Austan Goolsbee Is Worried the Economy Is Overheating

Inflation remains high and the 2% target is farther away than it was this time last year. There are signs all over that the economy is overheating — the strange labor market where hiring and firing remains low, while GDP is growing, but mostly due to AI and the data center buildout — and Chicago Fed President Austan Goolsbee is worried about how uncertain central bankers are about what to do to cool the economy. The next shock, he tells us, could be around the corner. In this conversation, recorded at the Jackson Hole Economic Symposium, Goolsbee explains why he is skeptical of metrics like r*, why he is embracing Kevin Warsh's philosophy around reducing forward guidance, the purpose of the new Fed task forces, and the economic indicators that influence his thinking around reaction function. See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Joe Weisenthal?

  There are some market stories where you want every detail. Tracy and I have made quite a few podcasts on that basis, but sometimes you've only got 10 minutes and need to know what's moving markets and why. That's the Barclays Brief Podcast. Every week, experts from Barclays Markets and research get you up to speed on what matters and what to watch next. About the time it takes to grab a coffee. So, search Barclays Brief wherever you get your podcasts.

• 0:24Speaker 01

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• 1:06Speaker 02

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• 1:46Speaker 03

  Bloomberg Audio Studios, podcasts, radio, news.

• 2:01Joe Weisenthal?

  Hello and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

• 2:06Tracy Alloway?

  And I'm Tracy Alloway.

• 2:07Joe Weisenthal?

  Tracy's still here in Jackson Hole. We are recording this, what is it, the 27th?

• 2:12Tracy Alloway?

  I think that's right.

• 2:13Joe Weisenthal?

  So, before Chairman Worshe's big speech, et cetera. But when we're here in Jackson Hole, we have to talk to as many people as we can about the state of monetary policy, the economy, central banking, all of the good stuff we love to talk about.

• 2:26Tracy Alloway?

  Yeah, definitely. And we don't play favorites on this show, but one of our favorite Fed presidents.

• 2:30Joe Weisenthal?

  We don't play favorites, but if we were to.

• 2:34Tracy Alloway?

  That's right. We're going to be speaking with Austin Goolsbee of the Chicago Fed.

• 2:37Joe Weisenthal?

  That's right. Literally the perfect guy, someone we've had on several times. So, Austin, thank you so much for coming back on Odd Lots.

• 2:43Speaker 05

  Thank you for having me.

• 2:44Joe Weisenthal?

  On the TV set this time. No moves.

• 2:46Tracy Alloway?

  I saw a bear.

• 2:48Speaker 05

  You saw a bear?

• 2:48Tracy Alloway?

  I saw a black bear, along with some of our producers yesterday. It's very exciting. I've never seen one here before, so.

• 2:54Joe Weisenthal?

  Hopefully not indicative of anything in the broader economy. There are so many places to start. Let's, how about a simple question? Right now, when you look at where the Fed has rates set, when you look at the curve, when you look at the state of the economy, would you characterize policy as restrictive right now?

• 3:14Speaker 05

  Depends what you think the underlying inflation rate is. Let's not, let's not forget. What matters is the real rate.

• 3:22Joe Weisenthal?

  Yeah.

• 3:22Speaker 05

  Rate minus expected inflation or actual inflation over some period. In the long run, where do we think it's going to end up? I loosely think 3% rates with 2% inflation and 1% real is kind of a

• 3:42Speaker 05

  eventual landing spot.

• 3:47Speaker 05

  The real rate, if the inflation rate is 3 plus percent,

• 3:54Speaker 05

  the real rate is a lot lower than than if inflation is headed back to target.

• 4:02Joe Weisenthal?

  Yeah.

• 4:03Speaker 05

  So, you can't, I don't think you can really answer that without saying, I'm

• 4:12Speaker 05

  I'm okay with waiting to see, but I'm a little nervous that the inflation side is, has, over the last six months, not been looking great.

• 4:20Joe Weisenthal?

  Got it.

• 4:21Tracy Alloway?

  Not to get too technical right at the jump of this conversation, but when we

• 4:25Joe Weisenthal?

  Just jump right in.

• 4:26Tracy Alloway?

  But when we talk about the restrictiveness of monetary policy, I mean, we're talking about where it sits next to R-Star. And R-Star is unobservable at the best of times.

• 4:35Joe Weisenthal?

  Yes.

• 4:35Tracy Alloway?

  And now we're in this environment where I don't think anyone would disagree that we have this huge structural change in the form of AI. Do we have any more confidence in the neutral rate of interest and versus where we are in terms of restrictiveness?

• 4:49Speaker 05

  I love, you know, I was an academic for 30 years. So, I love saying, let's get out of the world of theory, you know, let's get back in the I always called R-Star, our Sasquatch, and you know, somehow it feels with this as a backdrop. Because you can never see it until after it was left and you know, here was a footprint.

