Odd Lots - Austan Goolsbee on How This Cycle Turned Out To Be So Different

Episode Date: October 11, 2024

In 2022 and 2023, the Federal Reserve basically had one focus: defeating inflation. That's now changed. Keeping inflation at bay is still important, but the Fed is now attuned to labor market risks as well. On this episode of the podcast, we speak with Chicago Fed President Austan Goolsbee about how the US economy achieved something that almost nobody thought was possible: a marked decline in inflation without a major increase in the unemployment rate or a slowdown in economic activity. We discuss what actually happened to the economy over the last four years. What was the role of monetary policy in bringing down inflation? How much of the inflation turned out to be transitory all along? And what are the risks today, with the September jobs report having come in much stronger than expected? He explains why the Fed has shifted its priority and how he's thinking of risk management at this point in the economic cycle.Read More:Three Fed Officials Shrug Off CPI Report, Bostic Open to Pause Only Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox — now delivered every weekday — plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlots See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask, Alexa, play the Odd Lots podcast on Amazon Music. Bloomberg Audio Studios. Podcasts, Radio News. And welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway. And I'm Joe Wisenthal. Joe, how is your deep dish pizza? It was so good. You know, I actually don't know if I had ever really had a proper Chicago deep dish pizza before. But I went to this place, I think it was called Pequods.

Pizza? Yeah, Pequods. And they sort of burned the crust a little bit, which I really like, highly recommended. It seemed pretty legit, as far as I could tell. You definitely did the right thing because I just went back to the airport to hop on a flight. And I got to say, O'Hare is kind of even worse than I remember it. But anyway, in case you haven't figured it out yet, we both just got back from Chicago

where we interviewed the Chicago Fed president, Austin Gouldsby. That's right. First of all, Chicago is so nice this time of year. I love visiting Chicago. You know, we could have talked to Austin over Zoom or something, I guess, but it was great to actually go there, go to the Chicago Fed headquarters, and talk to the president of the Chicago Fed.

And what I have to say is, I think, an extremely interesting sort of moment for macro right now. Oh, it is so interesting. I know people overuse the term turning points, but I really feel. feel like this is a very specific moment in time where we thought the labor market was weakening, the Fed cut by 50 basis points, and then we had that blowout jobs report. And I have to say, we recorded this interview with Austin on Wednesday, October 9th,

which was the day before the latest CPI figure came out. Also, we recorded it right when the FOMC minutes came out. So not the best. planning in terms of timing on our part. But since then, we've had CPI come in ever so slightly hotter than expected as well. Yes, that's right. So as you mentioned, we recorded this Wednesday. You're listening to this presumably on a Friday. But even with the fact that like we couldn't talk about CPI, I think there's like really two things that make this moment interesting. And it's always interesting because we're never, you know, we live in a world of incomplete information on uncertainty. But the two things are really, and Austin talked about this in our interview,

the Fed has changed focus, right? For a couple of years, it was about inflation and getting it down, and now the risks are balanced. So that's a key thing that happened, and I would say that Chairman Powell's speech at Jackson Hall in August officially marked that moment of the pivot starting there. And then the other thing is like, okay, maybe there's this pivot, but things right now are still really uncertain. And we really don't know what's going to happen. And you mentioned the hot inflation number and the strong jobs report and all this stuff. So we're at a moment where pivot meets new uncertainty. Yes. And who better to explain some of that uncertainty than Austin? So why don't we go ahead and take a listen. Here's Austin Gulesby from the Chicago Fed.

Thank you so much for coming back on Odd Lots. Welcome to where the magic happens. We are very excited to be in Chicago. I have to say being in the Fed building, it's a gorgeous building, the architecture. Yeah, it's a landmark. It's great. Yeah. It's a It's over 100 years old. I heard you were celebrating the 100-year anniversary this year, right? Last year. Yeah, last year. Also, we probably could have caught up with you via Zoom, but it's just such a great time to be in Chicago.

