Why Austan Goolsbee Is Still Concerned About Inflation

Episode Summary

Executive Summary: Austin Goolsbee argued the Fed is still balancing sticky inflation against signs of labor-market softness, but he remains more worried about inflation—especially if tariff-driven price pressures spread into services. He urged caution in reading weak payrolls because immigration and labor-supply shifts may be lowering the break-even job gain, and said rates may remain restrictive enough to justify cuts only if labor-market deterioration becomes clearer.

Main Topics: Fed policy dilemma: inflation vs. labor market (Priority: 5/5): The discussion centered on whether the Fed should cut rates soon, hold steady, or remain vigilant about inflation. Goolsbee said inflation currently occupies more of his headspace, though he is not dismissing labor-market weakness. Tariffs and inflation pass-through (Priority: 5/5): Goolsbee warned that tariffs may not be a one-time price shock; if they persist and spread through supply chains, they could raise goods inflation and eventually seep into services inflation or expectations. Reading labor data amid immigration-driven distortions (Priority: 5/5): He argued monthly payrolls may be less reliable as a cycle signal because immigration and population growth changes affect the break-even pace of job creation, so policymakers should emphasize labor-market rates like unemployment, hiring, layoffs, and vacancies. Market pricing vs. perceived restrictiveness (Priority: 4/5): The hosts noted stocks, credit spreads, and broader financial conditions look loose despite elevated policy rates. Goolsbee replied that markets may reflect confidence the Fed will succeed, which can itself loosen conditions without implying policy is too tight. Productivity and long-run neutral rates (Priority: 3/5): They discussed why long-term rates may be higher than in the pre-COVID era. Goolsbee suggested historical ultra-low rates may have been the exception and pointed to possible explanations like debt issuance, productivity trends, global factors, and steep expectations for Fed cuts. Regional business impact in the Seventh District (Priority: 3/5): Goolsbee described reactions in manufacturing-heavy and agriculture-heavy parts of the Chicago Fed district, where tariffs initially sparked panic but now appear more manageable, though farmers remain concerned about lost export relationships. FOMC dissents and Fed governance (Priority: 2/5): The conversation closed on why dissents are rare and how much of that reflects Powell’s leadership versus shared analysis. Goolsbee credited Powell’s skill at synthesizing diverse views and keeping the committee aligned.

Key Arguments: Inflation is still the main concern because the U.S. has been above target for about four and a half years, and recent services inflation was disappointing. Tariffs are not clearly a one-off shock; they can persist, alter supply chains, and potentially raise productivity costs. Weak payrolls should be interpreted carefully because lower immigration and changing labor supply may be reducing the monthly break-even job count. The unemployment rate, hiring rate, layoff rate, and vacancy rate are better indicators than payroll totals when labor supply is shifting. Financial conditions may look easier partly because markets assume the Fed will succeed; that is not necessarily proof policy is insufficiently restrictive. Long-term rates may be higher because pre-COVID ultra-low rates were unusual, and global debt, productivity, and market expectations all likely play a role. If labor-market deterioration becomes clearer, rate cuts become more compelling; if inflation broadens outside tariff-related categories, the Fed should be more cautious.

Data Points: Time above inflation target: 4.5 years - Goolsbee said inflation has remained above the Fed's target for four and a half years. Share of GDP in imported goods: 11% - He noted imported goods are only about 11% of GDP, shaping his view that tariff impact may be contained if escalation stops. Chicago Fed district: 7th District - He identified the Chicago Fed's district as manufacturing-intensive and auto-heavy. Job market benchmark: ~75,000 payrolls per month - He discussed monthly payrolls around this level as near break-even in a more normal environment. Alternative break-even estimate: 40,000 vs. 100,000 jobs/month - He suggested immigration shifts could lower the monthly break-even payroll figure substantially. Credit spreads: 27-year low - The hosts cited historically tight credit spreads as evidence financial conditions are not obviously restrictive. Auto suppliers' margins: small margins to begin with - Goolsbee relayed that auto suppliers were alarmed because tariffs threatened already-thin margins. Consumer confidence: down somewhat significantly - He referenced weakening consumer confidence as part of the inflation concern.

Pivotal Quotes: "I'd say I've still got one eye on inflation." — Austin Goolsbee: He explained why inflation currently remains his primary policy concern despite some labor-market softening. "The four horsemen of truth and justice, in my view, are rates less susceptible to the immigration and population labor supply problems." — Austin Goolsbee: He argued for using unemployment, hiring, layoffs, and vacancies instead of payroll totals to assess labor-market health. "If it's spreading into services inflation this immediately, it's probably not coming from tariffs." — Austin Goolsbee: He used the recent services inflation reading to warn that a broader inflationary impulse may be at work.

Implications: Markets may be overconfident about imminent cuts. The Fed may wait for clearer labor deterioration or broader inflation re-acceleration signals, especially if tariffs keep feeding costs and expectations.