• 5:12Speaker 05

  And when I say that, it's because I don't think R-Star, while the concept exists, I don't find it helpful for me in determining, well, what should the, what should the, the next monetary policy move be? Because it's not observable. It's even in the best of times, not observable. That said, I think if you start thinking longer run, what does an increase in the productivity growth, growth rate do to R-Star? I think it increases it because faster growth, you gotta have a higher steady state

• 5:55Speaker 05

  interest rate. And I gave a speech last year, I mean, at the, at the last Hoover Conference that was kind of thinking about, if you think AI is increasing productivity, it makes a big difference to what that means for the here and now R-Star. Is this expected or is it unexpected? So, if it's unexpected landing on you, then inflation goes down and in a way, people aren't adjusting their behavior in the short run and rates can go down.

• 6:32Speaker 05

  But if the bigger the hype, the more we're about to have a giant bounty that's going to come from technology, you could easily overheat the economy in the short run and you have to raise the rates. And we kind of live that through the mid to, to late 90s.

• 6:51Joe Weisenthal?

  Yeah, that's right. Let, how about we maybe try to reverse, take the question from the opposite direction? So, setting aside theoretical questions about R-Star, setting aside how we would measure restrictiveness, let's just take your point. The inflation data is still warm. There are signs that it's going in the wrong direction, even if, you know, here, whatever. Why? What, how would you decompose the drivers of either persistently higher inflation or the upward rate?

• 7:16Speaker 05

  Yeah. There, I was saying before, even before Liberation Day, as the tariffs came in, I warned, you'll remember, let's be careful. We learned during COVID that if a supply shock, that is, that's supposed to be transitory, if it's big enough, can end up taking a lot longer than, than we initially forecast. And that was my fear, that while one and done tariffs are supposed to be an increase to the price level, to do this, increase to the price level and a temporary inflation shock, where was the evidence that that was true?

• 8:02Speaker 05

  We've, we've been dealing with that. To add a oil price war-driven price shock on top of it before that one went away, that's a dicier proposition.

• 8:18Speaker 05

  Some component of the increase in inflation is from those two parts, tariffs and, and one-time increase in price of oil, which hopefully should go away as inflation.

• 8:34Speaker 05

  But if you look at services, that's not really caused from tariffs, that's not really caused from oil prices. That's a deeper level of concern. So, in my, is it a decomposition? I'm hopeful that much of it came from those temporary slash transitory factors. Ah, I'm giving myself hives even using that word. And if so, then we should see it. It should go away. We can't, it can't be that each quarter we say, ah, yes, it's about to go away, just not yet, you know, three months from now.

• 9:18Speaker 05

  And so that's why I was okay with if we get one or two readings of inflation that are moderating, it's perfectly fine to say, let's, let's wait a meeting or two meetings or whatever. Let's see if this is the heralded introduction of the, of the temporary part.

• 9:40Tracy Alloway?

  So in a normal world, these shocks are supposed to be, again, using the dreaded T word, transitory, like one-off levels to the price and then they kind of fade away. I think it's fair to say in recent years, we've seen shock after shock after shock. Do you think that the central bank needs to start like incorporating that kind of uncertainty into its mandate? Just assume that the world's more uncertain. Or sorry, not into the mandate, into its thinking.

• 10:07Speaker 05

  Yeah, into its thinking. Yes. I, I think you're honest. It does feel like we're getting more supply shocks that the traditional world, this is,

• 10:19Speaker 05

  world shocks aren't the main thing happening. It's not commodity prices. Normally the grubby reality of the business cycle, demand-driven, unemployment goes up when inflation goes down. Inflation goes up when unemployment goes down. When both of those things are moving together, like what happens with these supply shocks, there's not an automatic playbook of what to do. I do think that we at the Fed and the central banks all around the world should be contemplating at the least, what are you going to do if we're going to get more and more shocks?

• 11:00Speaker 05

  That's a slightly different, you kind of, you raise a second point, which is with the tariffs and with the war.

• 11:10Speaker 05

  Here, I think that has piled this uncertainty on top of itself. And I think that's what's led in the labor market to this kind of high, low hiring, low firing.

• 11:25Joe Weisenthal?

  Yeah.

• 11:26Speaker 05

  Which is not a normal combination. I think it's a combination that characterizes uncertainty. So yeah, we, we should start thinking that way.

• 11:37Joe Weisenthal?

  Just on AI real quick. Look, none of us know what, what AI as a technology will mean for productivity. Hopefully great things happen. In the here and now though, there's another factor that people talk about, which is just there's an extraordinarily high amount of spending going on in the build out of it. And I'm curious on both the maybe like theoretical level, but also in a conversations that you have with businesses in your district level. Does that show up? Does it feel like, okay, if we look at supply chains, they are getting tighter? Because data, companies that are building this out are competing for real resources, whether we're talking about labor, materials, commodities, parts and so forth.

• 12:19Speaker 05

  Yes. And you hear it from business executives, but in some ways I feel like maybe too much.

• 12:28Joe Weisenthal?

  Interesting.

• 12:28Speaker 05

  That if you look at the price pressures coming from AI data centers, the build out of very high investment. This isn't the first time that there have been, there's been high investment as an indicator of, of economic growth.