Yeah, this is the moment. This is what all the hype is about. It's actually warmer in Chicago right now than it is in New York, which is kind of surprising. Okay, speaking of stuff that's warmer, we had a pretty hot jobs report recently. Nice transition. Yeah, thank you. I'm a professional. Okay, blowout jobs report. What does that mean for you? Did it cause you to take pause? Maybe think about that 50 basis point cut?

Well, look, you know my thing is always, let's take the long arc and find the through line. Yeah. Not overreact to one number. It's 60 days before that, we got a disappointing number. And you had people going on publicly and saying by the time of the next Fed, meaning they need to have 150. basis point cut. Then we get a positive jobs number. And then we have a positive job number. And then people are saying maybe we should raise. I don't fault the market. That's the market's business model. They got to react to every little Twitter and blip that happens. In my view, the Fed's not on a timetable like that. We got to take the broad view. So far, I think the broad view shows inflation come way down. The job market has. has cooled from overly hot to something like sustainable, full employment, where we would

like it to be. And if we could freeze it right there, that'd be a lovely picture. And so then the question is, can you freeze it there? Or is it going to get worse? If we got multiple months that showed big positives like what we just saw in the jobs number, that would alter my view, that would affect my view. but I don't think that I think people can take that too far from one month. That all makes sense to me, but I'm going to try to present the same question and attack it in a slightly different way.

I have a few of these. If I think about Chairman Powell's Jackson Hole speech, and I think about that 50 basis point rate cut in mid-September and totality, like the basic way I think about is like you at FMT, the Fed is trying to cut off the left tail of a hard landing. And things are in a good spot currently. The levels are good by trying to cut off that hard landing outcome with a sort of strong beginning of the rate cut cycle by going 50. Does that strong jobs report change at all how you think about the risks today of a hard landing? I'm in the data dog caucus, one of the core members of the kennel. So I'm never going to ignore any data point. I want all the data that we can get.

If you take a step back and look at the dot plot in the SEPs, they ask independently. We don't talk about it, but they ask independently, everybody, and the mass bulk of the dots say that the FOMC members think inflation is going to keep coming in close to the 2% target. They think unemployment is going to stay somewhere around full employment benchmark and that the Fed funds rate is 150, 200 basis points above where they see it settling down. So the broad mass of people think in the long run Fed funds would be two and a half to three and a half, you know, something in that range. And we're even with the cut, we're well above that.

So I kind of think that's by far the biggest information content. So focusing too much on the short run, I was kind of teasing the market, but I guess I'll tease you. It sounds like you have that same short run focus that whether it was 25 basis points at the first meeting versus zero or 25 versus 50 at the next meeting. and what does that mean for the meeting after that, that's smallish potatoes. The big picture is inflation is weighed down. Unemployment is up to a level that we're happy with, and the rates are well above what almost everyone on the FOMC

is saying they think is the steady state. And as I keep saying, you just got to think about your restrictiveness. And that includes me. And you've got to think about how. restrictive you want to be. If you got the dual mandate where you want it, do you want to have rates be that much higher than where you think they're going to settle? Or does that endanger the pretty picture? And so that's kind of where my head is. It's not even technical. There's a tic-tech argument that I would just remind people that, A, you know, we meet every six

weeks. Okay, so we're constantly going back over the data and forecast of what's to come to try not to get behind the curve, or if we get behind the curve not to be too far behind the curve, it's why the Fed is the tip of the spear for economic stabilization. And there was a meeting where we had a meeting and there was no rate increase. Let's say it was between zero and 25. There are no 12.5s, but if there could be a 12.5, it was kind of a 12.5 meeting. And then we have a meeting where there's an argument in the market is, are they 25 or they 50? There's no 37.5 move. I think I've joked about that on this very possible.

Over two meetings, 12.5 and 37.5 is a 50 point move. Okay. So over some longer period, it doesn't feel like if you're trying not to fall behind the curve, we move in discrete increments. And so I still think this taking a long view is the right way to think about what's happening. And I don't know why we don't do 37.5. Why isn't it continuous? Why can't we pick like 33? Like I don't.

