then we will cut the rate. If this happens, we will raise the rate.” That’s forward guidance. The chairman doesn’t like forward guidance. Let’s not tie our hands. Now, the other tension is if you don’t give some explanation about how you react or what you’re seeing in the economy, then people are going to fill in whatever they want it to be. Now you can add more volatility, and so we got to balance those off.
The Fed is constructed to avoid political pressure. In the last few years you 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?
It puts me on edge. There’s two components of it. One are the attacking of individuals, criminal investigations of Chair Powell to attempted firings, etc. The other is explicit browbeating, saying you need to lower the interest rate. That’s in the space of the traditional Fed independence. . . . You’re out of the elections business when you went to the Fed. If a sitting administration is trying to remove Fed officials to get interest rates down or to influence interest rate decisions, that’s a problematic circumstance.
I’m curious what you’re hearing about AI’s actual impact, whether it matches what we read in the financial press.
People are all over the map and partly it depends what sector you’re in. And you do hear some blowback a little 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.
We’ve had six months or so, the productivity growth rate hasn’t been that impressive. Thus far, it’s been more hyped than what it has delivered in a lot of sectors. If a group of companies are spending trillions of dollars to build out data centers, they can’t think that they’re going to be giving that away free. So, either it’s going to be real expensive or the valuations that they’re premised on are way too high.
As you look at the economy overall right now, how concerned are you?
Just in the immediate term, concerned. But I do think mostly I would characterize the economy as it’s been stable. It hasn’t necessarily been good, but it has been stable. And there’s a lot that’s confusing. What we’ve got is very low layoffs like it was a boom and very low hiring like it was a recession. So, then you say, “Well, what does that mean? Does that mean we’re going down or we’re going up?” We got war in Ukraine. We got war in the Middle East. The price of oil was elevated by recent historical standards. 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. And we better be mindful, because if inflation starts going up again, it’s very hard to get rid of it.