• 12:50Speaker 05

  But the overall overheating of the economy is, is kind of the deeper question. Sectoral AI is going up and some other industry is competing for electricians and construction and complaining bitterly about that. That's not the same thing as the economy's overheating. It has to get out of its lane of just direct competition and drive up wages, drive up prices outside of just its lane. Because if this one going up leads this one to go down in the aggregate,

• 13:28Speaker 05

  in a way, the national unemployment rate and the national GDP growth rate tell you a lot about where you are in the, in aggregate economy. That said, you hear it, you go around the Midwest, the Chicago district is kind of heart of the Midwest. We're in Iowa, Cedar Rapids, Iowa. I'm like, what's the biggest problem? And they're like, the data centers are buying up all the land. They're driving up the prices. Nobody can construct, can do any construction. You can't get, you can't get an HVAC person. So it doesn't feel like we're far from what is this sort of traditional excess demand

• 14:12Speaker 05

  and outputs above potential and that's driving up inflation. And if it does, back to your first question, then we're not restrictive enough. If that starts happening in the aggregate, we're not restrictive enough. I, I don't know how to say, is this restrictive or not restrictive? Everything's relative to something. And if inflation starts going the wrong way, driven by just old fashioned, investment is so high and growth is so high that, that we're getting that impulse, then I think it's not restrictive enough.

• 14:55Tracy Alloway?

  It is true that people complain about not being able to get contractors like all the time. And now it's just, oh, it's the data center.

• 15:01Speaker 05

  Exactly. So that, that is what I mean. That's filled into the, the boogeyman is if you can't find a, an electrician. I, I half expect people to be like, I need to go to the dentist. They can't see you for three weeks. Thanks a lot, data centers. So it's like.

• 15:20Tracy Alloway?

  Well, okay, what's the difference when it comes to Fed policy between a, an economy that's growing mostly because of consumption versus an economy that's mostly growing because of investment? Like, how do you treat that difference?

• 15:36Speaker 05

  In the short run, it's probably not that different. Just in the business cycle sense of there are many different ways you could go. We've seen overheating from housing construction getting out of faster than the economy can handle. We've seen consumer spending, savings rate go to zero, consumer spending is faster than economy can handle. We're seeing a business investment driven threat to more than economy can handle.

• 16:06Speaker 05

  In the short run, if it's demand driven, I kind of think it's not. Fed has a very unsophisticated tool. We can raise the interest rate, lower the interest rate. What makes it work is that usually the most cyclical industries are the most interest rate sensitive industries. So it kind of does make sense that the, the Fed be the, the tip of the sphere, tip of the spear.

• 16:33Speaker 05

  If by that question, you're asking the deeper thing of, well, what does it mean long run? You hope that the investment will enhance potential output in the future.

• 16:46Speaker 05

  So then it would be different down the road, five years, 10 years, if productivity growth remains high.

• 16:54Speaker 05

  But then we're also sort of back to our discussion of, well, what does that mean for rates long run? I actually think rates could be higher when the, if the growth rate is higher for all the best reasons. I mean, that like, that's the manna from heaven.

• 17:11Joe Weisenthal?

  That was the normalization that people wanted for years.

• 17:14Speaker 05

  We would love that. We would love that normalization. If we could grow 3% a year and incomes are growing with, without inflation because of productivity growth.

• 17:25Speaker 05

  At the same time, be, let's be a little wary. I've been from early on highlighting, maybe some of this technology is raising the productivity growth rate, but we've now gotten six months in a row of pretty crummy productivity growth. So let's not all conclude before it's actually manifested that, that we've had a, you know, change of era.

• 17:51Joe Weisenthal?

  I want to keep speculating about what the future is going to be. But I want to ask one more, I want to ask one more question about the past, actually. Because we've actually had a few different, over the years, we've had a few different versions of this conversation, this question. Which is inflation has come down quite a bit from its peak in the post-COVID era. But there's this question of why, right? Because the unemployment rate never took off. It was, it was kind of immaculate, except there has been significant housing cooling. In a different era, they used to say the housing market cycle is the business cycle. That hasn't been the case in several years from now. It's totally disconnected. Do you have any, sitting here in August 2026, and you look at housing continuing to be soft?

• 18:34Joe Weisenthal?

  You look at where inflation is, maybe signs of it gathering steam again from an elevated level? Do you have any theory of the case of the last few years of the relationship between what the Fed did, the hikes and what they really did to the economy and how much they contributed to taking the economy off the boil in 2022, 2023?

• 18:56Speaker 05

  I thought, I thought you were going to go a different way, back to the old, how much was supply and how much was demand? In the rise up in inflation.

• 19:04Joe Weisenthal?

  But I'm sort of talking about what you did, the aggressive rate of rate hikes.

• 19:08Speaker 05

  I think the aggressive rate hikes, what the shoe that did not drop. I think that supply was a major driver of the run up to inflation. And the healing of supply eventually was a major component of the drop to inflation. As long as you say that, as long as you're not trying to have it both ways. And both sides, it feels like in that debate, want to have it both ways in the sense, they want to blame the run up on fiscal policy, say. But then the, and the fiscal and monetary policy, that it was all about stimulus.

