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Transcript

Michael McKee: Welcome to the campus of Stanford University, the Hoover Institution's Monetary Policy Conference. And we're very excited this morning to have with us Austan Goolsbee, who is the president of the Chicago Federal Reserve Bank. Thank you for making time for us this morning when all of a sudden the disappointment that the markets had on Wednesday went away. Everybody's happy this morning because jobs came in lower than expected, 175,000. What was your reaction?

Austan Goolsbee: Well, I mean, 175,000 is a very solid report. The sum of the root of our frictions here might be there's a kind of a day traders timetable and there's an economic timetable for setting monetary policy. Of course, you got to take a longer arc view on inflation, on employment.

And we're just trying to figure out after the excellent dual mandate performance of 2023, let's call it where inflation fell almost as much as it has fallen on record, and it did so without a recession. How much can we continue that into 2024? We hit a bump for sure at the start of the year on the inflation front.

And now everybody's just got to take a step back and try to figure out, is that a sign that the economy's overheating or is that a sign of some other thing? The more jobs reports you get like this where they're solid, but it's clearly moving back into something that looks like pre-COVID and conventional times, the more confident we can be that the economy's not overheating.

But we just got to we got to just got to watch this.

Michael McKee: You are one of the I don't want to use the word dovish, but more optimistic people about the possibility that rates could be cut this year. How do you feel now? We do see this slowdown. The ISM numbers show slowdowns. Spending numbers were lower than anticipated and lower than in the last quarter. Are we setting up to go back to the idea that rate cuts are going to happen this year?

Austan Goolsbee: I don't like committing to in our hands of even for the next meeting, much less when it comes to the fall and going into next year. I will say the I was optimistic in 2023 that we could hit what I was calling the Golden Path, that there were reasons why in an unprecedented way we potentially could get inflation down significantly without having a big recession, which previous 2023 that really doesn't happen.

We did that in 23 as we're looking in 24. Like I said, we clearly hit a bump at the start of this year and we've just got to get comfort that it's not a sign of of a re-acceleration of the economy. And we got some cross-currents going. There's no question about that. I think what's happened so far in the job market this year is a little colored by...You got to take into account that we actually had significantly more immigration than we anticipated or then we thought at the time. So everything's got to kind of be normed to a per capita basis, and that makes aggregate numbers like aggregate GDP growth or aggregate consumption or aggregate payroll growth. You got to scale it down a bit. And we're still trying to wrap our head around how much.

Michael McKee: What about the idea of the need to raise rates? The chairman was asked about it a number of times on Wednesday, said it didn't seem like something that was going to happen. Is it at all on the table for you?

Austan Goolsbee: Look, like I say, I don't like speculating when we're going to get a lot of information before the next meeting and before all the meetings for the rest of the year.

In an unclear way, I say don't think that nothing is never not on the table. You know, the job of a central banker is to be paranoid about everything at all times and to have thought through plans and how could we react to different circumstances. So it's not productive to say something's not on the table ever. Something is on the table.

I just think it's we're going to we're going to find out this data, these data and the key element on the economic timetable, not the market trading timetable is are we continuing the progress slow and steady that we saw last year, or is some other thing happening that we're accelerating? The more job's numbers like the ones we saw today, the more you see easing of inflation, the more comfort we would have, I would have on the committee, I don't speak for anybody else and if it goes the other way, we'll react to that. You know, that's the Midwestern way is there is no bad weather. There's only bad clothing. You know, we will deal with it. I mean, we're we're out here at Stanford. There's definitely no bad weather.

But back in Chicago, you know, it's different.

Michael McKee: Well, to drill down on that a little bit. The question then becomes, do you think monetary policy is tight enough? And if so, how do you square that with the idea that inflation has started going up again?

Austan Goolsbee: There's two separate parts to that. The first is how restrictive is monetary policy? I think it's restrictive.

