Moody's Talks - Inside Economics - Austan Goolsbee Clears the Dirt

Episode Date: July 11, 2025

Chicago Federal Reserve President Austan Goolsbee joins Mark and Cris to talk about the economy and monetary policy. He explains that the up and down tariffs and other economic policies have thrown lots of dirt in the air, so to speak, complicating things for the Fed and thus delaying the normalization of interest rates. He also weighs in on the policy response to the financial crisis and the economic repercussions of artificial intelligence. And tune in to hear why he wants to be 80% Paul Volker and 20% Muhammad Ali. Guest: Austan Goolsbee, President of the Federal Reserve Bank of ChicagoHosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, and Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s AnalyticsFollow Mark Zandi on 'X' and BlueSky @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Sandi, the chief economist of Moody's Analytics, and I'm joined by my trusty co-host, Chris DeRides. Hey, Chris. Hey, Mark. Where's our other co-host? I think she's a pickleball. What is it?

Pickleball circuit or something along those lines? Stuff. Oh, she's playing pickleball. I didn't know that. She's good at that. Apparently. Apparently. Good.

Do you play? No, you play Bucci ball or botchee. Whatever that is. That Italian. That weird Italian. lion sport. Yes, there you go. Yeah. Yeah, well, you know, the last podcast, the debate was whether folks like the chit chat, which is what we're doing now, the chit chat. And I'll have to tell the listeners, we're not going to tell you, we're not going to spill the beans, because we're still

collecting responses. But boy, the responses, right, the response rate's better than the BLS, I think, you know, for the employer report. We got a whole lot of response. And the good news is we got a definitive answer on whether people like to chitch chat or not. So, but I'm not going to tell you what that is. And the reason why we're not going to chit check is we have a great guest and we want to get right to it. It's Austin Gouldsby. Hey, Austin.

Yeah, Mark, how you doing? Chris, good to see you. Yeah, doing okay. And thank you for coming on. Austin, of course, is the president and CEO of the Federal Reserve Bank of Chicago. And you've been at this now for a little over a couple years, right? Yeah, it's my third year. I'm in the middle of it.

Now, Mark, you didn't tell them. The folks on Squackbox always said that Mark and I had this Clark Kent Superman thing going, that nobody, they never saw us in the same room together. Now, that was, I used to have as much hair as Mark had. And I said, that's absurd. That's offensive. How could you even say that? And then one day, it was a Sunday.

and my wife came in and was watching Meet the Press. And it cut to this panel. And she said, honey, I had no idea. You went on Meet the Press this week. And I said, that's Mark Sandy. So that was a, that was a, that was a, that was a tough one to swallow. You know, I had, you know, Austin, so I'm a shame to say, I forgot all those CNBC days, those employment reports.

We did that for a long time together, right? Yeah, exactly. Remember we had to put on a card what we thought the number? Yeah, and then they would count it down and then they would try to embarrass us. But we did pretty well, I think. Well, I don't remember it at all. So that's good. I'll take it.

I'll take it. I'll take that. You know, I was reading through your Wikipedia page and I didn't realize you've been on, and, you know, it sounds a lot because your accomplishments are many and, just an amazing career, but I focused on this one thing, and that is, you were on John Stewart for like six, seven, eight times. Yeah, a bunch of times. That was the most fun thing they let me do in the government.

Oh, is that right? Yeah. I surprised I let you do it. That's so cool. And then a Colbert, too. I saw your own Colbert. Yeah, a couple of times on Colbert. All of those were pretty fun.

They're both interesting characters. Yeah. Maybe I'd love to hear that backstories someday. But that was during the financial crisis and you were a member and then ultimately the chair of the Council of Economic Advisors under President Obama in I think 2009, 10, 11, right? Yeah. Yeah. First like three years. It must have been amazing.

It was amazing and awful at the same time. Yeah. You know, it was, as I say, it was a bunch of like, we're eating tick tax for dinner and, you know, getting a few hours of sleep under the desk kind of thing. But it was a looking back as far as financial crises go, it actually ends up being the least costly as a share of GDP financial crisis of all financial crises ever, I think. Is that right? And so it's sometimes it's,

funny to look back. The economists would say, and the financial analysts would say, hey, if you ever get in a crisis, this is a way you should do it. Because look, it ended up, the normal cost of a financial crisis to the taxpayer is five to 10 percent of GDP. You know, so that's, that beats two trillion dollars kind of thing. And they ended up by taking warrants and doing various things. It ended up costing close to zero. to the taxpayer that paid back the money that they had borrowed. But the political lesson is 100% the opposite. You know, if you analyze, how do you deal with a financial crisis, put money into the banks, take warrants, try to rebuild the capital. But every government of the

world that did that, kind of the government fell and they were run out of town on a rail. So hopefully we never face those conditions again, but it was certainly harrowing. You mean, you remember that. Oh, yeah. I mean, I've been a professional economist for 35 years, and that stands out by orders of magnitude. The pandemic, it was a big deal. What we're going through now feels, you know, in terms of the uncertainty, and we can come back to that.