• 19:51Speaker 05

  And then it, then you just say, well, why did it come down? Then they want to say, no, no, that wasn't, they don't deserve any credit for that. That was all from supply chain healing. I think it was loosely two-thirds supply and one-third demand then.

• 20:10Speaker 05

  I wasn't there when it went up, so I can't blame you can't blame me, but

• 20:17Speaker 05

  I do think that the Fed's aggressive action permitted the one shoe not to drop that was hugely important. And that is at the side note for for odd lots listeners, you will know that historically CPI of 2.3%. We kind of think correlates with a PCE of 2.0%. Even as CPI was pushing close to 10% inflation. If you looked at inflation compensation in the tips, it remained steadily at 2.3% CPI.

• 21:02Speaker 05

  So exactly 2% inflation target. To me, that was a piece of evidence that having a 2.0% inflation target was exactly the anchor that its advocates said. And I think

• 21:20Speaker 05

  it was critically important that the Fed not lose control. If they had lost the anchor, I think we would have had a heck of a time trying to get rid of the inflation. So I think the Fed deserves a lot of credit at that moment. And then the if you had plugged into chat GPT or some AI trained on all the data through history and said inflation is double, triple the the target.

• 21:54Speaker 05

  What should the Fed do? It would have said, jack the interest rate up to 20% and have a huge recession because that's the only way you ever get rid of inflation. And I do think the Fed's understanding that there was a component that was not going to be permanent and that the much maligned or mocked immaculate disinflation was in fact possible. I do think that the Fed deserves credit for for recognizing that, too.

• 22:27Speaker 05

  On the other side, they were slow out of the gate. There's no you can't look back and say they weren't. They clearly weren't.

• 22:49Tracy Alloway?

  There are some market stories where you want every detail. Joe and I have made quite a few podcasts on that basis. But sometimes you've only got 10 minutes and just want to know what's moving markets fast. That's the Barclays Brief Podcast. Every week, experts from Barclays Markets and Research get you up to speed on what's happening and what to watch next. Concise, focused, and brief. Search Barclays Brief wherever you get your podcasts.

• 23:14Speaker 01

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• 24:27Tracy Alloway?

  So since you brought up tips, we should talk about the bond market, right? So we're at this weird point in time in the bond market where like short term rates still pretty steady. The longer term yields have been going up. Tips haven't really been pricing in that much inflation. So when you look at bond yields at the moment, especially at the long end of the curve, like what is that telling you?

• 24:48Speaker 05

  If you're a central banker or you're one of the Fed heads, don't get into every blip in Twitter of the bond market. I kind of think you need a little bit of time to sort out what what's driving it. Long yields going up could be people are expecting inflation, could be people think that the Fed is going to have to be on a path that that rates will be higher. Could be there's a lot more competition in issuance. There's just more bonds getting put out. And it's probably some combination of of all of those. I don't put that much credence on the argument that

• 25:33Speaker 05

  there's a general freak out about the creditworthiness of the United States because if you really think that a country is going to experience default, the rates aren't whatever 5%, but you know, 5 and a quarter percent. That's just a historically pretty normal rate. So I think, look, we're watching that. It does have an impact on the economy, but whenever you're looking at market reactions, you got to think a little bit about this reflection problem that part of it is what do they think the Fed is going to do? And so I don't like, but Paul Volcker used to tell me, our job is to act and the market's job is to react.

• 26:18Speaker 05

  And let's not get the order mixed up. And that's kind of where I start.

• 26:22Tracy Alloway?

  This is exactly what I was going to ask you next, because Kevin Warsh has gone on the record saying that he thinks there should be less forward guidance from the Fed and that the market should be playing more ball versus being the referee. So he's suggesting that the bond market can send a useful signal through yields.

• 26:39Speaker 05

  I think you learn a lot from bond markets. As you know, the rules, I don't speak for anybody else or weigh in of what somebody else's message is. Personally, I speaking only for myself, I agreed with the and I think it's healthy

• 26:57Speaker 05

  in a general way to refresh every once in a while what what any organization's doing and have a rethink. But on the specific thing of should we have less forward guidance of saying here is where we think rates are going in the next six months. If X thing happens, then I promise I'm going to vote for an increase, a cut of blah, blah, blah. I think that's adds to volatility and threatens to get us into a tying of our hands that I don't think is healthy. So I I have embraced this. Let's let's engage in last forward guidance.

• 27:35Speaker 05

  That's different from should the market tell us what to do? I'm not a fan of it, but the Federal Reserve Act says by law what we're supposed to look at. Maximizing employment, stabilizing prices. Doesn't say anything about stock market, doesn't say anything about bond market. So gathering information from them, I'm totally for using that as a ah, then that's what we should do. I'm less.

• 28:01Joe Weisenthal?

