Austan Goolsbee Clears the Dirt

Episode Summary

Executive Summary: Chicago Fed President Austan Goolsbee said the U.S. economy still looks solid in the hard data—full employment and inflation nearing target—but policy uncertainty, especially tariffs, is creating "dirt in the air" that could delay Fed rate cuts. He argued that tariff effects may be temporary, yet risks from retaliation, intermediate-goods costs, and a consumer/business "freak out" could broaden the damage. The discussion also covered fiscal policy, AI, and housing affordability.

Main Topics: State of the economy: solid data, shaky sentiment (Priority: 5/5): Goolsbee said employment and inflation trends remain favorable, with inflation near the Fed's 2% goal and unemployment around full-employment levels. But he emphasized that policy uncertainty is clouding the outlook and makes it harder to judge the correct policy path. Tariffs and the "dirt in the air" problem (Priority: 5/5): Tariff announcements are the main source of uncertainty. Goolsbee said the Fed needs to wait for the noise to clear before deciding on rates because tariffs could cause one-time price effects or more persistent inflation if they trigger retaliation, hit inputs, or rattle business and consumer confidence. Inflation expectations and market signals (Priority: 4/5): He placed more weight on market-based inflation expectations than survey measures, arguing that long-run market expectations have stayed mostly stable even as short-run and consumer expectations rose on tariff news. Growth slowdown vs. tariff front-running (Priority: 4/5): Mark challenged the view that growth is fine, pointing to slower GDP, spending, and job growth. Goolsbee replied that front-loading of purchases and imports ahead of tariffs may be distorting first-quarter GDP and other near-term readings. Fiscal policy, deficits, and limits of Fed influence (Priority: 3/5): Goolsbee said the newly passed fiscal package may have limited short-run macro impact but leaves the U.S. with large deficits. He warned against fiscal dominance and said the Fed should stay focused on its legal mandate of prices and employment. AI, productivity, and adoption lags (Priority: 3/5): He took a generally optimistic but cautious view of AI, expecting productivity gains over time but warning that adoption will likely be gradual and that markets or firms may overinvest if they assume benefits arrive too quickly. Housing affordability and relative prices (Priority: 2/5): In the closing stat game, Goolsbee highlighted that housing’s relative price has surged versus durable goods over many years, suggesting affordability problems are driven in part by a long-term relative price shift rather than just broad inflation.

Key Arguments: The economy is in decent shape on the Fed's mandate measures: inflation is cooling and unemployment remains at full employment. Tariff-related inflation may be transitory, but the Fed cannot assume that because repeated policy changes can create broader inflation, supply-chain disruptions, and recession risk. Market-based inflation expectations are more reliable than consumer surveys right now, because survey sentiment has become noisy and more politically correlated. First-quarter GDP weakness may partly reflect front-loading and accounting distortions from tariff avoidance, not a true collapse in underlying demand. The Fed should not cut rates simply to ease fiscal pressures or debt service; monetary policy must remain anchored to the dual mandate. AI will likely raise productivity eventually, but the economy may not realize gains immediately because diffusion of general-purpose technologies takes time. Housing affordability complaints reflect a sharp rise in housing's relative price compared with goods, which monetary policy alone cannot reverse.

Data Points: Fed tenure at Chicago Fed: 3rd year - Goolsbee said he is in the middle of his third year as president and CEO of the Chicago Fed. 2009 jobs decline: 850,000+ jobs lost in one month - He referenced the severe labor-market collapse around the financial crisis. Inflation drop in 2023: one of the biggest drops ever - He said inflation fell sharply in 2023 without unemployment rising above 4%. Unemployment rate: around 4% - Used as evidence of full employment. Inflation target: 2% - He said inflation is not quite back to target but is on the path. U.S. GDP share exposed to imports: 11% of GDP - He noted tariffs primarily hit imported goods, which are a relatively small share of GDP. Fiscal package deficit impact: about $3.5 trillion - He described the longer-run deficit effect of the recently passed reconciliation package. Federal deficit: 6% of GDP - He said the current deficit is large even at full employment. Primary deficit: 3% of GDP - He noted the deficit excluding interest payments is still sizable. Housing relative price index: 223% - He cited the rise in housing's relative price versus durable goods as of June 24 data. Housing price inflation: 3% year over year - FHFA house price index reading through April as reported on June 24. Long-run adoption lag example: 50% of manufacturing still not electrified in 1925 - He used electrification as an analogy for AI adoption lags.

Pivotal Quotes: "There's a lot of uncertainty, but there is a lot of strength too." — Austan Goolsbee: His summary of the current economy: solid fundamentals, but policy noise is making the outlook messy. "We're going to announce tariffs. We're going to announce a bunch of things that I start hearing from the business folks out here... They're super nervous." — Austan Goolsbee: Explaining why he feels he must wait for the "dust" or "dirt" in the air to settle before changing policy. "The thing is the most obvious dirt in the air from tariffs discussion is on prices... A second form of dirt in the air is there was a bunch of front running." — Austan Goolsbee: His explanation for why tariff policy is distorting both inflation data and growth data.

Implications: Listeners should expect the Fed to stay cautious and data-dependent, with tariff uncertainty likely delaying policy moves. Businesses should prepare for more volatility in prices, supply chains, and investment plans, while households may feel housing affordability and policy uncertainty more than broad inflation.