What do I know? Is there a rule? Actually, I'm really interested in this question. I don't know you guys are the experts. The history is until the late 90s. And at some point people realize that's ridiculous. So I don't know. I don't know.

But I think maybe some of the confusion comes around because the Fed has emphasized data dependency so much in recent years. And data, by its very nature, is backward looking. And then we can talk about that. But then you get to turning points in the business cycle. and now it kind of feels like you're shifting more into, you talked about being behind the curve, it feels like you're trying to get ahead of something. And so I think there's that tension.

There is some tension between how much do you want to look back, how much do you want to look forward. You got to do both. If you want a soft landing, you can't be behind the curve. And the hardest thing, as I say, that central bank has to do is to get the timing exactly right, when they're moments of transition. It's why we meet every six weeks

so that you don't have to make one decision and figure out the thing. My only objection to the characterization is that to be data dependent, I do not think means you commit. I won't make any forward-looking judgments. I only want to look backward. I think it's a mistake to do that.

And especially because there are lags, to monetary policy and the lags, if anything, were even longer for this weird business cycle. And so if your decision rule was going to be, I'm just going to wait until we see, say, the job markets start falling apart before. Once we're in recession, we'll cut. No, exactly. By that point, it's too late to do anything about that. So I do think there's a risk management argument for being in a more nimble spot.

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Listen to leading by example, executives making an impact on the IHeart radio app, Apple Podcast, or wherever you get your podcasts. Since you mentioned lags, I want to ask you a question about that when the Fed started jacking up rates aggressively, one of the theories for why it didn't have a sharper impact on the economy is that so many households and corporations had in, say, 2020, first half of 2021 turned out their debt. And so there was not a lot of sensitivity to debt. The flip side of that now, and people have been writing about this, is that even though the Fed has now commenced a cutting cycle, that the weighted average cost of debt is probably going to rise in 2025, basically just mathematically, right? Because eventually that will have to be refied at higher rates and so forth. How do you think about that dynamic now when you're thinking about these legs, you're starting a cutting cycle, but at the same time, probably cost of debt is actually going to rise for a fair number of economic actors in this economy. You have remarked on this subject and thought it through. In my world, that goes into the economic conditions. And there are many things that have made this a hairy, strange time for central banks because the business cycle both down and up looked almost nothing like historical precedence.

This is one aspect of that. We've analyzed this specifically thinking about mortgages. So if I had told you the premise of your question, I 100% agree with, six years ago, if you said the Fed is going to raise 500 basis points in a single year, what is going to happen, I think most all economists would say, Yikes, there's going to be a major contraction, and it's going to be concentrated, autos down the tubes, consumer durables, bye-bye, business-fix investment, construction, all going to collapse because they're very interest rate sensitive. We didn't really see the economy go into the steepness of collapse that you would have expected. And so that brings us back to this question. it's kind of a twofold. Is there something about this unusual business cycle that makes economic activity less sensitive to the interest rate?

Or is there something strange about this moment that the lag effect is longer? And it can be both and they can run together. But in the case of mortgages, one of the things that has made monetary policy transmission less direct, is the fact that a vastly higher share of mortgages are 30-year fixed mortgages now than they were in 2005, 2009, whenever you want to look at. And so when they change the interest rate, in some countries, virtually all mortgages are adjustable-rate mortgages. So when their central bank raises rates, they bring out parents on the TV. The central bank is killing us. You know, our mortgage payment went up.

In the U.S., if everybody's on a 30-year fixed, in a way, that's just a delay. But it's a 30-year delay. So I do think that notion that there are companies that don't have a lot of debt, so they aren't as especially sensitive to the interest rate, that the term structure of their debt may be such that the average rates they're paying might even, even be higher as the Fed cuts, I think that's not a problem. That's just a fact. And we just need to understand it and see what the magnitude is. Let me ask you the same question in an extremely simplified manner. Yeah, but my question is going to be ultra simplistic. Can you explain to us in

excruciating detail what exactly you expect happens in the economy now as you cut interest rates? How does that cut get transmitted? Okay. As a general matter, the Fed has only one tool, really, which is a screwdriver that can tighten or can loose. And I always say, if your problem is a loose fender, that's great. If your problem is, can you make breakfast? No, you kind of can't do that with a screwdriver.