But, you know, that, particularly when you guys took office in January of 2009, didn't we lose like a million jobs or something on that in that month? No, no, in one month. Yeah, one month. Literally one month. I think it was 850,000 or something in a single month. And I was like, whoa. You were never, as I said along the way there, one month it was expected to be like minus 400,000.

And it was like minus 275,000. And I was torn because I was like, I'm never in my life going to say that a minus 275,000 jobs in a month is a good news. But in a way, it was kind of was good news. It was the least better than what a, yeah, progress. Right. Hey, you know, I've got, had folks on the podcast that have been through that period. And that one question I asked them and I ask you, because there's a gazillion policy responses. And many things the Fed did.

Yeah. Regulators did. Of course, the, you did, the Obama administration did. Of all the policy responses, could you single out one kind of at the top of the list of things that you felt really, was helpful or turned things around or is that impossible to do? There were so many things that it's like any, if you single out anyone, it's going to seem like a, you know, but that was just a biscuit, you know, in a whole Thanksgiving meal. That said, I've characterized what I consider the Washington way to be, you got an argument about

worldviews and in the end they just decide okay well let's do one third of each and everybody gets part of what they want and that in the argument about the stimulus at in 2009 there was there were at least three different worldviews one worldview was this is going to be a v-shaped recovery because it's a deep down turn there's going to be a steep comeback so don't do anything lasting and permanent or long live because by the time it comes on, it's just going to be inflationary. So that was the, let's make it timely and targeted and temporary. And let's move 2010 into 2009 kind of activities. First homebuyer tax credits, cash for clunkers, stuff like that.

And then there was a second group that was saying, no, look, it's a financial crisis. This thing might go for a long way. Let's invest in infrastructure. Let's invest in energy and upgrade the grid. And there was a third group that was kind of saying, we got to get 50 votes. So let's just make it all tax cuts. And some Republicans will want to go along. And they kind of went back and forth, back and forth, which is right.

And in the end, they said, let's do one third of each. And so looking back, it wasn't a V-shaped recovery. So the inverse of your question, I think if you knew what you knew, I understand why we did it the way we did at the time. because we didn't have the information. If you understood it wasn't going to be a V-shaped recovery, you would have done a lot less of the temporary stuff and you would have done more in the longer run investments. And I think if you go look at those, if you had the single individual things out, there are a series of long-lived investments that were really good ideas, including one that fell by

the wayside to build America bonds, I thought was an excellent way to. finance infrastructure and race to the top where they outlined kind of a contest, a challenge grant to improve education. You got a lot more bang for the buck than if you had just given the grant out to one. A bunch of states applied to try to get the money. And even the ones who didn't get it said, well, you know what, let's do it anyway, because we've done all the strategic thinking. Yeah, a lot of things. The one thing that's the stood out for me was when the FDIC decided to guarantee bank debt.

That, on that day, that's when funding, you know, kind of. I see. So from the financial perspective, I mean, there was a, there was a, there were a couple of moments where in a way we got fortunate. that we might not have understood it in the moment. The, when we announced the stress test, you'll recall there was that speech that,

that Geithner gave and then the market went down and people said it was because he looked too young or whatever. Yeah. I don't think it was. My take at the time was we announced there's going to be a stress test, but fundamentally, the world wants to know what's going to happen if somebody failed. because they think they're a bunch of institutions that are going to fail the stress test.

And who's going to take the first loss? Once they start guaranteeing the debt, and once they make clear, okay, here's how it's going to work, the government's going to take the first loss, but they're going to take warrants. We're going to do the stress test, and it's not going to be the end of the world. That opens the door for private capital to start coming back in. But where we got fortunate was when they did the stress test, and they opened up the books, the actual conditions of the banks

were not as bad as they feared. If they had been worse, and there was an argument at that time about Europe, that Europe didn't want to do the full open, all the books, you know, full kimono strategy. Right.

Because maybe they aren't as, they don't look as good. There was a period in the Depression, where the government kind of announced, we're about to wipe you out. And they paid out huge dividends and huge executive compensation knowing that the alternative was the government is just going to come in and take everything.

And so we did get a little fortunate that the actual conditions were better than what was feared. If they had been worse, I wonder if we would have then gotten into a big fight about, wait a minute, you let them pay out dividends and you let them, there weren't restrictions on compensation. Well, there was a, I just one other thing in your bio that I wanted to just call out. And that's your relationship with Chip Case.

