This is an audio transcript of The Economics Show podcast episode: ‘What’s up with the US economy? With Austan Goolsbee’

Chris Giles Hi, listeners, Chris Giles here, the FT’s economics commentator. Before we start the show, I’d like to invite you to join me and my top FT colleagues, Katie Martin, Claire Jones, and special guest Lael Brainard for an exclusive subscriber webinar called Markets on the edge: central banks, bonds and the risks ahead. It’s happening on October the 23rd at 12 o’clock GMT. So register now and put your questions directly to our panel. Visit FT.com/edge for all the details. Now, on with the show.

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Economics is often described as a dismal science, a description that seems particularly apt in the current environment. Central banks are juggling stubborn inflation and policies that have slowed growth. Every choice they make seem to disappoint or even anger someone a lot. Someone like, say, President Trump. My guest knows that well.

But there’s nothing dismal about him. He once joked that his life goal was to be 80 per cent Paul Volcker, the former chairman of the Federal Reserve, and 20 per cent Muhammad Ali. Why that mix? Well, Volker for his economic gravitas, and Ali perhaps for his fearlessness. And in the current economic environment, fearlessness may be just what’s required.

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Hello, I’m Chris Giles, the FT’s economics commentator and writer of the FT’s weekly newsletter, Chris Giles on central banks, and this is the Economics Show. My guest today is Austan Goolsbee, president of the Federal Reserve Bank of Chicago and a voter this year on the central bank’s interest rate-setting committee.

Before that, Austan was chairman of the Council of Economic Advisers and served in President Obama’s White House. Thanks for joining us, Austan.

Austan Goolsbee Great to see you again, Chris.

Chris Giles Now, you like to use a saying from the midwest: There’s no such thing as bad weather, only bad clothing. Well, on this show, we like to do things on a scale of one to 10.

So with the federal government in shutdown, on a scale of one to 10, how sure are you about the economic weather and therefore what economic policy clothing you should be wearing? The scale is one, haven’t the foggiest.

Austan Goolsbee Four. Four. Yeah, I would give it a four. And that was before they stopped putting out the data.

So now our core pieces of data that we look at, the inflation rate, the various measure of the job market, were going dark because there’s a government shutdown. So there’s a lot of uncertainty. So that’s four trending to trending to one. I don’t know. There’s a lot of uncertainty

Chris Giles And how can you actually take decisions if you are trending down to something where you don’t really know what’s going on.

Austan Goolsbee I mean, that’s the job. By law we have to come and meet every six weeks and try our best to figure out what’s happening now at the Federal Reserve Bank of Chicago, not because of the government shutdown. We’ve been working on it for months because we wanted some more real-time estimates of the job market.

We’ve recently come out with these three job market statistics that combine 11 different data sources, some of which are public sector data, but some of which are a bunch of private sector data too. And one of the things that we calculate is a real-time estimate of what will the unemployment rate be when it next comes out.

And if there’s not gonna be an actual unemployment rate that comes out, we can at least give our best estimate of what that unemployment rate would’ve been. And we believe that this last time it would have been unchanged. It would’ve stayed at 4.3. And our other measures we measure the hiring rate of people that are unemployed. We measure the lay-off and other separations rate of people that have jobs. Most of these rates, as you look at the job market show pretty much stability. So I think I wanna be a, to be a little wary of over-indexing on monthly payroll, which has shown a pretty market deterioration, but there are a lot of question marks about that because of immigration, because of population, because of choices about retirement of the baby boom. So let’s just be careful using only one measure.

Chris Giles So if we’re being careful on the labour market, and that’s one side of the Federal Reserve’s mandate, things look pretty stable in your view, do they, so there’s no great need to change policy or how do you see it?

Austan Goolsbee I think it mostly looks stable. I mean, you’re seeing slight cooling in the labour market, but I think it looks pretty stable. And on the inflation side of the mandate, and I like that you brought up the dual mandate that’s, remember the law says what we have to do when we set monetary policy is maximise employment and stabilise prices, and that’s it. There’s nothing in there about make the stock market happy. There’s nothing in there about, we’ll go listen to what somebody on the outside or what political leaders, what they want, that’s not in the mandate. So the employment side to me looks stable, close to full employment in most of the measures, but in its kind of an unusual environment where there is stable but low hiring, the hiring rate is definitely low, and you feel that for new graduates and others and/but the lay-off rate is also extremely low. So with just kind of a low turnover, low churn environment, which is unusual. You usually, if you’re getting close to recession, you usually start seeing the hiring rate go down, but the lay-off rate go up, not both of them go down.