So the main channels of monetary policy impact on the economy, I think are on the real economy side, and they are on interest rate sensitive parts of the economy, like consumer durables, business fix investment, construction, things like that. Now, there are other channels of monetary transmission where there's a lot of argument, how important are they? and they are, well, if you change the value of assets, like the value of housing, the value of stocks, et cetera, is there a wealth effect so that consumer spending might go up as the asset values go up? Or if you contract and asset values go down, would that limit spending?

There's a dollar channel that if rates in the U.S. are moving relative to how rates are moving, in other places can affect the currency, and that could affect imports and exports. Those are probably a lot of the main channels. And it's always in the counterfactual what would be happening if we didn't do this. So to the extent that there's already a debt structure, or to the extent that we went through a business cycle that for the first time ever was not driven by cyclical industries but was driven by services because nobody could spend money on that. And services aren't especially interest rate sensitive. That's another reason why you might think monetary

transmission, the monetary transmission mechanism, which is actually a whole bunch of different transmission mechanisms, just looks different this time than before. Now, everything that looks different is not bad. Okay. In a way, this is frustrating that monetary. policy doesn't have the same impact. But at the same time in 2023, we hit what I called the golden path. Inflation came down almost as much as it ever came down in a single year, and there was no recession. And that never happened before. And so the unusualness of this thing sometimes is good. Well, this gets to my question, and I sort of wonder whether us in the media or you in economics are going to be cursed with debating the transitory versus not

transitory debate of 2022 for literally the rest of our lives. Yes. But at this point in, I guess, October 2024, okay, and we talked with you when you first started talking about the golden path, and that looks great. It's even more golden today than it was at the time we were talking. It's beautiful. But, like, why?

Like, how much credit, like, for, you know, how much credit do you give yourselves at the Fed versus, like, how much of it was things were weird and then got normal? I think mostly things were weird and then got normal. We made the mistake. And look, I made the mistake. I was in the declare. I wasn't on the Fed at that time.

But team transitory, I like many people in the market, thought it would be transitory. If we had it to do over, I think you would call it team supply shock. Okay. And therein lies the- Take the victory just with a slightly different name so that it doesn't apply. Yeah, I get it. Steve Leasman said, well, it turns out team trade. was right.

And there is a sense in which the language should have been about what's the nature of the shock that's happening, not the how long is that going to last? I was wrong. I thought if you get a supply shock, that's going to heal itself pretty quickly. It didn't. It lasted. The supply shocks we learned lasted a lot longer because if the ports are messed up and the chips are not getting produced, then they can't get cars. But then the people who are buying the cars to use for delivery, they're delayed. And so this supply chain having more steps in it ended up being a

bigger deal. Just real quickly on this point, though, if this is the story, then does that mean labor market strength now does not necessarily pose renewed inflation risk? Yes, does not necessarily. I agree. So let me finish two thoughts. Isn't it not a one, did the Fed have anything to do with it? That's kind of the question. If it was all supply shocks, then the Fed didn't really, yes, the Fed can't be blamed for the inflation going up, but then the Fed shouldn't take credit for it coming down. There is some component that as supply shocks heal, you get immaculate disinflation. I do think that the fundamentally different thing that happened this time than the last time we were getting supply shocks, like at the end of the 70s, is that the market expectations of inflation basically never went up.

