Summary of "What Keeps a Fed President Up at Night" – The Indicator from Planet Money

Release Date: April 10, 2025 | Host: Waylon Wong | Guest: Austan Goolsbee, President of the Federal Reserve Bank of Chicago

Introduction: Navigating Economic Storms

In the April 10, 2025 episode of The Indicator from Planet Money, host Waylon Wong engages in a compelling conversation with Austan Goolsbee, the President of the Federal Reserve Bank of Chicago. The discussion delves into the intricate challenges facing the economy amidst escalating trade wars and volatile global stock markets. Goolsbee provides insightful analysis on potential economic "storm clouds," including the concept of a stagflationary impulse and the intriguing notion of the freakout channel. Despite these looming threats, Goolsbee maintains a composed outlook, offering reassurance amidst uncertainty.

Tariffs and Their Ripple Effects

Understanding Tariffs' Longevity

Waylon Wong sets the stage by referencing a previous conversation with Goolsbee from December, where tariffs were a central topic. Goolsbee clarifies, “Tariffs don't necessarily have a long-lasting impact on inflation unless there's a retaliatory trade war or some kind of drawn-out supply chain disruption” (03:23).

He emphasizes that while a single tariff might theoretically cause a one-time cost increase, the reality is more complex. The COVID-19 pandemic exposed how massive supply disruptions can have prolonged and cascading effects across industries. For instance, a shortage in computer chips hampers car manufacturing, which in turn affects used car prices and rental car costs, creating a chain reaction that extends beyond the initial impact of the tariff.

Regional Implications: The Manufacturing Heartbeat

Goolsbee highlights how the Chicago Fed oversees a manufacturing-intensive region, making it particularly sensitive to the effects of tariffs. Businesses, especially in the auto industry, express significant concern over potential spillover tariff scenarios, leading to what Goolsbee describes as uncertainty-induced paralysis. An auto executive poignantly states, “you'd be crazy to do anything to invest in any way for the next six months until you figure out what are the rules going to be” (04:46).

Stagflationary Impulse: A Double-Edged Sword

Defining Stagflation in the Modern Context

The conversation takes a deeper dive into the notion of stagflation, a term used to describe the simultaneous occurrence of stagnant economic growth and high inflation. Goolsbee prefers the term "stagflationary impulse" to avoid conjuring images of the severe economic conditions of the 1970s, where inflation rates were nearly double digits, and unemployment hovered between 7-9%.

He explains, “big tariffs drive up prices and drive down economic growth,” (05:32) aligning current concerns with the classic definition of stagflation but contextualizing them within today's economic landscape.

Lessons from Recent Disruptions

Reflecting on recent economic disruptions, Goolsbee points out two critical lessons:

1. Prolonged Supply Disruptions: The COVID-19 pandemic demonstrated that supply chain disruptions could last much longer than traditional models suggest, with impacts spilling over across multiple industries.

2. Inflation Fueled Dissatisfaction: The subsequent rise in inflation rates during 2021-2022 led to widespread dissatisfaction, even when unemployment rates were low and economic growth was robust. This dynamic poses a unique challenge for policymakers aiming to balance different economic indicators.

Goolsbee warns against allowing anxiety over tariffs to "talk ourselves into a worse situation than need be," advocating for measured responses to avoid exacerbating economic instability (06:34).

The Freakout Channel: Rational Behavior Meets Economic Anxiety

Preventing Behavioral Cascades

Introducing the concept of the "freakout channel," Goolsbee discusses how anxiety over tariffs can alter people's behavior in ways that self-perpetuate economic instability. He describes this channel as a potential feedback loop where fear-driven actions, such as front-running purchases or stockpiling, can lead to actual economic downturns.

“If you start seeing people change their behavior based on these uncertainties, that makes the economy more complicated and it should make you a little put you on edge,” Goolsbee remarks (08:42).

Rational Responses Can Amplify Uncertainty

He further explains that while such behavior can be entirely rational, stemming from legitimate economic concerns, it nevertheless contributes to overall uncertainty. This uncertainty can suppress business investments and reduce consumer spending, thereby hindering economic growth.

Goolsbee reassures listeners by highlighting the Fed's strong position: “We start from a position of strength. The unemployment rate is very low. Historically we worked very hard to get inflation from totally unacceptable to high level down to something close to the target of 2%.” (09:36). He emphasizes that while short-term inflation expectations may rise due to tariffs, long-term expectations remain stable—a crucial indicator that the Fed monitors closely.

Inflation Expectations: The Barometer for Policy Action

Monitoring Long-Term Stability

Goolsbee underscores the importance of long-term inflation expectations as a key metric. He asserts that if these expectations begin to rise, it would signal a need for the Fed to take action to prevent destabilizing inflation. Currently, while immediate concerns may cause short-term expectations to spike, long-term projections remain anchored, providing a buffer against runaway inflation (09:35).

Contrasting Short and Long-Term Views

The distinction between short-term and long-term inflation expectations is pivotal. Goolsbee observes that although short-run expectations have increased moderately due to the influence of tariffs, long-run expectations have not shown significant upward movement. This stability in long-term expectations provides the Fed with confidence that inflation remains under control, even amidst current economic uncertainties.

Conclusion: Maintaining Composure in Turbulent Times

As the episode wraps up, Goolsbee offers a light-hearted anecdote illustrating his composed approach to economic uncertainty. When faced with a listener's personal anxiety about a kitchen remodel amid economic unpredictability, he humorously advises, “If you do buy a fridge, make sure it fits in the new space.” This advice encapsulates his pragmatic perspective: amidst economic storms, practical and measured responses are essential.

Waylon Wong concludes by reinforcing the episode's key themes and acknowledging the contributions of the production team, ensuring listeners leave with a comprehensive understanding of the challenges and considerations shaping current economic policy.

Key Takeaways

• Tariffs' Impact: While tariffs can cause initial cost increases, their long-term effects depend on the presence of retaliatory measures and supply chain disruptions.

• Stagflationary Impulse: Current economic conditions exhibit characteristics of stagflation, with rising prices and potential slowdowns in growth, necessitating careful policy navigation.

• Freakout Channel: Public anxiety over economic uncertainty can lead to behavior that exacerbates economic instability, highlighting the need for clear communication and strong policy measures.

• Inflation Expectations: Monitoring long-term inflation expectations is crucial for the Fed to maintain economic stability and guide monetary policy effectively.

Notable Quotes:

• Austan Goolsbee: “There’s no bad weather. There’s only bad clothing.” (00:30)

• Austan Goolsbee: “Big tariffs drive up prices and drive down economic growth.” (05:32)

• Austan Goolsbee: “If you start seeing people change their behavior based on these uncertainties, that makes the economy more complicated and it should make you a little put you on edge.” (08:42)

• Austan Goolsbee: “We start from a position of strength. The unemployment rate is very low. Historically we worked very hard to get inflation from totally unacceptable to high level down to something close to the target of 2%.” (09:36)

Produced by Cooper Katz McKim, engineered by Harrison Paul, and fact-checked by Sierra Juarez. Edited by Kate Concannon. The Indicator is a production of NPR.