Transcript

Neil: Good rates overwintered as zero control though it can affect that. Obviously, they continue to back up a little less so today but the 10 year is still in and out about four and a half percent, which is the highest bad since going back to last fall. That's still weighing on stocks right now the Dow down 361 points NASDAQ at a deep sell off. That's almost erasing the gains we had yesterday, and keeping all the averages either negative on the week or very negative on the week ever Austen Goolsbee. He's the Chicago Federal Reserve Bank president delighted to have him. Austin, good to see you.

Goolsbee: Great to see again, Neil. So tell me exactly what the Senate does at the next meeting. Well as a great relief to my colleagues and as I always start, I do not speak for anyone else on the committee. I speak for myself.

Neil: Okay, now you've seen all these things were in environment, right it is cross currents.

Goolsbee: I was going to say we're an environment with just like you said with with cross currents. For the second half of 2023. We make good progress getting inflation rate down from the from the unbearable peaks that it had reached. And we did that without a recession, which was virtually unheard of. And now at the start of this year, we've gotten multiple inflation readings that are higher than where we wanted them to be. And I always say one month is no months, but two months. You got yourself a real month and now we got two to three months of CPI inflation. We'll see what happens on PCE inflation. But we must get inflation back down to target. The law says that we need to maximize employment to stabilize prices. That's the dual mandate and if we're not getting the job done, we have to get the job.

Neil: We're told that PCE that personal consumers part of is a favorite of you and your fellow fed and that generally might show not all the time more stable inflation environment if it does, are we back to the consensus that had built for at least two rate cuts? Some are looking at three rate cuts or is that also a jump ball?

Goolsbee: Well, I don't like tying our hands to say what we're going to do and future meetings. I don't even like doing that for the upcoming meeting when we're still going to get a bunch of data between now and then much less for these meeting. What are you going to do in June and September and and at the end of the year. Now that said it's clear if you take the long arc on inflation, that we were at real highs, and that it has come way down from those highs. And if we start getting readings from the PCE inflation, which is the better measure and that's why the Fed mostly looks at that and that's what the target is on. If we start getting better readings that show us that that arc of inflation coming down is true. That will make us feel a lot better about where we are in terms of monetary policy environment. If the PCE inflation is re reinflating, then like I say our job is stabilized prices and we will stabilize the prices

Neil: which means you will not be cutting.

Goolsbee: I'm not gonna I'm not gonna commit to what the policy could be. Let's just look at the numbers. You know, the parent of the data dog caucus is is the is the one I like to be part of and we just got to get the numbers.

Neil: Okay. I was hoping to get you on a weak moment. Let me get serious and so I'll spend about the soft landing argument Are you confident that that that can still happen?

Goolsbee: I kept using the phrase the golden path for 2023 that it was the mother of all the soft landings that you could get inflation down without a big recession. And in 2023, we did that. Now this question of the last mile is a little harder. We're not going to have as much of the beneficial supply developments that we had in 2023 as we go into 2024 and we're still dealing with this question of how persistent is the inflation? For me, the most important number to be watching on the inflation front here in the immediate term is what is happening with housing inflation, which if you go into the components of core inflation, this housing we thought by now would be coming down. If you look at market rents, they have come down the inflation rate there has come down, but that has not yet showed up as we thought it would in the broader measures of inflation. And if it does. housing costs in general, it's under the real estate market, housing costs in general, but it's what it's kind of a specific measure of housing costs, which is based on what the rental prices are an owner occupied rent equivalent. If that doesn't go down to something like what it was pre COVID will have a hard time getting the overall back to target. So I that's something everybody we're a long way from. We're a long way from there a long way.

Neil: So let me step back. And get your sense then. The conundrum the Fed could be in because obviously, you don't want to keep this going on with with rates where they are, God forbid higher because the flip side of that is the soft landing you hope to get doesn't materialize and that you could throw the whole country into a recession. If you erred on the side of hiking rather than cutting. How do you weigh that?