  Well, speaking then of communication technologies, this the thing that always makes me feel very old is reminding people that press conferences, dot plots and so forth are very recent innovations. And they were they were brought in because the Fed had a specific problem in 2008, 2009, etc. They solved the problem perhaps at the time as we think like what is suitable for this new era? Could could it say like, maybe it doesn't make sense to have press conferences? Maybe dots have outlived their usefulness. Maybe we don't need as many meetings as we used to have or something like that. And should all these things be on the table in terms of like?

• 28:41Speaker 05

  You've seen the table. I always say the biggest table I've ever seen in my life is the FOMC table. There's room for plenty of stuff on that table. All of that should be on the table. They've we've we have this outside task force headed by by outside folks that's contemplating a lot of these issues about communication. I think it's healthy. Let's let's let's rethink all of those. I you're right to remind the history. We were at zero. The interest rate was at zero. And the if you plugged into the formulas, what should the interest rate be? It was like 86%. And so the Fed at that time was facing unprecedented challenges.

• 29:26Speaker 05

  And they were trying to what do we? What do you do when you when the interest rate is already zero? And giving forward guidance in an environment where you're at the zero lower bound, where you're like, not only is the rate not not going to go up, it's not going to go up for years. It's not going to go up till the unemployment rate comes down.

• 29:47Speaker 05

  All of those things.

• 29:48Joe Weisenthal?

  Your predecessor.

• 29:49Speaker 05

  Can work at a time.

• 29:50Joe Weisenthal?

  You were describing your predecessor.

• 29:51Speaker 05

  The Evans rule.

• 29:52Joe Weisenthal?

  That was it right there.

• 29:53Speaker 05

  Each of those is a is kind of a creative solution to a problem that they were facing. We're in a totally different environment. And so we should look, we should think through all of those.

• 30:06Tracy Alloway?

  Joe, do you remember, I think when the Fed first started the dot plot, we were both at Bloomberg. Do you remember?

• 30:12Joe Weisenthal?

  No, we we were not at both at Bloomberg.

• 30:14Tracy Alloway?

  Oh, were we not?

• 30:15Joe Weisenthal?

  No, it was early, it was definitely earlier than that.

• 30:17Speaker 05

  Here comes, he's gonna be like, you weren't at Bloomberg, I was at Bloomberg.

• 30:22Tracy Alloway?

  Well, I genuine, but I remember there was like this all hands committee at one point to try to like, figure out a way to display the Fed's dot plot.

• 30:29Joe Weisenthal?

  This part is true.

• 30:30Tracy Alloway?

  Yeah.

• 30:30Joe Weisenthal?

  As it became clear that this became a thing, it was a very, a lot of efforts to sort of like, formalize the presentation of the dot plot in graphical fashion.

• 30:39Speaker 05

  I thought you were gonna say, this is like, like our, my mom's generation. Everybody remembers where they were when John F. Kennedy, you remember the day the dot plot came out.

• 30:49Tracy Alloway?

  I remember where I was when the BOE retired the fan charts. I was really sad about that, but that's it. Wait, so, okay, you talked about the Fed was trying to solve a problem with rates at the zero bound in terms of communications. Like, what is the problem that you think the Fed is trying to solve now in terms of comms? Like, why have the task force, other than there's a new Fed chair and he wants to leave the staff?

• 31:10Speaker 05

  The Fed charity wants to think through some of these issues. I think we're not anywhere near the zero lower bound. So some of the logics of the communication tools that existed before, we should revisit. And they, I've been on public record for years about the SEP. I don't like any time the the members of the Fed are making, are writing down what they're interpreting as predictions that don't turn out to be true. I think you pay a little price in in terms of credibility, that people can go back and look and say,

• 31:50Speaker 05

  wait, aren't you the bozos who said that, you know, by now, the whatever, inflation would be 2%? The unemployment rate would be something? So that it asks about one year, two years, three years ahead and the long run. Do we really need all of that? That's was had my expressed starting point.

• 32:12Joe Weisenthal?

  Right.

• 32:13Speaker 05

  And in the dot plot itself, I find it can use a purpose. I think it's important that the world be able to understand something like the reaction function, worldview of the members of the committee. And in a way, the dot plot could serve as that, except the assumptions are not tied to the rate of the dots. So to quote the median inflation and the median rate, but that's not necessarily the same person. And so it's, it doesn't actually serve as a reaction function.

• 32:57Speaker 05

  So I, I think there's a lot of things you could, you could do with the, with the SEP.

• 33:01Joe Weisenthal?

  I'm actually glad you brought up reaction function as a distinct thing from forward guidance. Because I feel like when people talk about the Fed, they are distinct and they often get conflated.

• 33:11Speaker 05

  Agreed.

• 33:12Joe Weisenthal?

  And so people say like, we don't want forward guidance. And they say that, oh, we're not gonna hold the market's hand. We're not gonna say what we're gonna do at the next two minutes. Like, great, that's, there's, you know, there's no reason for the central bankers to be pre-committing what they're gonna do. Nonetheless, it strikes me, it's still valuable to have some understanding of how the central bank is thinking about its tools in relation to the data.

• 33:34Speaker 05

  And, and like, what do you see in the world? That is, that's where my head is. So when I, when I say forward guidance, I mean literally of the form.