I didn't. Indeed. That I did not know. Okay, you didn't know that. No. Chip Case's wife, Susie, was a counselor at my high school. And I came in and I was really into science. and math, but I was really in a debate and current events. And I had kind of, in high school,

thought maybe economics is a combination of math and science and current events. And even though I was uninformed, that's not totally wrong. And so she asked me, what do you want to be when you grow up? And I said, I think I would like to be an economics professor. And then she started laughing. And I said, why is that funny? And she said, well, my husband, economics professor. And so you could talk to him and he would help you. And he was, he kind of took me under his wing. He'd help me. He started bringing me to NBR academic seminars. At that time, he was working on housing and housing was a very hot moment. Right. So even though they don't remember it, Larry Summers doesn't remember. I met all of these guys at seminars when I was in

high school because Chip would bring me down. I got to know Bob Schiller decently well. And he was just a wonderful mentor to me and really opened a lot and helped me get a first job in high school at the Boston Fed. I was a research assistant for this guy, Steve McNeese, typing in back then. Somebody had to type in all the forecast data. So I would get everybody's forecast and I would type them all in. And he was just couldn't have been kinder to me. Well, he played a really instrumental role in my career as well.

Really? How was that? Well, when I started a company back in 1990, it was called Regional Financial Associates, and a big part of it was providing information to banks who were now because of interstate banking. Yeah, right. So they were trying to understand the housing and mortgage markets in places in the country where they weren't operating. And that's when Chip and Schiller had come out with their H-DI, their house price index.

Yeah, exactly. So I funded that, I, not fully funded, I partially funded the development of that in the beginning. Yeah, at the beginning. And we used it in our one of the, I think we were the first study that used it because we modeled, we took it, we modeled it, we produced forecast for it, that kind of thing. And then because of that experience, and he's, he's the greatest guy on the planet. He know, he was on the board of directors of MGIC, the mortgage insurer, the private mortgage insurer. Oh, right, right, right. So when he retired from the board, he brought me in and said, you got to. you've got to bring Mark Zandi in on the board. So I've been on the board since 2011 because of Chip Case. Hey, look at that.

He's a good talent scout. He picked you out. Great guy. He was such a great guy. And I got to know through Chip, I got to know Schiller a little bit better as well. And Schiller is the most interesting character. But I digress. We got a lot to talk about.

We got a lot of talk about. Let's move on. Let's talk about the economy. And, you know, three, four times a day, I get a very simple question. The question is, how's the economy doing? So, Austin, how's the economy doing? But don't you? The state of the union is strong.

You know, that's over. It's weird. It's weird. The state of the economy is weird. Unprecedented. There's a lot of uncertainty. But there is a lot of strength, too. You know, if you just look at the hard numbers by Fed dual mandate grounds, that is, law tells us,

stabilize prices, maximize employment. That's what we're thinking about all day, every day. If you take 2023, that's, I come in January of 23 to the Chicago Fed. Inflation still kind of raging out of control, got way, way up above target. And almost everyone is saying you can't get inflation down without a deep recession. You've gotten. Larry Summer's saying the unemployment rate is going to have to go above 6% for five straight years if you want to get inflation down.

If they had existed at that time in as advanced a form as they are now, like I say, if you had typed into Jet, GPT, how can we get inflation down? It would have said, jack the interest rate up and have a deep recession. That's the only way to do it. 23, among the biggest drops in inflation ever,

and the unemployment rate never goes above 4%. 24. Inflation continuing to moderate with unemployment staying in kind of this full employment sort of level. And there is a sense in which as we come into 2025, things are looking pretty good on the hard grounds in the hard data, which is different from the vibes, which we may want to talk about. Then we start throwing, in my view, lot of dirt in the air. We're going to announce terrorists. We're going to announce a bunch of things that I start hearing from the business folks out here in the Midwest in the 7th District. They're super nervous that this is going to take us back to a period where the supply chain is

disrupted and costs are going back out of control. But we haven't really. seen it yet in the data. And so then I started getting my, getting more comfortable with the idea of like, okay, if this is what the impact of tariffs is going to be, maybe the industry folks whose hair was on fire, they're now when I'm talking to them, they're a little less hair on fire. And they're saying, we got some exemptions. They put some stuff off. Maybe it's not going to be as bad as we thought, to which I was going to go back to, great. Rates can start. I thought before, if you is close to you star and Pye is close to Pye Star, then R should be going down to R star and that's where we were. Through dirt in the air, kind of complicated it. But maybe we can go

back to that. But we just, we can't get a break. I mean, now, now we're going to announce a new round of tariffs and we're going to raise it on copper and intermediate goods. And we've just got to get a handle on this part of the uncertainty before we can truly answer the question, how is the economy? Seems like in the hard date it's going okay, better than okay. It's going well. But if we every six weeks have to revisit whether we're about to have some big supply shock, that's messy at the least. So just to restate it back, just to make sure everyone understands, what you're saying is, look, the Fed, in terms of its mandate, is pretty much achieved what it needed to do.

We've got, we're back to full employment, the unemployment rates around four, a little over 4%. That's full employment. Inflation feels pretty good. It's not quite back to the 2% inflation target, but within spitting distance. Yeah, like on the path. On the path. On the path.

Coming down. Direction of travel. Yeah. Clearly. And, you know, if that's the situation, then you'd say the federal funds rate, the, the rate I control should be back to something that consistent. You said, our star, our star is that. Yeah, like a settling point where you think things are going to settle down. Exactly.