And on the inflation side, it’s been going the wrong way. I mean, inflation has been ticking back up. We’ve been a long time above the 2 per cent target. And with that inflation ticking up, I’m hopeful that a lot of that is just a one-time price increase coming from the tariffs. But we gotta keep an eye on services inflation because that’s been ticking up too, and that’s almost certainly not coming from the tariffs.

Chris Giles And so how do you see the balance of those two things? Because if I just might add in one extra thing that isn’t directly labour market or inflation, but it’s the AI boom and what we’re seeing in the wider US economy, which seems to be quite a lot of investment for certain, quite a lot of growth right now and not a lot of employment through that might be something great for productivity in the future.

How do you put all that together for how you’re seeing interest rates? You know, they’re a little bit restrictive at the moment, but does that mean they can come down? Is that, or is that a little bit too much of a risk?

Austan Goolsbee Well, there’s a lot of content in that question. I would say a lot of times if you’re trying to figure out what, when we’re setting monetary policy, we are supposed to be looking at the part that is about the business cycle and things that are hitting the supply side, whether positive or negative.

There is a very real sense in which the Fed can’t pump oil. The Fed can’t fix supply chains. The Fed is not making chip that can be building data centres. We just control a short-run interest rate that normally the most cyclical industries are also the most rate-sensitive industries, and that’s why it makes sense for the Fed to be at the tip of the spear for economic stabilisation.

So if you’re trying to figure out where you are in the business cycle, you’re looking at inflation, you’re looking at job market data. But a lot of times you will also say, well, let’s look at the most rate sensitive sectors of the economy. And if we are overly restrictive, you probably will see those rate-sensitive sectors suffering.

Well, the three most rate-sensitive sectors are consumer durables, business investment and housing construction, or those are at least three of the big ones. As you point out, business investment is not suffering at all. Business investment is booming. Now, a lot of that may have nothing to do with the business cycle.

May just be if the AI boom is real, that would mostly be a supply side thing, and so that becomes a harder to interpret where does it mean on the business cycle. Consumer durables and consumer spending overall was expected to drop, but now we’ve been getting several months of data. It’s perfectly solid, if not accelerating.

You know, consumption growth, 3 per cent maybe for the quarter. Housing construction is weak. So of the big three cyclicals, the weakest is housing. But again, that’s been kind of steady. That’s not new. So all of those feel a bit like it’s not falling apart. I think the underlying nature of where we are in the business cycle, pretty strong. We’ve just had a lot of dust thrown in the air from the terrace. And other policies. So we’re trying to separate out is that impulse that we’re seeing on inflation, does it have anything to do with the business cycle? Because if not, then in a way we could look through it.

Chris Giles It doesn’t sound to me like you are seeing the sort of things that you would need to see to put in place a lot of cuts in interest rates because you’re not seeing the labour market particularly weak. You’re seeing investment. There’s a mixed story, especially interest rates, sensitive investment and on prices going the wrong way a bit.

Austan Goolsbee All of those are true, but I’m not gonna tie myself into a pre-meeting commitment to what we should do. I think we want to gather as much data and at moments of uncertainty, we gather as much data as we can. And I want to hear what my colleagues, how they’re viewing the world. Because we, a lot of us come from different backgrounds. We got pretty different world views. Before there ever was liberation day, just remember, my view was we’re pretty close to stable full employment. I thought inflation was trending back down to 2 per cent, was entirely conceivable that we would pretty quickly get to 2 per cent. And in that environment, I thought there could be a lot of rate cuts that we could go down a hundred basis points, 150 basis points from where we were.

I still believe underneath there, that’s true, so long as this is just gonna prove to be a temporary blip. So my hesitance, if you wanna call it that, is not really about should there ever be rate cuts. It is about, let’s be a little wary about frontloading all the rate cuts before we know that inflation’s going to go back down to 2 per cent.

That makes me a little nervous given what happened. The Fed made that very argument in 2021 and 2022 that inflation’s probably gonna be transitory, and then it proved to be much more persistent than they had initially forecast. So I do want us to be wary of that experience when we’re talking about the frontloading of cuts.

