What keeps a Fed president up at night

Summary

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

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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.

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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).

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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).

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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.

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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.

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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.

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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.

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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)

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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.

Transcript

[NPR Announcer]

NPR.

[Waylon Wong]

This is the indicator from Planet Money. I'm Waylon Wong. As some of you might know, I am based in Chicago. It's a city where the weather can be all over the place like it briefly snowed this week.

[Austan Goolsbee]

Even though it's April, weather outside is less than delightful but not horrible.

[Waylon Wong]

There's no bad weather. There's only bad clothing. Am I right?

[Austan Goolsbee]

That right? That's our motto.

[Waylon Wong]

Chicago Fed Austan Goolsbee is the president of the Federal Reserve bank of Chicago. And as you just heard, the bank's motto is there's no bad weather, only bad clothing. That means the Fed does its job no matter what's happening in the economy. Well, the economic weather conditions are pretty unpredictable right now. We've an escalating trade war and huge swings in global stock markets. So today on the show, Austan Goolsbee of the Chicago Fed tells us about some potential storm clouds on the economic horizon. You'll meet the stagflationary impulse and something called the freakout channel. And Austin also tells us why he's not freaking out.

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[Austan Goolsbee]

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[Waylon Wong]

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[Waylon Wong]

Saw Austan Goolsbee was in December. Tariffs were already very much in the conversation and Austan said then that 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. Those seem like pretty big open questions right now as we watch the news, like how are you assessing kind of each of those risks?

[Austan Goolsbee]

Yeah, I have some qualms you remembering every, everything I said, but I don't think that was, I don't think that was wrong. I don't think that was wrong, you know, back months ago to highlight in pure theory a one time tariff is a one time increase in cost. And the only problem with that analysis is that's for the perfect theoretical tariff, that there's no retaliation and there are no supply chain disruptions that spill over from one industry to the next. And the problem is we went through a period in 2020 with massive supply disruptions. Everybody lived through that. Transitory became transitory. And the partly because if you can't get a computer chip, you can't make a car. If they can't make a car, then the used car price goes up. If the used car price goes up and there are no new cars, then the rental car companies prices go up and that kind of chain lasts a lot longer than the theoretical pure tariff.

[Waylon Wong]

The Chicago Fed oversees an especially manufacturing intensive region. This means Austin talks a lot with people who work in the auto industry and other businesses affected by tariffs. He says they're worried about spillover tariff scenario and they're struggling with an uncertainty induced paralysis.

[Austan Goolsbee]

As one auto executive expressed that 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.

[Waylon Wong]

This uncertainty is making his job even harder.

[Austan Goolsbee]

This is not that easy of a time to be a central banker because at the end of the day the law gives the Fed two jobs when setting monetary policy. Stabilize the prices, maximize employment. When you get a stagflationary shock, which is to say something that both reduces employment and increases the prices simultaneously, that's a kind of uncertainty that's, that's not that pleasant.

[Waylon Wong]

I just wanna say for the record, you said stagflation before I did. So is this something that is a topic du jo these days?

[Austan Goolsbee]

Look, I call it a stagflationary impulse. Because if you back to the future style brought somebody from the 1970s when we had stagflation, the inflation rate was almost double digits and the unemployment rate was 7, 8, 9%. So if they came in a time machine forward and you said we're Worried about stagflation. Unemployment is a little over 4% and inflation's in the twos. They would be like, we would love to live in that kind of stagflationary environment. So let's be careful not to talk ourselves into a worse situation than need be. But it's directionally a stagflationary direction, which is to say big tariffs drive up prices and drive down economic growth.

[Waylon Wong]

We talked about the transitory versus transitory debate over inflation with COVID What are your takeaways from that period as you think about the stagflationary impulse and kind of the new pressures you're seeing now?

[Austan Goolsbee]

My fear has been, and what I hear when I'm out talking to people is this anxiety that if the tariffs do come in place and are this big, that it's going to take us back to these two periods that were really unpleasant. So period one was 2020, when we learned that massive supply disruptions can last well longer than, than the textbook seems to suggest they should and that they spill over from industry to industry to industry. And then the second lesson is the 2021, 2022, when inflation gets going, people are angry, dissatisfied with the economy. Even if you tell them, ah, but the unemployment rate is low, growth is high, like, look out the window at what the prices are. I'm not coming up with some theoretical. This is just what is on the minds of people when I'm out talking to them. They don't want to go back to these, to these twin towers of awful that we just went through.

[Waylon Wong]

Do you also worry about inflation expectations if we're. Everyone's still recovering from the trauma of this period you just described. Plus now you see on the news about tariffs. And I will say for myself, we're about to embark on a kitchen remodel which feels completely cursed. And I was going to ask you, like, should I buy my appliances now? And second of all, does this make you worry about inflation expectations?

[Austan Goolsbee]

People ask me, well, what keeps you up at night? One of them is if the anxiety over the tariff starts changing people's behavior, then it can go through a channel. I call that the freakout channel.

[Waylon Wong]

Oh, no, the freakout channel. We've now covered the stagflationary impulse. We've talked about the twin towers of terror. Now we're at the freakout level.

[Austan Goolsbee]

Here's the thing about the freakout channel. It can be rooted in completely rational behavior that front running. And we're going to build up a stockpile of parts and components as soon as you see a lot of behavior like that, it will start showing up in the aggregate data. Now you should be a little nervous because uncertainty tends to suppress businesses. Investing tends to make people not want to spend money. 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.

[Waylon Wong]

Oh, I am on edge.

[Austan Goolsbee]

You're on edge. Okay. Just remember 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%. And the hard data remains pretty decent. If you started to see the market based measures of inflation expectations in the long run going up, that would be a very disturbing sign. I think the Fed would have to act. So far we haven't seen that. We have seen short run expectations go up quite a lot I think because of tariffs. But long run they aren't.

[Waylon Wong]

Oh, and as for my kitchen remodel, Austin wouldn't tell me whether I should buy my appliances now or wait. But he did say if you do buy a fridge, make sure it fits in the new space. Which honestly great advice. Trade war or no trade war. This episode was produced by Cooper Katz McKim. It was engineered by Harrison Paul and fact checked by Sierra Juarez. Kate Concannon is our show's editor and the indicator is a production of npr.

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