Where policies neither supporting or restraining economic growth. And we're above that now because of the fund rate. That's what I think. Yeah. Yeah. That's what I think. But then comes along. economic policy and you focused on the tariffs, but there's other stuff. And you're saying

your metaphor is dust in the air or dirt in the air. I threw all this stuff out there. And now I can't, I don't really know. I have to wait until the dust settles before I can make a decision around, you know, interest rates and policy going forward. That's kind of how I've been feeling. That's kind of how I've been feeling. And there is a, I gave a speech in January at the big auto insight symposium. They had been talking about tariffs. And, I outlined a, I guess it's kind of a hypothetical. I said, look, if they put in big tariffs, there is a theoretical argument that a one-time tariff that just raises costs, even if the tariff is permanent, that's a transitory inflation shock. So there is a theoretical argument that you

should just, in some ways, just ignore the tariff, the part of inflation that comes from a tariff. And I said the problem is going to, there are going to be two problems with that. The first is that's exactly the same logic that we used. I shouldn't say we. I wasn't there. Don't blame me. But that was the general logic that the Fed used coming out of COVID to say, hey, any inflation we get is going to be transitory because the supply shock part is going to be transitory. They're going to fix the supply chain. The demand stimulus is going to be transitory. It's going to be a one-time level increase. And it proved to last far longer than the theory said because the supply chain is more complicated and more spillover.

than we understood. So there's a threat of that with terrorists. And then the second is in an environment in which it's not a theoretical one-time platonic ideal of a tariff. But it's instead we're going to revisit in 30 days. We're going to up it again. We're going to do another. The threat is that it can jump.

out of its lane. So I, my starting point was always the U.S., as you know, is overwhelmingly domestically driven, imported goods, which are what the tariffs basically applied to. That's only 11% of GDP. So there is a sense in which even a pretty big tariff, is it going to be so big, it could be noticeable without being material at the macro level. It could kind of change relative prices without generating aggregate inflation. How does it get out of its lane? It's 11% lane. A, if it leads to retaliation, then it's automatically doubled its lane because now exporters are facing it.

B, if it's applying to intermediate goods and components and parts and supplies, now it just got out of its lane because it raised domestic production costs and that's going to flow into inflation. But the third and the biggest potential is if it leads people to freak out. If the chaos associated with unbridled trade wars leads business or leads the consumer to pull back, you can get a recession easily. And I've cited the example back in 2001. Everybody remembers that is the internet bubble popping. But the thing is, the internet wasn't big enough to cause a recession. that shouldn't have been mechanically a driver of recession. It was because of the freakout jam.

So those three things are the dirt in the air to me. And we just need to know, let's call it the argument is, one side says if the inflation's coming from tariffs, we should look through it because that'll probably be transitory. but how do you know are we going to be in an environment where inflation is actually rising whatever 3% 4% 5% annualized rate and the Fed is trying to decide which parts of that should we ignore and which parts not to ignore that's not an easy that's not an easy question yeah I like the freak out channel I hadn't thought of it that way the freak out channel I guess the one way the inflation from a tariff, and it is initially one-time pop to prices, can be metastasize more broadly is through inflation expectations.

Yeah, that's a good point. Right. And here it feels like it's consistent with the dust and the dirt and the air kind of metaphor because it's hard to read inflation expectations. There's so many different measures. There's expectations based on consumer surveys, University of Michigan, your Fed, conference board, there's bond market expectation, inflation expectations. How do you, and I assume that that's a key variable here in terms of your thinking about whether

the price increases from the tariffs are going to become more sustained, more persistent. If that's the case, how do you, what do you look at? What do you think about when you're thinking about inflation expectations? Look, that's a key concept. I agree. I have, before we ever got into tariffs before April 2nd, I have always been. I have always put more weight on market-based inflation expectations like tips measures or inflation swabs than I have of consumer surveys. And that's been even more true lately as it has felt

like a lot of the sentiment surveys, their relationship to the hard data has broken down a little bit or has gotten, they become more indicative of the respondent's political affiliations than they have about their true opinions about the economy in ways I don't fully understand. And I'm a big proponent. I love the University of Michigan survey is done in the district and their chief economists is on our academic advisory council at the Chicago Fed. So we've thought a lot about and have a lot of respect for what they do. It is the case that as the response rates to all surveys have gone down

and as they've shifted to the internet, there is at least some component that for whatever reason, people on the internet are a lot grumpier than people who are answering by mail. So there is some, you've got to try to separate out what is happening. If you see a drop in sentiment

or you see a jump in consumer expectations of what do they say inflation is going to be, how nervous should you be about that? I would characterize, this is the long way to say, I would characterize the market-based measures of long-run inflation expectations have mostly not moved, and that I take some comfort from. The short-run measures and the consumer measures went up pretty significantly, when, you when there was lots of public discussion of tariffs and how much they were going to cost. So in a way, I wasn't surprised that the more you read in the media about prices going up,

and then they ask you, what do you think is going to happen to prices? People started saying, oh, I bet they're going to go way up. And my only hesitation is, I don't, inflation expectations is a really important measure. But if you started to see expectations going up, now we're back into the realm of psychology. That's not exactly. Inflation expectations is not in the mandate for the Fed. The mandate is about actual inflation and actual employment. And the expectation-

It's in a reaction function. It's in our reaction function. That's what I was going to say. It is in our reaction function. it is a very good indicator, we think, of where inflation is going to be going and how hard it will be for monetary policy to get rid of inflation if it were to appear. But I am so far find at least comfort that it does not seem like the world thinks that the inflation shock is going to be a long run hit to the tariff. I think I mixed up the words, that the tariff is going to be a long run hit to inflation. Yep.

