Masters in Business Podcast Summary

Episode Title: At the Money: Chicago Fed President Austan Goolsbee on Tariffs, Supply Chains and Inflation
Host: Barry Ritholtz, Bloomberg Radio
Release Date: March 5, 2025

Introduction

In this episode of Masters in Business, Bloomberg Radio host Barry Ritholtz engages in a comprehensive discussion with Austan Goolsbee, the President of the Federal Reserve Bank of Chicago and a voting member of the Federal Open Market Committee (FOMC). The conversation delves into pressing economic issues including inflation dynamics, supply chain resilience, housing market challenges, and the nuanced approach the Federal Reserve adopts in navigating the complex economic landscape of 2025.

The Golden Path: Disinflation Without Recession

Key Discussion Points:

• Unexpected Path to Disinflation: Austan Goolsbee reflects on 2023 as a "golden path" year where significant disinflation occurred without triggering a recession, defying widespread expectations.
• Supply-Side Improvements: The decline was attributed primarily to supply-side factors such as the healing of supply chains and a surge in labor force participation, including among previously marginalized groups like self-described disabled workers.
• Complex Supply Chains: Goolsbee emphasizes the intricate nature of modern supply chains, using the automotive industry as an exemplar with its thousands of interlinked components spanning multiple countries.

Notable Quotes:

• "There was almost as large a drop in inflation in 2023 as we have ever had in a single year, and not only was there not a recession, the unemployment rate never even got above 4%." [02:47]
• "The Chicago Fed is the seventh district and we're like the Saudi Arabia of auto production... a single car has up to 30,000 different parts and components in it." [06:00]

Revisiting Recession Predictions: Why the Models Missed

Key Discussion Points:

• Faulty Historical Models: Goolsbee critiques the historical economic models that predicted a recession would be necessary to curb inflation, highlighting their basis in demand-driven business cycles.
• Central Bank Credibility: He underscores the importance of the Federal Reserve's credibility in anchoring inflation expectations, drawing parallels to the Volcker era.
• Unique COVID-19 Impact: The pandemic-induced economic cycle was atypical, driven by supply shocks rather than traditional demand fluctuations, leading to unprecedented outcomes.

Notable Quotes:

• "The worldview got wrong is that it was rooted in almost all previous business cycles were regular demand driven business cycles." [08:10]
• "If the Fed or the central bank does not have credibility, it's extremely painful to get rid of inflation." [08:50]

Monitoring Inflation in 2025: Indicators and Strategies

Key Discussion Points:

• Focus on Long-Term Trends: Goolsbee advocates for prioritizing long-term inflation trends over monthly fluctuations, which can be misleading due to their volatile nature.
• Core Inflation Components: He breaks down core inflation into goods, services, and housing, noting that while goods inflation trends towards deflation, housing remains a persistent puzzle.
• Impact of Productivity: An uptick in productivity growth contributes to his optimism that inflation will continue to decline without necessitating restrictive measures.

Notable Quotes:

• "I put a lot of weight on the new months coming in and trying to get the through line of that, not just react to one month." [12:14]
• "Goods inflation over long periods is actually deflation. The 2% inflation that we were at before COVID was housing 3.5-4%, services 2.5% and goods -0.5 to -1%." [15:30]

Housing Market Challenges: Supply Shortages and Regulatory Hurdles

Key Discussion Points:

• Underbuilding of Single-Family Homes: Goolsbee agrees that there has been a significant underconstruction of single-family homes since the financial crisis, exacerbating supply shortages.
• Regulatory Barriers: He identifies land use regulations and stringent business permits as major obstacles to increasing housing supply.
• Construction Productivity: The stagnation and decline in construction industry productivity over decades hinder the ability to meet growing housing demands.
• Interest Rates Impact: Higher interest rates not only dampen demand but also constrain the construction sector, creating a dual challenge for housing supply.

Notable Quotes:

• "Land use regulations have made it very difficult for us to build housing of any form, single family home, multifamily homes." [17:04]
• "Rates do have a twin effect. One is they affect demand, but the other is they do affect construction." [19:00]

Inflation Target Revisited: From Skepticism to Advocacy

Key Discussion Points:

• Initial Skepticism: Goolsbee recounts his early skepticism towards the Federal Reserve’s 2% inflation target, questioning its practical precision.
• Change of Perspective: The persistent high inflation post-COVID and the central bank's role in anchoring expectations led him to fully endorse the inflation target.
• Personal Consumption Expenditure (PCE) vs. CPI: He clarifies that the Fed’s target is based on PCE inflation, which differs from CPI in its broader scope and weightings.

