Chicago Fed President Austan Goolsbee on Tariffs, Inflation and AI

Summary

WSJ What’s News: Chicago Fed President Austan Goolsbee on Tariffs, Inflation, and AI
Release Date: July 20, 2025

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Introduction

In this insightful episode of WSJ What’s News, co-hosts Gunjan Banerjee and Telus Demos engage in a deep conversation with Austan Goolsbee, President of the Chicago Federal Reserve. The discussion revolves around pressing economic issues such as the impact of tariffs on inflation, the state of the housing market, productivity growth influenced by artificial intelligence (AI), and the Federal Reserve's monetary policy decisions. This summary captures the essence of their conversation, highlighting key points, notable quotes, and Goolsbee’s expert analysis.

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Tariffs and Their Impact on Inflation

The conversation opens with Banerjee and Demos addressing the anticipated effects of tariffs on inflation. They reference previous analyses predicting that tariffs would begin influencing price data in the summer or fall. Telus Demos remarks, “It’s no more of this inflation,” suggesting that tariff-induced inflation is becoming palpable (01:13).

Austan Goolsbee provides a nuanced perspective on tariffs, highlighting their limited impact on the broader U.S. economy. He explains, “Imported goods are only 11% of US GDP” (05:44), emphasizing that while tariffs can disrupt supply chains, the U.S. economy remains predominantly domestically driven. Goolsbee elaborates on how tariffs might affect specific sectors, noting that excessive tariffs could push the economy into a "stagflationary direction," where both inflation rises and output slows (22:21).

He also discusses the dynamic nature of tariffs, mentioning potential increases such as a 50% tariff on copper, and the subsequent effects on business and consumer confidence. Goolsbee cautions against overreacting to tariff changes, advocating for a balanced approach to maintain economic stability.

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Housing Market Dynamics

The hosts shift focus to the housing market, a critical component of the U.S. economy. They discuss recent data indicating a slowdown in home sales and explore whether this trend is a cause for concern or a sign that inflation in housing is being controlled.

Goolsbee responds by highlighting positive trends in housing inflation. He states, “The inflation rate of shelter in the CPI, core housing inflation has been moderating” (11:23). This moderation signals progress in controlling one of the most persistent components of inflation. However, he acknowledges the complexity of accurately measuring housing inflation and the need for continued observation to ensure sustained improvement.

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Productivity Growth and the Role of AI

One of the most engaging parts of the discussion centers on productivity growth, particularly influenced by advancements in AI. Demos poses a question about how AI is impacting workforce productivity and whether it will help sustain the economy’s “golden path” or pose risks.

Goolsbee underscores the significance of productivity as a critical economic indicator, albeit one that is often “noisy” and less emphasized in public discourse compared to figures like the Consumer Price Index (CPI). He notes, “Industries with the biggest increase in productivity growth from before COVID to after COVID are AI-related” (17:32). Goolsbee is optimistic about technology-driven productivity boosts, suggesting that AI can lead to substantial long-term economic benefits.

However, he also warns of potential pitfalls, drawing parallels to the 2001 internet bubble. Goolsbee cautions against overestimating AI’s immediate impact, stating, “Let’s not repeat that bubble and bust cycle” (20:43). He emphasizes the importance of sustainable, widespread adoption of AI technologies to avoid economic overheating driven by speculative investments.

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Federal Reserve Policy and Interest Rates

A significant portion of the dialogue focuses on the Federal Reserve’s monetary policy, specifically regarding interest rate decisions. Banerjee inquires whether the Fed should consider cutting rates in the upcoming meeting to alleviate mortgage rates, a topic of political significance.

Goolsbee maintains a data-driven stance, asserting, “I don’t like tying our hands before we get all the data” (13:37). He emphasizes that the Fed’s mandate is to stabilize prices and maximize employment, without succumbing to external pressures. Goolsbee explains that interest rate decisions are based on current economic conditions and outlooks, rather than political influences.

He expresses optimism about the U.S. economy’s resilience, likening it to having a “six pack of muscle” beneath economic indicators. This metaphor highlights the underlying strength and stability he perceives in the economy, despite surface-level challenges. Goolsbee notes, “People still credibly believe that when the Fed says we’re going to get inflation back to 2%” (20:58), reflecting confidence in the Fed’s policy direction.

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Broader Economic Outlook and Concerns

Towards the end of the episode, Banerjee asks Goolsbee about the broader economic trends or blind spots that concern him. Goolsbee identifies the risk of stagflation—where both inflation and unemployment rise—as a primary worry, particularly if escalating trade wars and tariffs contribute to this scenario (22:21).