In the 70s, as actual inflation went up, the expectations went up. And part of what made the Volker experience so hard is you didn't have to just slay the inflation dragon. You had to go convince everyone that we will hold this thing underwater for as long as it takes until it surrenders. And that's a brutal, that's a brutal process. I do think that the, that expectations stayed even as actual inflation. was almost double digits, stayed exactly at PCE 2%, as the inflation target said, was fundamentally the Fed making a promise. It may look bad, but we're going to get it back, and that the market de facto believed it. And that is to the Fed, is about Fed credibility. And I do think it made a big

difference. I want to ask one more question on the Golden Path and the interview we did with you about, I guess it was almost a little over a year ago, right? Like a year and a half. Yeah. In that conversation, you talked about housing costs coming down being essential to the Golden Path scenario. And yet, here we are, as we discussed earlier, mortgage rates aren't really coming down. In fact, some people expect them to, you know, either stay where they are or go higher from here. Shelter costs in CPI still, you know, kind of high. And, you know, kind of high. And, you know, how did we manage to get here without housing costs really substantially coming down? Okay. Now I'm afraid you're remembering, you know, each thing I said back from over a year ago. But my emphasis was about the shelter costs and the inflation aspect. And to our previous discussion, I had just given this speech at the Peterson Institute in which I said we were getting a series of very strong jobs numbers. Yet inflation was coming down. And I was arguing, don't lose sight of if you're getting positive supply shocks, labor force participation coming back after a severe drop, that is a supply shock. If you see the supply chain's healing, all of those would be reasons. And I wasn't

fully cognizant of the impact of immigration, that it was. going to have at that time. But all of those supply shocks mean don't just take at face value. If you got a big aggregate GDP growth number or you got a big monthly payroll job gain number, that doesn't mean, that doesn't have to mean that the economy is overheating. And if you're seeing inflation falling while that's happening and you know there are supply shocks, tone it back a little in the argument that it's demand overheating because this is just the inverse of the thing that made it so strange on the way up. That lesson, I kind of think, is a little bit applicable now, too, potentially. And the question that you asked, how do we do that

if inflation housing didn't come down? You said it was essential. Housing inflation has come down a bit, but the real answer is services inflation came down even more than we thought it would be able to. and goods inflation has come down and stayed down into the mild deflation that it was before COVID. And I kind of think that's how we did it. And the market rents say that it did happen. The inflation rate of shelter in the market is down to something like what it was before COVID. It just hasn't yet been fully reflected in the CPI, which I think it is. but every month it's not, we again say, what in the world is happening?

Yeah, we've been hearing that those Zillow market rent indices are going to feed through in the next three months for about two years now. For two years. I know. Some people have figured out of the math. I'm still trying to use them to negotiate with my landlord. I can say it's been mildly effective. Yeah, how did it work? Did it work?

A little bit. I think I managed to negotiate like a 10% increase down to a 5% increase. So I guess that's a win for New York. But since you've actually teed me off here on another question I have. Teed you off. Thank you. No, in like a good way. Oh, oh.

Not that. You set it on a tee. Housing starts, multifamily in particular, have come way down. And some people would blame the Fed, just in the strict sense that higher rates, project finance it comes down. Do you worry about the effect that that has on housing supply in the coming years and therefore on the effect of shelter inflation? A little. I mean, I do think we've seen that housing markets are complicated markets. And A, it's not just one housing market for the whole nation.

It's very different in different parts of country. And there's a supply and a demand component. But that's always true. Okay. It's always true that when the Fed raises interest rates, that the impact on housing demand, demand goes down because it's more expensive, but there is also a supply component. And now we add on top of it because we got so many people with 30, your fixed mortgages, there is on the margin a group of people who don't want to leave their

house. They say, I'm not going to move because I got a three and a half percent mortgage and I would have to have an 8 percent mortgage if I moved. So we have to think about that, but this is the only tool we have. We have balance sheet and interest rate, but it's basically just we can tighten, we can loosen. That's what we can do. I'm Francie Lacquan, an award-winning journalist.

And I've got a new podcast, Leaders with Francine Lacqua from Bloomberg Podcasts. I've interviewed everyone from Heads of State to fashion icons about the news of the moment. But I've always been curious who are these people as leaders. I don't think there's one right way to be a leader. Make decisions. A poor decision is always better than no decision. Listen to new episodes every other Monday. Follow leaders with Francine Lacroix wherever you get your podcasts. What separates good leaders from transformational ones?