Chris Giles Do you therefore need to see evidence or progress that inflation is just a one-off, that tariffs are staying in their lane and not spreading to the rest of the US’s economy like they did in ’20, ’21, ’22?

Austan Goolsbee That would certainly give me comfort if we started getting evidence on that. I don’t think that means that automatically we should demand to wait for a year to make sure that it went away. I do think some of looking at the components of inflation can give you more or less comfort. So if the increases in inflation are heavily concentrated in tariff-affected sectors and are applying just to physical goods, and I would feel one way about it. If you start to see a continued uptick of inflation in services which are probably not coming from tariffs and which historically are much stickier and harder to get down, then I would feel differently about what’s the probability of persistent inflation.

Chris Giles OK. Let’s pause here for a moment and when I come back, Austan, I’d like to talk to you about independence of the Federal Reserve because it’s something a lot of people are worried about amid Trump’s constant attacks on the institution and its policies.

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And we are back. So Austan, anyone who follows the Fed and the US economy will know that Trump is attempting to fire your colleague Fed governor Lisa Cook by looking to find dirt on her mortgage history and saying this is cause for her to lose her job. Trump claims he’ll soon have a majority on the central bank’s Washington board, and all of that is stoking concerns that he’ll seek to remove one or more of the dozen regional Fed presidents, basically attacking the Fed’s historic independence. The Supreme Court has postponed a decision until January. How worried are you?

Austan Goolsbee Look, I’m not a lawyer. I’m not a pundit. We have a Fed system that from its earliest days more than a hundred years ago, they have tried to make as independent from political interference as is possible to do. The political appointees sitting around the table are appointed to 14-year terms and the non-political appointees that are there from all over the country at the reserve banks, they bring an independent spirit to the job. I have been super impressed. I’ve been in the Fed for almost three years. The people who come to that table have an independent spirit and they take the job extremely seriously. And you can look at the minutes and you can look at the word-for-word transcripts of what happens at these meetings. They aren’t about elections, they aren’t about politics. They are fundamentally about how is the economy, what’s the outlook, and that’s the way it has to be. The thing about Fed independence is that’s just a subset of central bank independence everywhere. Economists are virtually unanimous that the central bank needs to be independent of political pressure from the sitting government.

If the sitting government can tell the central bank what to do with interest rates, inflation will come roaring back. Just look around the world, the reason economists are unanimous is not primarily based on some theory, it’s based on observation of what happens in places where there isn’t central bank independence. So it’s completely natural that presidents come in, they make appointments to the Fed for the political appointees. All of that is totally normal. If we’re talking about that the independent Federal Open Market Committee will not be setting the interest rate, that instead that will be subject to pressure from the political process, that’s a mess and nobody should want that. And I don’t think they do. I’m not nervous. My observation of the committee is a lot of people outside the committee have opinions. I try to pay attention to all the critiques and think through the world views that they outline, but Fed independence is absolutely important unless you want inflation to come back. Because if you don’t have independence, inflation is gonna come back.

Chris Giles Now maybe you want to convince some readers first because when we interviewed you last for the newspaper, one of our commenters wrote that he, as in you, had better watch out. It’s coming. He’s coming for you next. Do you feel under any pressure?

Austan Goolsbee No, like I say, the, everybody has an opinion outside the FOMC. There are many, many opinions about what we should be doing and about what we’ve screwed up, and we have to meet every six weeks and make these decisions, and this is the business we’ve chosen. It comes with a lot of criticism. That’s OK. That’s what it should be. I believe that, as I’ve said before, in the 21st century, I think the Federal Open Market Committee is the world’s greatest deliberative body, and you can just look at the minutes for yourself and just when the transcripts come out, you can read where people are coming from and we gotta do the job that we’ve been given. The law requires us to do this. The system is designed to have independence and to bring independent thought, and I’m just the guy out here in the midwest, and I go to the meetings and I talk to business people and consumers and civic leaders here in the midwest, and I bring that perspective to the table.

And my, like I say, my experience is that everybody does that. We gotta do our job. That’s all we can do.

Chris Giles Do you see anything different when you’re going out talking to business leaders in the midwest? Do people come and tap you on the shoulder and say, Austan, tough job these days. How are you getting on? And feel sorry for you?