He underscores the complexity of addressing stagflation, noting the lack of a clear central bank playbook to manage such a situation effectively. This concern highlights the delicate balance the Fed must maintain in navigating economic policies amidst global uncertainties and internal challenges.

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Conclusion

The episode concludes with a light-hearted exchange about baseball allegiances, reflecting Goolsbee’s personal connection to Chicago culture. Despite the casual end, the discussion leaves listeners with a comprehensive understanding of current economic challenges and the Federal Reserve’s role in steering the U.S. economy towards stability and growth.

Notable Quotes:

• Telus Demos: “It’s no more of this inflation, is it in the room with us? Like it’s, it’s kind of knocking at the door.” (01:13)

• Austan Goolsbee: “Imported goods are only 11% of US GDP.” (05:44)

• Austan Goolsbee: “Let’s not repeat that bubble and bust cycle.” (20:43)

• Austan Goolsbee: “People still credibly believe that when the Fed says we’re going to get inflation back to 2%.” (20:58)

• Austan Goolsbee: “The nightmare scenario for central banks is anything that pushes us in a stagflationary direction.” (22:21)

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Final Thoughts

Austan Goolsbee’s insights provide a balanced view of the current economic landscape, emphasizing resilience and the importance of data-driven policy decisions. His cautious optimism about tariffs, housing, and AI-driven productivity offers a path forward amidst potential economic uncertainties. For listeners seeking a deeper understanding of these complex issues, this episode serves as a valuable resource.

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Note: Timestamps correspond to segments within the transcript and are indicated in parentheses for reference.

Transcript

[Austan Goolsbee]

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[Alex Osola]

It's Sunday, July 20th. I'm Alex Osola for the Wall Street Journal. This is what's New Sunday. On today's show, we're bringing you an episode of WSJ's take on the week where we dive into markets, the economy and finance. Later this week, the Fed will hold its next meeting to decide on interest rates. Last Tuesday and before the Fed entered its dark period when they don't speak to media, co hosts Gunjan Banerjee and Telus Demos spoke with Chicago Fed chair Austan Goolsbee. They talked about the US Economy's six pack of underlying strength, the impact of tariffs on inflation, what the Fed might decide at its meeting and baseball.

[Gunjan Banerjee]

So tell us, I feel like we've been wondering the whole year when we will start to see tariffs reflected in some of this inflation data.

[Telus Demos]

Well, we said back in April, was it, I think it was April. It was a thousand years ago, Liberation Day. I think people were saying then that you really wouldn't see any price impacts from tariffs until the summer or fall. And I don't know where, where you are, audience, but here in New York, it is definitely summer. And it seems like we are starting to see it in the data a little bit. It's no more of this inflation, is it in the room with us? Like it's, it's kind of knocking at the door. Right.

[Gunjan Banerjee]

We're having a hot inflation summer.

[Telus Demos]

Well, the temperatures outside are matching the always sweltering temperatures inside of our studio here at WSJ's take on the week. I'm Tellistemos.

[Gunjan Banerjee]

And I'm Gunjan Banerjee.

[Telus Demos]

I read recently somebody said that trying to get a read on the role of terror of what's going on in inflation, tariffs were like kicking more dirt into the air and just sort of muddying the picture. And the person who said that is joining us now, he is Austan Goolsbee. He's the president of the Chicago Fed. So, Austin, welcome. Thanks for joining us.

[Austan Goolsbee]

Thank you for having me.

[Gunjan Banerjee]

So what are you hearing right now? What's your read on the Chicago economy? And does, does it tell us anything about the U.S. economy right now?

[Austan Goolsbee]