But of course, within inflation expectations is this reflection problem. It might be that the market believes there won't be inflation because they believe that the Fed will do whatever it takes if you see inflation going up, that the Fed will do the equivalent of raising the interest rate. Right. Got it. Got it. So just to paraphrase, information. inflation expectations as measured by market-based measures, like bond market measures, a little higher weight just because of the survey issues that are... That's what I think. Yeah. Yeah. Yeah.

And right now, certainly long-run inflation expectations embedded in bond market are pretty sanguine. They're pretty stable. Yeah. So that would kind of suggest that it's not, you know, it's an empirical question. We'll have to see how it goes. But right now it feels like the tariff increases will be more one-off than they would be persistent because of that dynamic. That's what I'm hoping. Yeah, right.

As long as you don't go look at the other expectations, if they are expecting big increases in interest rates. Yeah. And that's the way the market is translating why they don't think inflation is going to go up. Then you would want to think that through that scenario. Of course, that's not what's the case. Because if you look at interest rate expectations, it's for cuts, you know, a couple of years. It is for cuts, though. You're seeing.

Yeah. We're going to get into this discussion about. about lawn rates, I don't think that much of the increase in long rates can be explained by expected increases in inflation, long run inflation. So that's at least good. That keeps us grounded in reality. And like I say, before there ever was April 2nd, my headspace that I had expressed many times was this, hey, inflation's coming down. I feel like this is the path to 2% and we're at stable, full employment. So I have no problem in an environment like that thinking about where do we think the

ultimate settling point is of rates and let's start getting to it. It's just this, we're going to go into an environment where prices are going to start rising again. And when I'm out all the time talking to people in Michigan, I just got back from Iowa, above over in Indiana, if they're telling me our costs are out of control, our supply chain is disrupted, I'm going to be nervous. I got to wait until that noise kind of dies down, that anxiety dies down before I'm going to be comfortable that we are back on the old golden path, as I called it, to a stable soft landing. Got it, got it.

I want to, Chris, I'm going to bring you in the conversation just a minute, but we'll explore one other thing about the economy. You kind of gave the sense that the economy's, it's okay. It's doing fine, you know, came into the year very well. But let me push back on that a little bit. I mean, growth rates feel like they're throttling back. I mean, if I just look at real GDP, that grew, you know, almost 3% last year. That was a pretty good year.

Yep. And if you look at the first half of this year, and of course, we haven't gotten Q2 data, but if you look, take Atlanta GDP now, you know, it's 2-6. If Q1 was negative, you kind of average, it feels like it's half, the growth rate in the first half of the year's half of what we got last year. It's below the economy's potential. And you're also seeing consumer spending basically going flatline here since the beginning of the year. Job growth is slowing. Unemployment has arisen, but that might go to supply side issues, you know, labor supply. is and forces slowed. So when I look at that, I see an economy that, you know, it's not recession,

but dangerous warning signs. It sounds like you say. Yeah. I'm not dispute that. I'm not disputing that. The thing is the here's another case where the most obvious dirt in the air from tariffs discussion is on prices and things like that. But a second form of dirt in the air. air is there was a bunch of front running. And you see if you go talk to business or if you look in the data, people buying cars, buying iPhones before the tariffs come in, stockpiling of inventories. And that's some component of the drop in GDP that we saw in the first quarter. You see a big surge of these imports that kind of have yet to show up in the normal data. If you just get down in the weeds, if you buy.

buy a car that's made outside the U.S., the import part is a negative and the consumption part is a positive, and it's supposed to have zero impact on GDP because it wasn't made domestically. We kind of saw a bunch of negative, and we have yet to see the positive. So there may be just like a temporary accounting-based surge in the next quarter. and so that to me is just the same dirt in the air. We just got to step back and kind of average through. I like how you said of if the GDP now were right and then you average that with the first quarter, wouldn't that be a slowing?

Yeah, I probably would. If we came back with even the rebound GDP was below potential, then that would be more of a concern of growth. It does look like it's slowing. But I'm not yet ready to conclude that growth is slowing. You haven't really seen layoffs go up by a lot. The unemployment rate is still fairly stable. When I'm out talking to business, they're generally saying we're as steady as she goes,

economy, except that the uncertainty has us in a, as one of we, we had the big Fed listens event here at Chicago Fed, and a construction firm from Indiana said, we're calling this our pencils down moment. That it's like we can't go on to the next section of the test until we get some clarity of what are we doing. And I think that's the same uncertainty as dirt in the airport. Right.