Notable Quotes:

• "I not only am I not opposed to the inflation target, I think it's critical. It's vital and it is serving as exactly the anchor that we needed." [26:53]
• "The 2% inflation target is for personal consumption expenditure inflation. That's not CPI. It's a little different." [28:00]

Inflation Expectations: Lagging Indicators and Market Signals

Key Discussion Points:

• Lagging Nature of Expectations: Goolsbee describes inflation expectations as inherently lagging, shaped by the central bank’s credibility and current monetary policies.
• Survey vs. Market Measures: He expresses a preference for market-based measures over survey-based ones, though he acknowledges recent upticks in long-term expectations as a cause for concern.
• Preventing Stagflation: Maintaining control over long-term inflation expectations is crucial to avoid entering a stagflationary environment where high inflation persists alongside stagnant growth.

Notable Quotes:

• "If the expectations start rising, it is really hard to slay. You don't have to just slay the inflation dragon. You have to go convince people that it's going to stick." [30:22]
• "We've actually started to get a couple of observations where not short run expectations but longer run expectations actually bumped up." [31:00]

Real Economy vs. Wealth Effects: Prioritizing Substance Over Speculation

Key Discussion Points:

• Focus on Real Economy: Goolsbee emphasizes that the Federal Reserve’s mandate centers on the real economy—maximizing employment and stabilizing prices—rather than influencing financial markets or wealth effects.
• Critique of Wealth Effect Overemphasis: He argues against overvaluing the wealth effect's impact on consumer spending, advocating instead for a primary focus on tangible economic indicators.
• Financial Markets as Beneficiaries: According to Goolsbee, when the Fed effectively manages the real economy, financial markets naturally benefit without the need for direct intervention.

Notable Quotes:

• "The Fed by law, is supposed to be looking at the real economy and financial markets. To the extent they're affecting the real economy, we should pay attention to them. But that's it." [33:38]
• "If you get the real economy right, the financial markets will benefit." [34:00]

Data-Driven Monetary Policy: The 'Data Dog' Approach

Key Discussion Points:

• Being a 'Data Dog': Goolsbee describes his approach as a "data dog," prioritizing comprehensive data analysis and real-time information over rigid theoretical models.
• Comprehensive Data Utilization: He advocates for utilizing a wide array of data sources, including private sector information and qualitative insights from regional business interactions.
• Adaptability in Unprecedented Times: In the face of unusual and unprecedented economic cycles, a flexible, data-centric approach allows for more informed and nuanced policy decisions.

Notable Quotes:

• "The first rule of the data dog kennel is that there's a time for walking and there's a time for sniffing and know the difference." [37:31]
• "If you have a question, get out there and sniff. That's the essence of the data dog credo." [38:00]

Conclusion: Embracing Complexity in Economic Analysis

Barry Ritholtz wraps up the conversation by highlighting the intricate and multifaceted nature of economic indicators and Federal Reserve policies. He emphasizes the importance of adopting a sophisticated, data-driven approach to understand economic trends, especially in predicting Federal Reserve actions and assessing the robustness of the economy. Goolsbee's insights underscore that economics is far from black and white, advocating for a nuanced and intelligent approach to economic analysis and investment strategies.

Final Notable Quote:

• "Economics is hard. It's complicated. There are lots of moving parts. We oversimplify this at our own risk." [39:12]

Key Takeaways

1. Supply-Side Resilience: The unexpected disinflation without a recession in 2023 was largely driven by improvements in supply chains and increased labor participation.
2. Critique of Traditional Models: Historical demand-driven models failed to predict the unique economic impacts of the COVID-19 pandemic, highlighting the need for adaptable frameworks.
3. Housing Market Constraints: Regulatory barriers and stagnant construction productivity are primary factors behind the ongoing housing supply shortages.
4. Inflation Target Importance: A credible 2% inflation target remains crucial in anchoring expectations and guiding effective monetary policy.
5. Data-Centric Policy Making: Adopting a comprehensive, data-driven approach allows for more accurate and responsive economic policymaking amidst complex and unprecedented challenges.

This episode provides valuable insights into the Federal Reserve's strategic considerations amidst evolving economic conditions, emphasizing the importance of data-driven decision-making and a deep understanding of underlying economic structures.