• 33:43Joe Weisenthal?

  Yeah.

• 33:43Speaker 05

  Here is what I intend to do with rates. Here is what I think is the appropriate rate move at the next meeting. And it's the tying of hands.

• 33:53Joe Weisenthal?

  Yeah.

• 33:53Speaker 05

  That's different from, here is how I see the economy right now. What am I looking at? I'm looking at inflation. I'm, I really want to see that inflation is not persistent, that we are coming in into that. They're related, of course, but they're, but they're different.

• 34:10Joe Weisenthal?

  But like, I think like, so for example, in the 2010s, or coming out of the GFC, it was important for the Fed to communicate that if you get a hot inflation print here or there, we're not gonna react too much, because right now.

• 34:22Speaker 05

  Here is the way we see the economy.

• 34:24Joe Weisenthal?

  It's important for us to get the employment right down. Then comes 2022 or 23, and the Fed needs to communicate, you know what? We might get a little labor market softness, but we gotta smash that inflation down. And that is our thing. To me, to my mind, that's reaction function.

• 34:37Speaker 05

  Yeah, I agree with you.

• 34:39Joe Weisenthal?

  And I'm curious if you.

• 34:40Speaker 05

  And I'll give you an example, I'll give you a tiny microcosm. When I first got to the Fed at the beginning of 2023, there was a lot of public discussion about the, can inflation come down? And people said, no, it can't come down because look at how fast wage growth is. And wage growth, wages are the lion's share of costs and services. So inflation can't come down until you see wages come down. I don't think that's correct, but I think that's gets the dynamics wrong. They're forgetting that wages are stickier than prices. So when shocks hit, it tends to be, prices go up first.

• 35:20Speaker 05

  You see the price inflation, then the wage inflation, and then it comes down.

• 35:26Joe Weisenthal?

  Yeah.

• 35:26Speaker 05

  And then the wages come down. So in the short run, this is a reaction function. Call it reaction function, but it's just, here's my worldview of what I'm watching in the economy and why I don't, if I see wage growth as high, that doesn't make me nervous that inflation can't come down.

• 35:47Joe Weisenthal?

  So just the last part of this question. Chairman Warsh's press conference have been different so far, have been different from his predecessors. They'd say, the forward guidance here is coming to turn out fine. I don't feel like I have yet to establish a handle on what his reaction function is right now. And I'm curious if you in the committee feel like you have a feeling.

• 36:07Speaker 05

  You constantly try to get me in trouble.

• 36:10Joe Weisenthal?

  Yeah, of course.

• 36:10Speaker 05

  I'm not allowed to talk about somebody else's reaction function. And you're like, no, no, okay, don't ask. What do you think his reaction function is? I'm not gonna tell you.

• 36:22Joe Weisenthal?

  You don't have to tell us what it is.

• 36:24Speaker 05

  The chairman's reaction function, go ask him what his reaction function is. I'm telling you mine.

• 36:28Joe Weisenthal?

  All right.

• 36:29Tracy Alloway?

  Every sell-side analyst note that has come into our inbox for the past five or six weeks has been talking about the need for clarity on the Fed's reaction function, or something about the the reaction function. How would you?

• 36:41Speaker 05

  You want me to speak for the committee? I'm not allowed to. I can tell you, here's what's the Google's reaction function.

• 36:49Joe Weisenthal?

  Yeah.

• 36:49Tracy Alloway?

  We'll settle for that.

• 36:50Speaker 05

  What I'm looking at is especially tuned to the inflation side. I thought, okay, front-loading of rate cuts. The reason I dissented, I'm not a voter this year, I was last year. The reason I dissented in the last meeting of the year, when they cut rates, was I'm not comfortable front-loading the rate cuts, counting on this inflation to be transitory and go away. I want some evidence that it is going away, that we are headed back to 2%. And if we get that, then I'm totally fine.

• 37:27Speaker 05

  Look, let's strap, put on the seatbelts, we're headed back to the 3-2-1 that, that we talked about before. Not only did our progress, we were making substantial progress on inflation. Then it stalled out, then it started going the wrong way. And now we've had a, not a blip, but a bit. We've had a bit of easing of inflation, but it's still, it's still iffy. And so my reaction function is heavily geared toward, I need evidence that inflation,

• 38:11Speaker 05

  that, that this inflation shock is, is not gonna be persistent. And I'm okay with waiting as, as we're getting that. But if the evidence starts coming back, especially on services, that it's high, it's going the wrong way, we're not making progress, then I'm gonna be nervous.

• 38:32Tracy Alloway?

  Wait, can I ask a personal question?

• 38:35Speaker 05

  You gotta wait until you, I might not answer it, but yes.

• 38:38Tracy Alloway?

  That's, that's your right. But what's it like when you dissent? Like, is, does it make you nervous to dissent?