Hey, Chris, let me bring you in the conversation. Yeah, I'm listening to this. What would you like to, what question would you like to post to Austin? I guess along the lines of. Be gentle. Be gentle. Yeah, come on, Chris. He's fragile, so you can tell that. So go ahead.

I'm curious to hear your thoughts about a tariff-induced, lags in the tariff-induced price increases, right? Yeah, yeah. It could be, you know, things look great now. Things look, okay, they're moving in the right direction, but there's certainly a narrative out there that businesses are eating a lot of tariff increases, now passing them on to consumers.

The high-end consumers are still relatively well in spending, so maybe we're seeing some growth there. but is there another shoe to drop and when do you expect assuming you know obviously policies that's what i'm going to ask you chris is there another look this is the key point this is absolutely the key point on the tariff question and mark i like that you said there are a lot of other questions going on too but on the tariff question it has been surprising the modesty of the impact of tariffs on prices so far. We've had three excellent inflation reports,

and one and a half months of those three months, I would say tariffs were kind of in place. If we got several, you know, a few more months like that, that if we found that the kind of the residual seasonality issues, that in the cues two, three, and four of the last several years, we've seen inflation moderate much more than was expected. If the impact of the tariffs is kind of smaller than that so that we basically don't even see a material aggregate impact,

that would be pretty notable. And I would kind of, that would persuade me, we're on the golden path. We never left it. It's fine. the dust is gone. Let's keep moving. But we just don't know. In a way, the previous argument was, we know prices are going to go up. One side is saying, you should ignore the prices going up because it's transitory. And the other saying, I don't know if we can ignore the prices going up. We might have to

wait until the prices come back down. I kind of think on the bingo card of nobody was prices don't go up. so we're just waiting for the shoe. This is sort of your, you know, the basketball game was last night and you taped it and you want to watch it. You're like, don't tell me, don't tell me. I don't want to know who won. Like, do we already know what's going to happen? And it's only because the data are coming out with a lag that we haven't seen it yet. I don't know.

That's the core question. So I don't know if you want to go here or not, and I'm sure you'll tell me if not, but fiscal policy. So the other, there's a lot of economic policy. We talked about tariffs. There's the immigration policy. There's doge cuts. There's also the recently passed BBB, big, beautiful bill, HR1 reconciliation package.

And, you know, my take on that is it, from a macroeconomic perspective, there's a lot going on there and there's a lot of impacts on different groups and different companies and businesses. But from a macro in aggregate perspective, it's not that big a deal. It doesn't juice growth. It doesn't weigh on. In the short run. In the short run. I do think there is a sense in which an economic stabilization terms, it feels right. Everything's Delta from last year. Right. And what's how much more or less does the deficit, get in 26, then it will be in 25, might be modest. Might be modest.

Over a 10-year period, it seems like it's three and a half trillion or something of fiscal stimulus, if you want to think of it that way. But the longer the period, it goes, the less direct and immediate impact. It has an economic stabilization front. and I kind of got out of the fiscal policy business when I moved over to the Fed. So as I always say, our motto is there's no bad weather. There's only bad clothing. That comes from our Chicago way.

And for the Fed, fiscal policy is just a weather. You know, those are the conditions. And we got to prepare the jacket. it. If you're afraid of overheating, hey, $3.5 trillion of fiscal stimulus that might make you nervous. If you're of the view, no, no, wait a minute, the economy seems like if anything, it's slowing, not overheating. And that fiscal stimulus part of that thing is spread out over 10 years and it's not going to be a ton at the beginning anyway, then it's more likely. irrelevant. Yeah, I mean, I was thinking that more from a kind of a current policy basis, you know, the, no, exactly. That's what I call the delta from last year. The delta from last year.

Yeah. But even in the long run, this neither adds nor subtract significantly to the deficit. But what we're left with are big deficits. So the deficit is 6% of GDP. The primary deficit excluding interest payments is 3%. We're at full employment. In full employment, you you know, you really should be at zero or even in surplus. This is, this is pretty bad stuff. I'm not saying this bill less as you're worse. This is pulling us into the, there wasn't time in my life when I was heavy into the fiscal policy business.

Okay, okay, fair enough. And I don't, that one, we just got to take it as given the conditions. I'm going to respond. With the one exception being to the extent that now there are people arguing, it's like they're advocating the fiscal dominance position. Yeah. The Fed should cut the rates to make it easier slash less costly to run more debt. Let's be a little careful with fiscal dominance. You know, as you know, there's a, there's not a great history around the world of fiscal dominance monetizing the debt as being

real consistent with the dual mandate. Yeah. Meaning ultimately that lines us in a bad place, generally inflation ultimately weak. That's what it is. Yeah. In the pure theory of the game of chicken between a central bank and a fiscal authority, I do think it's pretty important for the Fed's reputation and Fed credibility that we're not engaged in a, we're not pre-committing to that, ah, we're going to, we're going to, We're going to make it as easy as possible.

