5 Questions For The Fed’s Austan Goolsbee—Including: Did They Move Fast Enough On Inflation?

It's an unusually tense time at the Federal Reserve as Democrats and Republicans—including former President Donald Trump—target the central bank as it starts cutting rates in its most significant monetary policy in decades. Forbes spoke with Austan Goolsbee, president of the Federal Reserve Bank of Chicago, an alternate member on the highly watched Federal Open Market Committee and a former chair of the Council of Economic Advisers for President Obama, about how “super serious” central bankers feel about becoming a political football ahead of the election, how the Fed is adjusting to easing inflation and growing recession angst, and what he’d change about the “behind the curve” policy leading to the worst inflation crisis in the U.S. since the early 1980s.

When you become a sworn member of the Federal Reserve, you're out of the election business. Everybody takes that super seriously. The things that determine our decisions are: What are the economic conditions and what are the forecasts. What would we need to see to stop raising? What would we need to see to hold? What do we need to see for stuff to come down? We've been laying out the criteria, and now we're just seeing come to pass the stuff that we've been forecasting, and so the reaction function is pretty well established.

Forbes: What are the data points in the labor market that you are paying the closest attention to meeting to meeting? Context: We interviewed Goolsbee two days before the September jobs report surprisingly revealed the strongest job growth since March, decelerating bets on continued aggression from the Fed on lowering rates and throwing another wrench into the central bank shift as borrowing costs look less likely to tumble.

Goolsbee: The unemployment rate, but everybody knows that. A little bit less, the payroll, job employment numbers. There was a time when, if you had asked me “what's the single most important number?” I probably would have said that, but not now, with the uncertainty about immigration and the uncertainty about these [revisions to jobs data].

MORE FOR YOU
Today’s NYT Mini Crossword Clues And Answers For Saturday, October 5th
Alex Pereira Calls Out His Easiest Potential World Champion Opponent
UFC Cuts Contender Series Winner After 2 Failed Drug Tests

This has been such a strange, unprecedented moment of new firm creation and self employment and different work arrangements. I think that's why we're having such major revisions on these [data points]. All of those things make me put a little bit less weight [on monthly nonfarm payrolls] since there's more of a question mark around [them]. All the measures that we tend to look at as economists to track the labor market – the ratio of vacancies to the number of unemployed, the employment-to-population ratio of prime age workforce, the quit rate, hiring rate, all of those things, plus the the new unemployment claims – I feel like they're all kind of saying the same thing.

The rate of change is all in the direction of cooling. And if you look in the past, it's quite rare that you see cooling labor markets that just settle into full employment. Usually, when things start to go bad, they keep getting worse. And so that's our challenge now: After an ahistorical business cycle, and an ahistorical recovery, are we back to something like normal conditions and we're going to stop here, or are we going to blow through full employment, things are going to get worse and it's going to look like a more like a normal business cycle?

Forbes: Let's imagine we have that crystal ball and we're able to look forward to the end of next year. We officially stick the landing, core PCE runs right in that sweet spot of about 2%, and the federal funds rate falls to right around the median forecast around 3%. What risks for the second half of the decade are you most worried about? Context: Core PCE is the Fed’s favored inflation metric as it tracks how much Americans spend monthly on goods and services outside of more volatile food and energy categories. Projections shared at the FOMC’s latest meeting indicate officials have a median forecast of 3.4% at the end of 2025.

Goolsbee: It's productivity growth.

For productivity growth, the [data] matters the most over the long run, and in the short run, it's one of the most noisy [data points] there is. So that's why it's kind of hard to take that into account in the meeting-to-meeting monetary policy decisions. We saw wild swings in that over Covid…but in the last year-and-a-half, that growth rate of productivity has been averaging well higher than the trend before Covid.

Is that a sign that technology has changed, or is it AI? Is it something else? Is it hybrid work? Is it the business dynamism that we've had all these startups? Because if the productivity growth rate is going to be higher, even if not permanent [but] for the medium term, then the second half of the decade we're going to have a bunch of discussions like the second half of the 1990s, where there was an extended increase in the productivity growth rate. The implications for the economy are that you can grow faster and have more job growth without inflation in a world like that.

And income, wages are going to go up. Nobody needs to be nervous about wages going up at fast rates, because productivity growth will justify it. To me, that's an overwhelmingly important factor that we're going to have to think about in this second half.

Forbes: You're allowed to time travel back to mid-to-late 2021, right before inflation skyrocketed, and you can change one policy within relative reason. What do you choose? Context: After a decade of sub-3% inflation, prices began rising rapidly in 2021, and consumer price index inflation peaked in June 2022 at a 41-year high of 9.1%. The Fed didn’t raise rates, the most common response to inflation, until March 2022, and raised the federal funds rate from near-zero to a two-decade high of over 5% in a 16-month span.

Goolsbee: I think looking back, if you had one thing to change, if you could know that the supply shocks were not going to be transitory in the three or four months sense, you would have started moving earlier.

You would not have been raising with this kind of rapidity that the Fed engaged in, 500 basis points in one year. That’s about as fast as it's ever gone up. You would have started earlier but also realistically, I think it's worth considering how much lower you think inflation would be if they had done that. If you could have a crystal ball and have perfect timing and recognize it's not going to be a temporary supply shock lasting three months, it's going to be a temporary supply shock lasting two years, how much less would inflation be?

There were a lot of countries that tried both monetary and fiscal policy a lot of different ways, and, for the most part, they basically had the same inflation experience. It is instructive that there are limits to what the Fed could have done. But if I had one thing to do over – I wasn't on the FOMC at that time – but looking back, they were behind the curve, slow to move.

Goolsbee: Mr. Burns has, in various episodes, lots of cash, lots of equity and/or lots of bonds. So does he want high rates or low rates? I would like to think Mr. Burns, just out of his own pure self-interest, wants whatever is good for the economy. Financial stability seems like it is the order of the day for him. At Moe's Tavern, there's one of the episodes where they're showing old presidential debates, and Kennedy's like, 'I'd like to express my fondness for Duff beer,' and Richard Nixon's like, 'I would also like to express my fondness for that particular beer,' and it cuts Moe's Tavern. And they're like, 'That guy never drank a Duff in his life!' And I fear that Moe's Tavern, they would not be super enamored of the FOMC, but they should be. We're not the bad guys. We're the Guardians of the Galaxy.

[Goolsbee revised his Burns response in an email: “Burns is a notorious gold bug that’s still complaining that the Coinage Act got rid of the ha’penny in 1857. He’s had it out for the Fed since we tipped off authorities in season 9 that he was the one who stole the 1 Trillion dollar bill after WWII.”]