• 38:44Speaker 05

  Like, uh-oh, are they gonna come, like, the goons are gonna come punch me? They, they didn't really. It was, I, I wasn't alone. And the people are, I found them respectable. I, I had laid out my criteria. I, I was expressing multiple times, hey, okay, we're doing this, but I'm really uncomfortable with front-loading too many rate cuts. And if you remember, that was the meeting where the government was literally shut down and we didn't even have the data. So, so my, my thing was, let's not just keep, we don't even know what's in the data.

• 39:29Speaker 05

  Like, let's at least get some data before, before we act. So there wasn't, I didn't get any mean and nasty calls from the chairman or, or the other committee members. So there was plenty of in the public, you jerk. Yeah, but, but it's a deliberative body, as we've talked about many times. And people take the job real seriously. And everybody's comes there with a worldview and it's okay. We, you know, we've seen a little more dissents lately than in the immediately preceding period. But by historical standards, there's still way fewer dissents nowadays than there were in the old days.

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• 42:38Tracy Alloway?

  I'm going to ask a weird question, but are silent dissents a thing? And the reason I ask is because I saw Goldman Sachs analyst note where they were talking about like, oh, sure, there were three official dissents at the last meeting, but what about all the silent dissents? And we don't know what number those are at. And it's kind of funny to think about, you know, there's economists out there trying to count up something that's not happening.

• 43:00Speaker 05

  The thing is, there's not happening, and then there's not happening, which is to say, not everybody gets to vote at every meeting. So to that extent, there are silent dissents if there are people sitting around the table who, if they were a voter, they would be dissenting, they just have no way to express dissent, except to go out and say in public, here's what I think about the economy. So to that extent, of course, there are silent dissents. It sounded like a little bit they're making an argument, though, there's people voting differently than what they think, like, that'd be a different type of silent dissent.

• 43:43Speaker 05

  I don't, that hasn't been my experience. But, look, the minutes come out, you see, you know, basically what everyone says, and in a couple of years, you'll start getting the word-for-word transcripts.

• 43:57Joe Weisenthal?

  I know, we just have to wait five years. I can't wait. Then we'll actually see, well, this actually leads to my final question.

• 44:02Speaker 05

  Now, it's four years, nine months.

• 44:03Joe Weisenthal?

  Oh, okay, that's right. Well, but this is actually good for my final question, which is that, I think, last year here at Jackson Hole, one of the questions I asked you, and it had to do with dissents, was this sort of like, the wire dissents generally rare? And is it because you generally see?

• 44:18Speaker 05

  That was a good question.

• 44:19Joe Weisenthal?

  The view, did you see the thing similarly? Or is the chairman particularly good at, like, more or less corralling the FOMC? Does it seem like right now?

• 44:28Speaker 05

  And I said both.

• 44:29Joe Weisenthal?

  Okay.

• 44:29Speaker 05

  Right?

• 44:30Joe Weisenthal?

  Yeah, but I think you primarily said that you credited Powell.

• 44:33Speaker 05

  Chair Powell was quite good at that, and, you know.

• 44:36Joe Weisenthal?

  So we'll read these transcripts in four years and nine months, but in the FOMC, does it feel any different than it did under the Powell era?

• 44:45Speaker 05

  It feels very different. I mean, just personally, it feels very different. Of course, when there's a different chair, who kind of does the, the chair always gives us kind of a summary at the end, or, you know, where the chair's head is. It's always different. I only was there for one chair. It is kind of unusual that the former chair has now just kind of moved his seat over a couple of spaces, so he's still there. But I think it feels different.

• 45:15Joe Weisenthal?

  Interesting.

• 45:16Speaker 05

  And it's, the chair's new. I mean, you can see in the press conference. Yeah, he just brings, there's no snacks. The snacks are outside with the phones. You can't bring, you're not supposed to bring the snacks in there.

• 45:29Joe Weisenthal?

  Interesting.

• 45:31Speaker 05

  He just has a different worldview. I mean, you could see it in the press conferences, you could see it in the, in the talks. He just has a different worldview, and he's wanting to rethink a bunch of the, a bunch of the issues. He's publicly said he would like to get a little more, stir up a little more debate.

• 45:51Joe Weisenthal?

  Yeah.

• 45:54Speaker 05

  I think there was debate before. And if we're going to have more, change the format of the meetings or stuff like that, I'm open to thinking those through.

• 46:07Joe Weisenthal?

  Powell's still there, and you sort of like, two popes tension, like, you know?

• 46:11Speaker 05

  I don't know. Again, now you're trying to get me in trouble on a different role.

• 46:16Joe Weisenthal?

  I'm trying, I'm trying to get you.

• 46:17Speaker 05

  I'm not allowed to say what, what happens at the meetings.

• 46:20Joe Weisenthal?

  All right. We'll read about it in the transcript.

• 46:21Speaker 05

  I just feel like the tone is, is, there's a new person, there's a new, there's new leadership, he's trying to do it different ways. And like, he's, he's clearly getting his, his, bringing it into his own of how he wants to run this stuff.

• 46:37Tracy Alloway?

  We're going to stop trying to get you into trouble, and I'm not going to ask what you think Worshe is going to say tomorrow. And again, we're recording this ahead of the speech, but like, what should we be looking out for? What would make you sit up in your seat and go like, oh, wait a second, this is different?