I'm Jessica Chen, and in season two of Leading By Example, we'll sit down with executives like Grace Chen of Bertie Gray to find out. It's important to understand where you spike, but also really acknowledge where you don't and find people who can fill those gaps. Listen to Leading by Example, executives making an impact on the IHeart Radio app, Apple Podcast, or wherever you get your podcasts.

You mentioned the importance of inflation expectations earlier on. And I have to say, in the course of preparing for this interview, I think I did just a search on my phone of my inbox going inflation. And one thing that came up from yesterday was there is a J.P. Morgan note talking about the potential for a reflation trade. Now that the Fed has cut and China is stimulating, I know you're not in control of what Wall Street banks recommend their clients do. But it is kind of interesting that in the course of the Fed cutting interest rates, some people are pitching, well, inflation is going to come back in this

scenario. Look, don't believe everything you get in an email. And the market gives you actual estimates of what do they think inflation is going to be over the next year, over the next five years to five years after that. So there's some survey-based measures. And, and, and, and, and And there are market-based measures. You don't have to rely on a newsletter to say, well, is this a sign that expectations have become unhinged? I don't think, you are. Just look at the tips spread. Sure.

But the question is more generally, as you cut, is there the potential that inflation somehow comes back? Of course. And job of central bank is to be paranoid about everything. and that's why the through line is the main line. Overall, inflation's weighed down over a long period. And we had one bump in Q1 of this year, but you had six months where inflation was at or below 2%. Then we have a bump, and now we've had four,

I will see tomorrow what happens with CPI, but on the implied PCE, we've been coming in the new months at or below 2%. The only thing I'd say for the scare scenario that inflation's coming back is expectations for a five-year inflation are actually down if you think PCE inflation is like CPI minus two-tenths if anything, the expectations are that PCE inflation would be below 2% as it was before COVID. And the three-month actual headline has been like 1.5%. So there is now opened us a window that seemed inconceivable, not that long ago, where inflation is actually undershooting the 2%.

target. So it could be, it could come back and be high. It could come back and be low. And my, my, is it my read? Is my statement about doing a 50 basis point cut to start what looks to me like a cycle over a 12 to 18 month period is I think it's fine to have a demarcation when something has changed. And the demarcation is, We went through a long period. Since I've been on the Fed, we've had an almost exclusive focus on the inflation side of the mandate, as we should have. And now I feel like that's changed. Now we're back to thinking about both sides of the mandate, thinking about the tradeoffs,

and trying to stabilize the picture pretty much exactly where we are right now, that the new months of inflation are at 2%. and the unemployment rate is kind of stable around 4.2, 4.3, some measure of full employment. And when you're in that circumstance, you've got to think about both sides. You can't just think about inflation. This is good because we'll get one of those headlines, you know, Chicago Fed's Gould's to both sides. Yeah, this will be a nice, like, pithy headline. We cannot shoot out when this comes out on this episode.

But I take your point. I think the job of a central banker, as you said, to sort of be. paranoid. The risk management, it's always risk management. That's probably never going to change, right? It's always about thinking about risks. And as you mentioned, okay, maybe there's risks to both sides. Just to delve deeper on this, and it kind of relates to Tracy's question, if you're thinking about inflation risks, if, let's say six months from now, we come back and we're talking to you, and we'd love to visit again in the spring. If we're out here in the springtime in Chicago is only 14 days. Oh, yeah. It's the same in New York. And they're not in a row.

Okay. That's the only problem. We'll stick with fall visits. Yeah. We'll stick with auto visits. If an inflation were to be higher, like, you know, when you're like up at night and you're paranoid thinking as your job is, what would concern you? Is it the, say, China stimulus? Is it the wars that we're seeing?

Yeah. I was going to distinguish. Demand overheating is the kind of inflation that we want to be the most attuned to. Yeah. I'm paranoid about. But that's not necessarily either. That's not a supply shock inflation. That's much more complicated.