Austan Goolsbee Sometimes, sometimes. Sometimes they tap me on the shoulder. You jerks. You need to either raise the rates, lower the rates, you know, there are a lot of opinions. As I say, I try to not just take the opinion, I try to understand what the critique is or what the opinion is. I would say immediately following liberation day and the tariffs in April, the district that Chicago’s the head bank for is the most manufacturing intensive, and especially the most auto reduction intensive of all the districts in the country. And I saw a list of the most exposed states to tariffs. And of the top seven most exposed states, four of them are in the five states of the seventh district.

So in April, much of what I was hearing was kind of a hair on fire. Yikes. If this is gonna be the rates, if this gonna be sustained, we don’t know how it’s gonna work. As we’ve gotten some deals, we’ve had some exemptions, USMCA compliant exemption, and the rates haven’t been as big as they thought.

That cooled down a bit, and depending on the sector, some of the sectors say, hey, maybe this is sustainable. Others say, we’re planning to roll through some more price increases based on what already happened, and that was through most of the summer. And now as we’ve gone into the fall, as there has been a new round of tariffs, a little bit of rising anxiety again. I’m hearing that people are saying, uh-oh, wait a minute. This might start messing with the supply chain again as the new tariffs come in on intermediate goods.

Chris Giles And when you are looking at what’s going on with the tariffs on intermediate goods, what are you looking for? What’s the thing that is worrying both business and you?

Austan Goolsbee Let’s remember, imported goods are only 11 per cent of GDP in the United States. We’re mostly a domestically driven and service sector driven economy. So there is a sense in which if the tariffs just kind of stay on the 11 per cent in their lane and don’t jump on to others, the aggregate impact might not be as bad as some people have argued.

How does it get out of its lane? One of the ways it gets out of its lane is if you start taxing intermediate goods, parts, components, supplies, and stuff like that, now you just transformed it to being a tax on production and you’re raising the cost of production. So the manufacturers look and say, whoa, wait a minute, if the steel prices are gonna go up and if heavy truck prices are gonna go up and a bunch of electronic components are gonna be blocked off, now we are gonna have to raise our prices domestically.

And it’s not just on the imports themselves that they jump out of their 11 per cent lane. The other category is retaliation, and for sure as you talk to the agriculture economy folks, they’re feeling the retaliation bit that the Chinese have stopped, effectively stopped buying soybeans completely and a lot of grains.

Farm incomes are getting squeezed in a serious way. So they’ve got the sale price is way down, markets getting closed off, but their input costs continue to rise, so they’re stuck in a tough spot.

Chris Giles OK. One thing very quickly, do you think you’ll get the blame? Politics will get the blame or who, where? How does this blame game fall out if something goes wrong?

Austan Goolsbee I should ask you. I don’t know. I’m just a guy’s down there at the table trying to figure out where the economy’s headed on dual mandate grounds, and my observation is everybody sitting around that table is trying to figure out. The who will be blamed if something goes wrong.

A, let’s try to not have something go wrong, but B, I don’t know, you tell me and maybe that was your nice way to say you’re going to be blamed. We might, like the Fed gets blamed for a lot of things.

Chris Giles I dunno how the public will act, but I think there’s one person who will blame the Fed that’s for certain. Now just to finish up, give me a prediction. In five years from now, will the independence of the Fed be something that’s just accepted by all or will we still be talking about it?

Austan Goolsbee Oh, geez, I, we better have an independent Fed. And like I say across the board, this has never been a partisan issue, the independence of the Fed, because just look around the world or at times in the US when the central banks were not independent of political interference when setting the interest rate, bad things happen that it, it just, everybody needs to remember, we’ve got a lot of experience of the alternative and the alternative is not good. So for whatever critiques we have five years from now, I have to believe that the traditional view will prevail. And there’s not gonna be a debate about Fed independence.

Chris Giles Austan Goolsbee, thanks very much for coming on the show.

Austan Goolsbee It’s great to see you, Chris.

Chris Giles That’s all for this week. You’ve been listening to The Economics Show from the Financial Times. If you enjoyed the show, please do rate and review us wherever you listen. This episode was produced by Lulu Smyth and Persis Love with original music from Breen Turner. It was mixed by Jean-Marc Eck. Our executive producer is Manuela Saragosa. Andrew Georgiades is our broadcast engineer. I’m Chris Giles. Thanks for listening.