• 46:51Speaker 05

  Well, this is different than what?

• 46:55Tracy Alloway?

  Than previous Jackson Holes, previous Fed chairs, something to take notice of.

• 47:00Speaker 05

  I'm, I'm going to be paying attention to broadly defined reaction function. You know, how do you see the economy as the chairman? And I'm hyper-focused on this question of, is inflation going to be transitory, or is it going to be persistent? Because if, if inflation is going to be persistent, then it's going to force action by the Fed or by any center. If it's going away on its own, or if there's, if you even feel like it could go away on its own, then it puts us in a very different circumstance.

• 47:44Speaker 05

  So I think we're all going to be looking out for that.

• 47:48Joe Weisenthal?

  All right, Austin Glusby, thanks for playing ball with us.

• 47:51Speaker 05

  Yes, always.

• 47:51Joe Weisenthal?

  Thanks for letting us try to get you into trouble. Really appreciate you coming back on the show.

• 48:08Joe Weisenthal?

  Tracy, that was a lot of fun. I always love talking to Austin.

• 48:10Tracy Alloway?

  Yeah.

• 48:10Joe Weisenthal?

  I appreciate that he doesn't mind our efforts to get him into trouble, to try and cause a little bit of attention. He plays along. He plays along, I appreciate it.

• 48:19Tracy Alloway?

  I got to say, I know this episode is going to come out after Worshe's speech on Friday, but I'm so intrigued to see what he actually says. And now I'm kind of thinking, wouldn't it be funny? But not really. If he just spoke about financial innovation and payments for 40 minutes.

• 48:34Joe Weisenthal?

  Everyone is waiting for the chairman to say something about the state of the economy, whether rate hikes are necessary, and you're like, oh, I'm going to talk on theme, and I'm going to talk about the state of.

• 48:44Tracy Alloway?

  Stable coins and Fed Now for 40 minutes.

• 48:46Joe Weisenthal?

  Exactly. That would be extremely funny, although I guess we'll see. I'm glad we got into this point with Austin about the distinction between reaction function and forward guidance.

• 48:56Tracy Alloway?

  Yeah.

• 48:56Joe Weisenthal?

  Because I actually do think there's a lot of sloppy discourse about it, and people lied the two. And I think it makes it, you know, if you go back to the Greenspan, you're, there weren't dots in those days, there weren't press conferences, et cetera.

• 49:10Tracy Alloway?

  Statements were a lot shorter.

• 49:11Joe Weisenthal?

  Their statements were, it's very clear that the Fed is capable of operating with far less sort of like, both literal communication and quote, hand-holding about what it's going to do. I do think the deeper question is still, what we got even with Austin, which is, okay, right now, as Austin said, he's more anxious about inflation. That's the sort of, the burden is on the inflation side to improve, and otherwise, that would probably call for higher rates. And that is the reaction function question, and that is what we really haven't got yet, from the chairman at least, as of the 27th right now.

• 49:46Tracy Alloway?

  Well, I also think it's funny, I remember under Powell, when the Fed deviated from some of its forward guidance, and people were writing, this is the death of forward guidance, back then. And now suddenly, everyone's like, oh, it's dying again.

• 49:58Joe Weisenthal?

  I think this phrase was always kind of bad. I think, and I, and I do, and I think this actually gets to the point that, maybe we didn't need those dots forever. They served a purpose, or the, or the press conference or any of it. And it was helpful to hear Austin describe it as like, yes. You plug the conditions of the time post-GFC into a Taylor rule and it gets you negative 6%. That's impossible. You can't, the Fed can't do that. So then layers on all these other things. We gotta talk about it. We gotta do whatever. Maybe these things really like did not need to exist for as long as they did. And again, if maybe the task force says, we really don't need all this talk and dots and all this stuff, that might be totally, totally wise.

• 50:42Tracy Alloway?

  This is the other question about tomorrow because WASH could talk about findings from the task forces, right? It's early indications. So I guess anything and everything from stable coins to Fed comms is up for grabs. But shall we leave it there for now?

• 50:54Joe Weisenthal?

  Let's leave it there.

• 50:55Tracy Alloway?

  All right. This has been another episode of the Odd Lots Podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

• 51:01Joe Weisenthal?

  And I'm Joe Weisenthal. You can follow me at TheStalwart. Follow our producers, Carmen Rodriguez at Carmen Erman, Dashil Bennett at Dashbot, Cale Brooks at CaleBrooks, and Kevin Lozano at KevinLloydLozano.

• 51:12Tracy Alloway?

  And for more Odd Lots content, you should check out our daily newsletter. You can find that at Bloomberg.com/oddlots.

• 51:18Joe Weisenthal?

  You can chat about all of these topics 24/7 in our Discord, discord.gg/oddlots.

• 51:24Tracy Alloway?

  And if you liked this conversation, if you enjoyed the video, then please like or leave a comment, or better yet, subscribe.

• 51:31Joe Weisenthal?

  Thanks for watching or listening.

• 52:04Speaker 08

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