Goolsbee: What look, this is why every central banker in the United States and around the world goes to sleep each night with indigestion is you got to you got to balance those things off. The way to square the circle, I think is we're mostly gonna just follow the data and see what happens. The law gives us the dual mandate. And if we're getting inflation down, then the real rate the the rate that we set minus the inflation rate, which is kind of a level of restrictiveness.

Even if you're holding the rate steady as inflation falls, you're tightening the restrictiveness. So if we see that inflation is on this path back down to 2%. Then we got to think do we want to remain as restrictive as we are right now for for a long period. If inflation doesn't come down, then the the that answer is that for us. I mean, we have to get inflation down.

Neil: You can't control oil prices. And they're the web admin spiking largely on some of this recent instability in the Middle East. So that's a wildcard for you right?

Goolsbee: That's definitely a wildcard on two counts. One is the price of oil and the price of gasoline go into the cost of living so for headline inflation, that goes in there, but it's a wild card on the second dimension, which is when the price of oil goes up. That's a key component to the production of a whole bunch of things, and from FedEx drivers to manufacturing to et cetera. And so that's a negative supply shock and we've seen over the decades what happens when you get negative supply shocks hitting the economy is not good. It leads to more stagflation airy environment, so we're going to have to definitely keep an eye on commodity prices. In the meantime, we are in a presidential election year I think because we have all these fancy graphics here, Austin and special music. And I'm just wondering if Donald Trump got back into the Oval Office, he's made it clear he's no fan of Jerome Powell.

Neil: So he replaced him. What do you think of that?

Goolsbee: Well, when I became a Fed man, I stopped talking about elections and politics and partisan battles of the old days. The feds job is to go off to conditions we got a dual mandate. There's nothing in there that says anything about politics about the stock market or any

Neil: Are you saying that the Fed ignores saying the Fed ignores all of that though, because he needs to look put that pressure must be unbearable, because when you have many saying that, you know, Jerome Powell wants to make you know, this a little bit better for Joe Biden to be reelected. Not that he can orchestrate that at the Fed, but that is his personal preference. If he had his druthers, I don't even know if that's true, but that none of that enters into the equation with you guys. You don't. You don't sort of see what's going on around you. It's the big old elephant in the room.

Goolsbee: Like I said, I don't speak for I'm not gonna speak for Jay Powell you can go you should have an interview with with chair Powell. And you can ask him, I know that if you use specifically Austin goes we're not influenced by it. I don't have any pressure. Okay, and go just go look at the minutes or the transcripts of the FOMC meetings. We put those out publicly. Yeah. It's not about politics. It's about the dual mandate, what's in the employment and the job market and what's happening to prices. That's what's going to drive our behavior and because we got to tune out the arguments about elections, that's not appropriate in in the Fed context.

Neil: So you also tune out the markets you say and I've heard a lot of your colleagues say the same thing. You don't pay attention to it, but the markets were clearly expecting, you know, three rate cuts. Now they're down to two some are down to one I believe Bank of America is down to none. They don't think rate cuts this year. I don't you don't want to get into those predictions. But you know, what you say in that regard, is the type of stuff that that rattles them that's been rattling the market of late with this backup and inflation or the perception that it's not totally worked yet. So they're kind of losing hope. What do you tell them? Do you just ignore that?

Goolsbee: I don't want them to feel bad. But yeah, you mostly ignore them. The thing is, like I say the the law says what we're supposed to be watching, and it's employment and inflation. It doesn't say anything about the stock market. And when we put out a summary of economic projections, where we make contingent predictions of what will be the appropriate policy and each member of the FOMC is asked individually, we don't debate it, we don't deliver it.

Neil: What do you think the median of those at the at the last go round was for three cuts in this UI, right?

If you remember in December when we put it out the median of the FOMC said three cuts and the market immediately said well that must mean seven cuts so that's right. Part of me just can't ignore that you're gonna find out what you ignore that in the markets right? So you just you don't if it's down a few 100 points, I get it today. What that says all noise to you.

Goolsbee: I think that it's mostly noise. The thing to remember is financial conditions do affect the economy. They are like monetary policy, but only with a long lag. So what happens this week or next week? That's a part is noise. You can move what you're looking for is the longer live signal.