We should be looking at our mandate and committing to the world. What we do is we look at prices and we look at employment. And that's what the law tells us what we have to do. Got it, got it. We got about 10 minutes left, Austin. And I kind of want to think a little longer run if it's okay. Yeah. You know, a lot of your work before you joined the Fed Reserve.

was around you're an academic i one thing i didn't mention obviously you were a professor at the university of chicago's booth school and you did a lot of you've done a lot of great research in fact your paper on construction productivity in my world created a pretty big stir a couple of years ago uh yeah a construction productivity is real bad that's a whole that's really bad it's really negative negative productivity for decades yeah i still don't understand it but yeah yeah well it's generate a lot of, you probably missed a lot of what was going underneath in the construction world, in the housing world, but that really generates a lot of buzz. But I want to talk about artificial intelligence, if you're okay with that.

Sure. It's your take on, you know, this kind of, there's two, you know, I'm simplifying, but two views. One is a kind of a sanguine, very positive view. This is going to generate a lot of productivity growth. And of course, productivity growth is key to everything. make us rich. Yeah, make us rich. Yeah.

The other is a dystopic view that the productivity gains effectively are going to come on so fast. It's going to wipe out all these jobs. And we're going to be left with, you know, high unemployment. People just aren't going to be working. Do you have a perspective on that? How do you think about that? I get this question all the time. I'm closer to the economist view.

That's kind of the historically, the economist view is we've had hundreds of years of technological change and technological replacement of jobs. and over the medium, long, and oftentimes even in the short run, it'll be fine. We want productivity. It makes us rich. That's kind of the economist's view. And the technologist's view has been, you have no idea how great this is. This is the greatest thing that has ever been.

It's going to wipe out everyone. And we've been through a series of these over the last 10 or 15 years. You'll remember there was the, there will not. within 10 years, there won't be a single professional driver in the country. All trucks will be self-driven, all taxis, all driving of every kind. And that's one of the most common occupations. So get used to disappointment. I think the speed, you identified the key decider in that is how fast does it happen.

But it's worth remembering. previous general purpose technologies. I don't know that AI becomes one, but if it does, if it becomes like electricity, computers, telephones, et cetera, it's worth going back and looking at the adoption of previous general purpose technologies. It's not instant. And it follows a pattern where the productivity growth is extremely high in the generating sector itself and then with a lag to the heaviest users. And then only with even more lag does it spread to the rest of the economy? And Paul David had that really important piece on the adoption of electricity. And I think the dynamo and electricity, electrification of manufacturing plants was available by the late 1800s.

But even as late as 1925, literally 50% of, of manufacturing was not electrified. And that just kind of tells you there's a long tail of adoption, which might mean that the impact of this thing is not as rapid as the dystopic vision relies on. And while a large fraction of people have sampled LLMs, the actual penetration rate of regular use, usage is we're still a very, very early stages on this.

So we're just going to have to see how it goes. Yeah. Yeah, that makes sense. I think that's most macroeconomics kind of think in that way. That, you know, it says when you see a technology, even if it hasn't come to fruition, like a driverless car, driverless truck, you know it's going to happen. It's going to happen. We all think it's going to happen immediately.

Right. It's just so many frictions and so many. things that get in the way, slow things down. And that's what you're saying. That's what I think. That's where I think we are. So we're going to get those productivity gains. We're just, it's going to be, but if history is any guide here. And I gave this speech out at Hoover saying, here's some evidence. It presented some evidence that maybe AI is a little bit behind this surge of productivity that we've seen, even though that seems improbable because it's not big enough yet. But it was added the cautionary tale. If you get big productivity growth,

shocks that are forward-looking, you do got to be careful not to get way out over your skis counting on that. So if valuations go way up and businesses start massively investing, counting on the productivity gains that are about to be realized, and the entrepreneurs start spending money out of the wealth that they're getting from these valuations, you can overheat the economy in the short run and you can be due for a rude awakening if the even if what happened in 2001 is everybody counting on the internet growing at 20% per year then when they came in it was like well maybe it's only going to grow 5% per year we had all of this overhang of investment and that kind of sent us into the freak out channel so we want to

to be a little careful not over, getting over-exuberant about these productivity gains. Let's kind of make sure that they're there before we spend the money. Well, although this does feel a bit different, right? I mean, yes. Yeah, right? Can you go? Yes. It's a cousin. It's not a, it's definitely not a twin. It's not a twin. Yeah. Okay. We're running out of time, Chris. I'm going to give you the last question. So make it a good one. Okay. And that last one, I'll cut a little closer to home. What do you think about using AI to run monetary policy? Okay. Now, there's a Fed rule.