And so if you had war in the Middle East spreading to a big run-up in the price of oil, we know we've seen that movie several times and it stinks. You know, the original was bad and all the sequels are bad. It's a stagflationary impulse. and that's what would happen. You would get the economy turning sour and inflation rising, but it's not obvious what the central bank's response to a supply shock would be. For sure, you'd have to think through, is this a temporary or is it a permanent?

It's going to be uncomfortable, but that doesn't automatically mean the Fed should tighten or the Fed should loosen. and it would very much depend on conditions. So I'm thinking more on the demand, excess demand, and if you started to see that, then you'd have to react. And just right now, and I kind of, I tried to interject this earlier and didn't get it because you were completing a train of thought. But we have seen that right now. Maybe I was ignoring.

No, that's probably far. But, okay, we like saw like this. If the labor market continues strong, does that give you any, pause or anxiety about demand-driven inflation? It could give pause if, A, it's sustained, and B, you see it in all the measures. Okay. So that's the long. If you take now vacancies to unemployed ratio, hiring rates, quit rates, the UI claims coming in, all of the measures broadly have been showing a labor market that is cooling,

from a white-hot level to something like sustainable full employment. I haven't seen anything that is yet convincing that there's a new trend that we're not stabilizing at full employment, that we are, in fact, going back to white-hot overly overheated. But you never, as a core member of the data dog kennel, you will never hear me say, oh, data came in. Do you just ignore it? No, I don't ignore it. But it's only one data point. The data dog kennel.

Is this why you've sort of become the go-to Fed speaker on big data days? So I know you were on Bloomberg TV when that jobs report came out. Why do you do that out of curiosity? Because, you know, you put yourself out there at a time when. Why do you talk to the media? Well, no. I don't think I'm the only one. Especially sensitive days.

The thing is you are more interested in. opinion on the days when it is salient, like when the data come out. I feel like at moments of transition, like kind of this spirit we're in here, I feel like it behooves us and it is our responsibility in the Fed to give a description of, here's what we're seeing to remind people, we're not on a day trader's timetable. You know, the market is up, the market is down, Let's take the through line. I don't think I'm the only one going out. I certainly see my colleagues and I value their views quite a lot.

But I think an openness and transparency, this is the field guide to openness and transparency, talking about our reaction function and the data, not just releasing SCP dots. My takeaway is that Austin thinks that the market is too attuned to the short term and their before they need to remind us every single day. I'm running through my mind. Maybe let's pull down our business. No, no, no, don't do that. I have one more weird media-related question, though, but since you mentioned filibustering,

if you were going to filibuster this entire interview, like, say you had to speak for at least two hours. What would you talk about? I appreciate that you don't think that's what I did. No, you didn't. But I'm curious what you would talk about. would be the cash department at the Chicago Fed. And the way that we have a lot of money and this is a live operational bank. We are the bank to other banks.

And I would love to give you a further insight. We promise we will have Austin give us a very detailed breakdown of the cash ops here at the Chicago Fed. There's a follow-up episode to this one coming in the coming weeks, all about the Chicago Fed's cash operation. It's so great of Austin to give a little tease for that next episode. That was perfect. Can I ask one more serious question before we wind it down? But you talked about restrictiveness earlier in this conversation.

And, you know, I get where that comes from and people look at things like real yields and stuff. But if you look at stock market prices, we're recording this on October 9th. I think stock indices are at records again. If you look at credit spreads, those are like at multi-year lows. where is the restrictiveness? Because I don't see it in the financial parts of the financial market. Let me put it that way. I'd say two things. I told you. My focus is primarily on the real side of the economy. I think those are the biggest, most impactful parts of the monetary policy transmission mechanism historically. So I'm less of a fan of interpreting financial conditions indices as a measure of monetary restrictiveness or what monetary policy should do. Because in my view, it's got a major reflection problem that, let's say, the market, which is forward-looking, decides they think it's going to work, that there will be a soft landing, that rates are going to

come down because inflation has been tamed and is at 2%. Then equity markets go up, long rates would come down, and that would then be interpreted as a loosening of financial conditions, and it would be like, oh, you better stop cutting, you better raise. But that's just self-referential. So I think that's a little problematic. And the inverted yield curve for two years, which everybody has been. saying is an indication that there's about to be a recession, that's not normal.