Okay. The district, seventh district is more than just Chicago. It's basically 90% of Iowa, Michigan, Indiana, Illinois and Wisconsin. It's kind of heart of the Midwest. We're the Highest manufacturing intensity of all the districts and the highest auto production of all the districts. That historically means we're among the most cyclical of all places. And if you're cyclical because of the manufacturing and durable goods and things like that, we're a little bit the canary in the coal mine of the business cycle. So a lot of times we will. People will be interested. What are we hearing in the 7th district? Because it's an indicator of where we are in the business cycle. That got a little scrambled going through Covid because it was such a weird recession. It's been such a weird period coming out. That said, going into April 2, before April 2, hair on fire, especially in the auto industry, but throughout manufacturing, about yikes. If the tariffs are going to be this big, it's going to disrupt the supply chain, Then I would characterize over the summer, late spring and summer, the impact of tariffs wasn't as big as they feared. The feeling's been a little less hair on fire and a little more, hey, maybe we got some exemptions. Maybe the tariffs won't be as big as we thought. There's not 100% pass through. We're kind of cost sharing, burden sharing, as they described it. So we were getting a little, I guess I would characterize a little more. Maybe this is a sustainable equilibrium. And now I'm hearing more nervousness again that August 1st, another day's coming. We're going to raise tariffs on copper 50%. Back to the dynamic that was kind of the unfortunate dynamic around April 2. You open with my line that we're kicking dirt in the air. I thought coming into April 2, we were still on what I was calling the golden path, where we're at stable, full employment, inflation coming down to the 2% target. In an environment like that, I absolutely thought, and continue to think, if we can show that we're still on that path, rates have a fair way to come down. They can come down a fair bit below where they are today. But if we just keep throwing the dust up in the air, then it makes it very difficult to make sure that you're still on that path. And you know, the law requires us. Anything that affects prices or employment, the law says we have to look at it. So that's where we are.

[Gunjan Banerjee]

So Wall street doesn't seem too concerned. Right. The stock market is at a record. Despite some of the recent data that we've gotten on inflation, the market freaked out.

[Austan Goolsbee]

At the same time, business and consumers seem to be freaking out, which was liberation day. And after and Then the market began to recover, similar with the recovery of people that I was talking to. They said, yeah, I know. I said, you guys told me that it's going to be the end of the world and inflation's been coming in modestly and yeah, it's not going to be the end of the world. We think this could be sustainable. And what I'm picking up now in, in real time, if you want to think of it that way, is if we're going to go back through this same cycle where well, maybe tariffs are going to be massively higher than, than they were before, maybe there is going to be 30% tariff put on Canada. And so now a lot of scrambling to figure out well, what are the rules going to be. It's worth remembering imported goods are only 11% of US GDP. So there is a sense in which the US is overwhelmingly a domestically driven economy and even substantial tariffs might not have that material and impact on the aggregate in the US and the three places that you should be worried of, how does it jump out of the 11% lane are a if there's retaliation from other countries now you just spread it to, to all our exports. B if you put the tariffs on intermediate goods and parts and components and supplies now you just jumped it out of its lane and it's raised the cost of production for domestic manufacturing. And then three, the most important, if people start freaking out businesses and or consumers and change their behavior, then the impact of tariffs can get can be a lot larger than just the 11% lane. We it seemed to be making progress. It felt like on all three of those fronts over the early summer, less freaking out, more exemptions on intermediate products and parts and components and backing down from the escalation and retaliation cycle last two weeks seems like we've getting a little more back in that lane.

[Telus Demos]

You've described your approach and I think most people the Fed would describe themselves this way as sort of data dependent. Right. So when it comes to all the things you're talking about, when it comes to, you know, people deciding how they're going to vote at the next Fed meeting or a Fed meeting later this year, is there anything data wise that you're seeing that says to you that we're on an inflationary course? Is there anything that has jumped out to you in the most recent report, the CPI report for example, that that would sort of point to you that okay, all these things are actually being seen in the data.

[Austan Goolsbee]

Just the impact of tariffs? I do think you started to see it in the last inflation report and in this inflation report, imported goods, you're starting to see pretty significant accelerations of inflation. The caveat and why I took us on a long journey about the 11% lane of imported goods is it's worth remembering imported goods aren't that big of a deal. And so the fact that we've continued to make progress on services and on housing, that's fabulous. That's what I want to see. And it's entirely possible that if we don't overdo the price impacts of tariffs on goods that the, I'll call it the residual seasonality that for the last several years, kind of for Q1 inflation has bumped up. But the later parts of the year we made real progress on inflation. And if that continues this time of a magnitude that kind of drowns out or overwhelms what's coming from tariffs, I would feel good. Like I say, I think underneath there is still that golden path and we just need to not get bumped off of it.

[Telus Demos]

We're going to take a quick break and when we come back, more with Austan Goolsbee.

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[Gunjan Banerjee]

Well, I want to drill down on housing because that is just such a big part of our economy. And you said that you're encouraged by where prices are heading in the housing market, but some of the data has shown that home sales are slowing down. Right. Is that actually a worrying sign about the economy, what we're seeing in the housing market? Or is it encouraging because inflation in housing is not getting out of hand?