We can't, you can't put any secret Fed data into one of these things. And we're not supposed to use the output from an LLM for work purposes, unless it's adjusted. My thing is, and we talk about this a little, the AI is, as good as the training sample. And what we've experienced the last five years was totally unprecedented. I mean, we had a deep recession, which was not driven in any way by cyclical industries. It was driven by services. And we've had a big drop in inflation without an increase in the unemployment rate. And things like that, you've got to know something about the economics to predict. So as it was happening in 23. I started saying, wait, we might be able to pull off the golden path because

the economics of supply shocks are different than demand-driven business cycles. I'm a little nervous that the kind of the standard of what everybody says on the internet, which is in a way what goes into the training sample, that might not be that great. I could be proven wrong. But, and I don't, I come to it wanting it to work, but the, at least if it's the Google AI overview, it's frequently wrong. And so I still, I still think job security for central bankers is, is at least more secure than, than, than the biggest advocates of AI believe. And economists, Austin? You'd say, Economists, what's their job security?

I don't know. I don't know. You better improve your advice there. I know. That's where your job security is going to come from. There was a great study that I can't remember who wrote it. It just came out about a year ago where they took all the folks that contributed to the Philly Fed survey, that long-running survey. And I'm one of them.

And they did build a LLM that it was trained on their forecast. other information, but really economists. Yeah. Okay. Look, it could be that this thing is a revolution in forecasting. That'd be okay. But the judgment, I have a friend who's a prominent doctor. And one thing that a lot of doctors, the ones that have high patient care, they got to fill out their notes. And it's very onerous. And there are AI tools that, that there's a section in the notes they describe, which is kind of like presentation,

and then there's a section of, and what do you make of it? And this friend of mine described that the presentation and what might it be, it does pretty well. Like it is accurate. It'll listen to the patient and it'll give the summary, and she'll say,

oh, this was a good summary. of what I said and what the patient said, et cetera. And then when it's like, and what should you do? It's like 10% accurate. And that's the money part of the thing. The money part. I don't want to be prescribed, eat three rocks and, you know, have a Dr. Pepper. I know you got to go.

But one final thing in your bio, I think this is on a frontline interview I was looking at, that was in your Wikipedia page. You said, I want to be 80% Paul Volker, 20% Muhammad Ali. Yeah, I said that was my goal in life. Yeah, what was my goal in life? Can you explain? Well, look, but Paul Volcker was a real mentor mine and I worked with him through the financial crisis. So the alternative would be that you would aspire to be 100% Paul Volcker. Yeah.

But the I never took myself that seriously. And 20% like, I want to have fun. And okay, there you go. Yeah, little, little, uh, yeah, little taunting, you know, Never heard. Tunting the other reserve banks never hurt. Yeah, I agree with that. Hey, Austin, thanks so much. Hey, guys, what a fun conversation. And we never played the stats game. No stats game. You want to do stats game? Let's do stats game. We'll take one minute. My stat.

Yeah, what's your stat? You're never going to guess it. But I'm going to give you a hint. Okay. As of June 24th, 223%. That's the stat. Or 2.23. You said you're going to give us a hint. The hint was it was June 24th. So you have to know what came out on June 24th. No, you'll never get it.

So that's the day that the FHFA House Price Index came out. And as of that day, which goes up to. April. So the date goes up to April. And I think it's a repeat sales. It is. It is. It is. It showed house price inflation of 3% for the year. And we've had a whole bunch of discussion. You hear a lot of young people saying, my dad, you know, had only one job in our family. And he was able to buy a big house. And I can't afford a condo and housing is super expensive. the 223% is the relative price of housing compared to durable goods. Okay.

So it's been extreme rate. Right, right, right. For over the last, that was from December, December 2011. Okay. So for 14 years and even going back before, we had inflation less than 2%. Yeah. House price inflation was three and a half to four percent a year, and goods inflation was like minus half a percent per year. That's been true for 15 or 20 years in a row. And so here we got in 12 years, the relative price of housing is up 223 percent relative to TVs and peloton's and stuff. You buy at Costco. And part of that maybe is from, regulation, building regulations.

Part of that is from, I don't know what, but that idea that I think a lot of what people are striking out at when they say there's an affordability crisis, is they're actually noting a massive shift in relative prices, which is different from what the central bank is doing. The central bank is looking at the overall price level, but it doesn't have a, we have a two percent inflation target. We don't have an ability to target house prices and get house prices back down to the relative price they were in when your when your father was buying a house and whatever that was, 1965. And so if we were going to talk about that, I know you both know a ton about housing. And I was going to try to get you to explain to me, why is the relative price of

housing drifting up so dramatically over such a long period of time. Well, we'll have to get you back on. And, you know, you're right. There's like zero probability I would have ever gotten that statistic. Exactly. Exactly. No chance. No way.

That's your hit. Are you kidding? No, that was the only hit. So how good are you? Look, the Chad GPT would have got it. Uh, I'm not sure. Now, our co-host, Marissa, might have gotten it. Maybe.

You know, anyway. Hey, thanks so much, Austin. Yeah, you guys, this is a real treat. Thank you so much. Look forward to see again. Take care now. Thank you. And dear listener, with that, we're going to call it a podcast.

Take care now.