It's not, if we go back to a regularly shaped yield curve, like we're in more normal conditions, that's not the end of the world. That's my view of restrictiveness is we set the Fed funds rate, we set it high and held it there for more than a year. And as inflation came down, the real Fed funds rate just kept going up past of tightening that is the highest the real Fed funds rate had been in decades. And so to me, that's where the restrictiveness is. All right. Austin Gulesby, thank you so much for coming back on all lots. It's great to see you live. And thanks for coming out to Chicago. Thanks for having us here.

Thanks for we're the guests this time. That's right. Joe, that was so interesting. And I really appreciate Austin sitting down with us for like 45 minutes and really explaining how he's thinking about these things. Austin is really game to chat. And he really likes it. And he really likes it. And I appreciate that he seems to enjoy it quite a bit, just sort of going back and forth and thinking things out and he's very energetic. You know, in the intro we talked about it is a very, this is a very interesting on a certain moment for macro. And of course, that's always true.

But part of what makes the moment interesting is that the last four years have been really interesting. And to this day, we're still trying to piece together the puzzle of why inflation surged as it did and why inflation came down as it did. Yeah. And going back to that tension between the data dependency and the sort of forward-looking stuff, it does feel to me like the Fed is trying to get ahead of something right now, which is slightly at odds with this idea of data dependency. But on the other hand, to Austin's point, if it's been a really weird business cycle, then maybe it makes sense to, you know, deviate a little bit and try new things and maybe try to be more forward-looking, getting ahead of labor market weakness. Totally. You know, I think it's interesting, too, this sort of revisiting of the transitory debate. And I think a very compelling point is just objectively, it might have made more sense to describe the whole thing as sort of team supply side. I've said this before. In fact, I think I asked someone possibly from the Fed if they regret kind of calling it transitory and if it should have been called something else. I think I remember who you asked.

Who did I ask? Well, it might have been an off-the-record conversation. Oh, oops. No, no, no, it's okay. But we can say our part, but we can't say who was. Okay. And it's funny because when I tell you afterwards who it was, it'll make it better. I feel so bad that you remember this and I don't. But anyway, it's funny that that came up again. Well, totally.

And then so like transitory to some people is a specific amount of time. Yeah. Well, it implies that it's going to be like fairly short-lived. So that was wrong. But the idea that it's still the big thing. So there's two things. Still the big thing is maybe, as we put it in the conversation, things were weird and then not normal, which is a big part of the story.

But also, and I think there will be a lot of debate about this question, as Austin put it, maybe why things got weird and normal, but then things didn't keep getting weirder and weirder is this idea of inflation expectations having remained well anchored, which is sort of a vindication of the sort of Fed's traditional approach to dealing with this. Or, you know, it's an ideal, it is a logical vindication. If you buy that, then that explains why, regardless of the causes of the inflation, the right thing to do is to hike so aggressively. Yeah.

All right. Well, lots to mull over for sure. And obviously, there's going to be more data coming out relatively soon. But shall we leave it there for now? Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Allaway. You can follow me at Tracy Alloway.

And I'm Jill Wisenthall. you can follow me at the stalwart. Follow our guest, Austin Gulesby. He's at Austin Gouldsby. Follow our producers, Carmen Rodriguez at Carmen Armin, Dashel Bennett at Dashbot, and Kel Brooks at Kel Brooks. And thank you to our producer, Moses Onda. And for more Oddlots content, go to Bloomberg.com slash Odlots.

We have a transcript, a blog, and a newsletter. And speaking of the newsletter, up until this week, it had been a weekly newsletter that came out every Friday. Starting on Monday the 14th, it will now be a daily newsletter. that Tracy and I contribute to. So go to Bloomberg.com slash odd lots, find it, and sign up for it. Daily newsletter of whatever is on our mind these days, whatever is interesting in markets, finance, and economics, go check it out.

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