I think if you look at the real federal funds rate, it's high. It's as high as it's been in some decades. And I think that lately, if you look at the interests, interest rate, sensitive parts of the economy, you see that restrictiveness. The second part of the question is, well, then what happened with inflation? And I think the answer but that's partly what we're trying to find out is there's a whole lot of other things besides monetary policy and besides the aggregate stated demand that drive inflation rates.

And you've definitely seen things happening on the supply side of the economy with shipping and bridges and canals, shutdowns and things like that. Commodity prices, you've seen movement, energy prices, you've seen movement. And so we've just got to get a better, more comfort, I think, on this question of are we on the long arc that we saw all of last year and especially the second half of last year, where inflation's steadily coming down or are we in some different environment?

Michael McKee: If you're in some different environment, is it things that monetary policy can affect?

Austan Goolsbee: It might be, you know, if it's all supply shock. Probably not. I mean, we kind of saw that dynamic play out at the beginning of the pandemic when the supply chains shut down. So that's another important aspect that's in this effort.

You know, as I kind of say, that everyone thinks it's a battle between dovishness and hawkishness, but it's really it's not about the birds, it's the data dogs. And the first rule of the data dogs is know when to walk and know when to sniff. And, you know, the time to sniff is when we're trying to figure these out.

Michael McKee: Well, when you look at the overall economy, we mentioned earlier that we're seeing some slowdown. Fed officials have said we can wait because the economy is in good shape. But how much do you worry that you're going to slow the economy too much? And because things like unemployment are a lagging indicator that you'll find yourself with really slow growth or recession before you can react?

Austan Goolsbee: Look, that's the balance that you have to strike, that delicate balance.

That's the that's the dual mandate. And there was a time when the job market was explosively hot and inflation was well off the chart in worse than we wanted. And there's no balance in an environment like that. You're just trying to get the inflation rate down.

If we remain as restrictive as this for too long, we're in my view, definitely going to have to be thinking about the employment side of the mandate. So far, we've got some cross-currents going. As I say, the job numbers today are solid. There's not in a previous world, if you said you're getting jobs numbers in 175,000 - 200,000 range, people be quite happy with that. So we'll just have to see.

It is true that in normal times, when the business cycle turns the wrong way, it doesn't do so. It's not subtle, there's no subtlety about it. The unemployment rate goes up quite significantly. You see your credit delinquencies deteriorate a lot. You see durable goods manufacturing, which are and other cyclically sensitive sectors deteriorate it in a noticeable way. And you haven't really seen that.

And that's part of where we're that's part of where we're monitoring.

Michael McKee:You have a manufacturing intensive district, but also a lot of services. What are CEOs telling you about their vision for what's coming and they're planning in terms of employment and in terms of prices?

Austan Goolsbee:As you point out, the Chicago Fed's district is the most manufacturing intensity of all the Fed, and four of the five most manufacturing intensive states are in the are in the district. Our business contacts on the manufacturing side mostly they convey more of the same that that 2024 it's not accelerating. It's not decelerating.

They're just trudging along in a decent environment. I think we still are seeing play out We've we got past the supply chain bottlenecks. You don't hear a lot of input on that but we're still in the what you might call the consumer spending transformation that in Covid services went down, which normally doesn't happen in a recession because people couldn't go to the dentist and people couldn't go to the movies or see sports and they shifted to buying physical goods.

So the share of their budget that they spent on manufactured goods went way up and we're shifting back. You're seeing that shift back. So that's playing out in manufacturing, too.

Michael McKee:Very quick last question or two questions you can answer yes or no. The things people wanted me to ask you, was there any talk at the meeting of raising rates or about raising rates? And did you have an advanced look at the job's numbers?

Austan Goolsbee:Okay. You don't have an advance. Look at the jobs numbers. You're going to have to wait five years to get the transcript from the meetings. The minutes will come out in a few weeks. So I'm definitely not going to say what people talk about. I as you know, I never put anything on the table or off the table.

I try to be as paranoid as possible about all potentialities and what could happen.