[Austan Goolsbee]

Yeah, but it's all of those. It's all of those. My reference to what's encouraging in housing is that the inflation rate of shelter in the cpi, core housing inflation has been moderating. And that was for a very long time. The biggest puzzle was why has that been as persistent as it was? And there, as you know, there were a bunch of arguments way down in the weeds of maybe it's how they're calculating it and the market measures. The inflation rate already fell, so maybe it's just a matter of time before that starts to come down. That has been coming down and that's that tends to be a persistent component. So when you see improvement in the inflation rate on core services and core housing, that doesn't flip around as, as, as much as goods can.

[Telus Demos]

I do think that that transitions us into the important political dimension of what's going on here. You know, the President and a lot of people around the President would like the cost of, would like mortgage rates to come down. And one pathway that some people see towards that is that the Fed should be cutting rates. Do you think that there is a pathway to lowering mortgage rates through what the Fed does in its policy? And you know, is that, is that a sensible economic policy to you?

[Austan Goolsbee]

The rules of the FOMC say I'm not allowed to speak for anybody else on the committee. I don't speak for the chair, I don't speak for the committee as a whole, just my own opinions. That's all I'm allowed to talk about. My observation and you can go look at the minutes or you can go look at the word for word transcripts of the fomc. What drives the interest rate decisions is exactly what it should be, and that is the economic conditions and the economic outlook facing the country. We have a mandate by law that when we're setting monetary policy where we do two things and two things only, we're supposed to stabilize prices and maximize employment.

[Gunjan Banerjee]

So do you think the Federal Reserve should cut rates at its next meeting?

[Austan Goolsbee]

I don't like tying our hands before we get all the data and before I've heard what my colleagues say. The most important thing at the FOMC gatherings and for a central banker is to figure out the through line. So it's not about this meeting or that meeting or what it's to figure out, okay, what is the path we're on. And if we had comfort, if I add comfort that we're definitely on the path back to 2%, then as I said, I think rates can come down a fair amount. If we have a meeting and then two days later tariffs are scheduled to have a massive jump. And so everybody we talk to says, yikes. I think within a month after that prices are going to be rising significantly again. Then we gotta take that into account too. And in periods of uncertainty, you just gotta be a little careful moving certain ways and then finding out that you're in the wrong spot.

[Gunjan Banerjee]

So you've talked about this dual mandate, right, between employment and inflation. What is your read on the broader economy and some of the jobs reports that we've seen?

[Austan Goolsbee]

Pretty good. I mean, I think like I said coming into April, I thought on dual mandate grounds was looking quite good. We have an unemployment rate that's around little above 4% and it's been stable there for quite a while. To me, that looks like the kind of maximum employment, full employment baseline that we look for. And the worst thing that that had faced the economy is no secret. It's that price inflation got out of control. And we've spent literally years bringing that back down. And I felt like it was to me looked like a path to get to 2%. And the added bonus, we've had a real surge of productivity growth in this country for, in the last couple of years and that makes it, that makes everything better. That makes wages can grow faster without generating inflation, we can have more growth, we can raise our standard of living. So that combination is pretty positive and that's what I hope is underneath there. But I, I made the analogy. It's at one point I hired a trainer at the gym and, and the trainer said, ah, you could do this, you could do sit ups, you could do push ups. And, and I said, well, how much, how much lifting, how many sit ups I got to do to get a six pack? And the trainer politely said everyone has a six pack underneath.

[Gunjan Banerjee]

That was the beginning.

[Austan Goolsbee]

And said the problem is not how much lifting that muscle does. The problem is getting what's on top of that muscle off of there if you want to get a six pack. And I kind of feel like that coming into April 2, there is a six pack of muscle in the economy. It's just we're layering things on there that make it hard to see that muscle. And I just want us to get back to that muscle.

[Telus Demos]

Well, you anticipated my next question, which is going to be about productivity because I know you've talked a lot over the years about the role that that plays in the inflation picture. So maybe just unpack for us a little bit what's happening in the productivity of our workforce. And the thing that jumps to mind for me certainly is artificial intelligence. So maybe just lay out for us like what you see happening in productivity and how that will or either will keep us on that golden path or maybe things that could move us off of that golden path in the productivity picture.

[Austan Goolsbee]

Okay. As you know, you talk to the economists, they will tell you this is the single most important number that nobody talks about is what's the productivity growth rate. One of the reasons people don't emphasize the number as much as they do, as much as they do say CPI or jobs numbers is it's also the noisiest number among the noisiest of all the data series that we have. So if you key on well, what did the data show this quarter? It's going to be all over the map. Over a longer run. There are these productivity trends that can be significant and substantial. I started as a skeptic that it was AI because AI is just not big enough. But I will say we had folks here at Chicago Fed doing research. What industries had the biggest increase in productivity growth from before COVID to after Covid. And a large fraction of the ones that had the biggest increase are AI related. They're, they're in technology or they're big users of technology. And the good news about that is if it is a technology driven productivity boom that can have legs because that doesn't happen right away. It spreads through the economy. Here's the only shadow. I won't say it's a downside, it's just a shadow. If we, and we learned this lesson in the 90s, if the productivity growth boom is mostly in the future and everybody's anticipating these productivity increases and the market is forward looking and so they're giving massive valuations to productivity, they're counting on the productivity growth delivering. You can overheat the economy in the short run. You can get out far in front of your skis because suddenly the entrepreneurs are all rich because they're counting on trillion dollar improvements in the future. And we saw in the 2001 recession, everybody remembers that as the Internet bubble popped and that caused a recession. But if you I was working on Internet economics back at that time, it should have been impossible. The Internet was not big enough to cause a recession. The adoption had not been enough. And the way it did was the exuberance of business investing and of consumers spending out of their newly acquired stock market wealth. As soon as the growth rate of the Internet it became clear it's not going to be 20% a year, maybe it'll be 5% a year. There was a huge overhang and a collapse of confidence. So I just want to caution us on AI, let's not repeat that bubble and bust cycle.

[Gunjan Banerjee]

So it seems like despite what we discussed about tariffs, you are expecting the US economy to, to make it through this path. Right. Or you are expecting the US economy to not tip into a recession.

[Telus Demos]

It's got a six pack underneath everything going on.

[Austan Goolsbee]

I think it's got a six pack under there. And I just want, let's show the muscle. People still credibly believe that when the Fed says we're going to get inflation back to 2% and you go look at what the market thinks the inflation rate will be in 10 years is basically 2%. So that that hasn't moved. I find an encouraging sign that the world does not think tariffs are going to blow up everything.

[Gunjan Banerjee]

We are going to take a short break and when we come back, we have one very important question for Austan Goolsbee.

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[Gunjan Banerjee]

Conditions Appreciate what is one economic trend or blind spot that's keeping you up at night right now?

[Austan Goolsbee]

If the question is what keeps you up at night? I always say that the job of the central bank is to be the night's watch and not sleep at night because there shouldn't be anything that goes wrong that we haven't at least thought through the possibility and worked out a scenario. Now that said, I think the nightmare scenario for central banks is anything that pushes us in a stagflationary direction, which is to say employment gets worse. At the same time inflation is rising and historically we think of those as supply shocks. So if geopolitics start driving up the price of energy a lot. But now it's the thing that makes me nervous about escalating trade wars and tariffs is they can have that stagflationary direction too, that they can slow output at the same time they're driving up prices. And that's just not a fun place to be because there's not a, there's not a well established playbook of, well, what should the what should the central bank do in response?

[Gunjan Banerjee]

Thank you so much. This has been great.

[Austan Goolsbee]

Thank you.

[Gunjan Banerjee]

If you enjoy the show, please give WSJ Podcasts a follow on YouTube. And that's everything you need to know for this week. This show is produced by Jess Jupiter, Jessica Fenton and Michael Lavalle. Additional support from Coleman Standifer, Michael Lavall and Jessica Fenton are our sound designers and Michael also wrote our theme music. Aisha Al Muslim is our development producer, Scott Salloway and Chris Zinsley are the deputy editors and Falana Patterson is the head of news audio for the Wall Street Journal. For even more, head to WSJ.com, i'm Gunjan Banerjee.

[Telus Demos]

And I'm Telus Demos. Until next time. We have a lot to talk about. But first, I want to ask you something very important to me. You know, when the Chicago Pope ascended in Rome, he made it very clear quickly where his baseball allegiances were, which is something very important in Chicago. He's a White Sox fan now. He's a born and raised Chicagoan. I know you're not a native of Chicago, but I just are you on the record as having picked a team? Is that something that you have to do as kind of the leading economic voice in the region?

[Austan Goolsbee]

I can't profess allegiance to either team now, but I am going to throw the first pitch out at the White Sox game in August. Oh, wow.

[Telus Demos]

Congratulations.

[Gunjan Banerjee]

Telus has been waiting for an opportunity to bring a baseball.

[Telus Demos]

That's the main reason we called you, actually.