The Indicator from Planet Money - What keeps a Fed president up at night

Episode Date: April 10, 2025

"There's no bad weather, only bad clothing." That's the motto of the Federal Reserve Bank of Chicago, where Austan Goolsbee is president. As economic weather conditions stay unpredictable, Austan tells us how he's gearing up for tariffs, inflation, and more. Related episodes:The Fed cut rates ... now what? (featuring: Sasquatch) (Apple / Spotify)Tariffied! We check in on businesses (Apple / Spotify)A chat with the president of the San Francisco Fed (Apple / Spotify)Is the economy going stag(flation)?For sponsor-free episodes of The Indicator from Planet Money, subscribe to Planet Money+ via Apple Podcasts or at plus.npr.org.Fact-checking by Sierra Juarez. Music by Drop Electric. Find us: TikTok, Instagram, Facebook, Newsletter. See pcm.adswizz.com for information about our collection and use of personal data for sponsorship and to manage your podcast sponsorship preferences.NPR Privacy Policy

NPR. This is the indicator from Planet Money. I'm Waylon Wong. As some of you might know, I am based in Chicago. It's a city where the weather can be all over the place. Like, it briefly snowed this week, even though it's April. Weather outside is less than delightful, but not horrible. There's no bad weather.

There's only bad clothing. Am I right? That right. That's our motto, Chicago Fed. Austin Goulsby is the president of the Federal Reserve Bank of Chicago. And as you just heard, the bank's motto is, there's no bad weather, only bad clothing. That means the Fed does its job no matter what's happening in the economy. Well, the economic weather conditions are pretty unpredictable right now. We've been escalating trade war in huge

swings in global stock markets. So today on the show, Austin Gouldsby of the Chicago Fed tells us about some potential storm clouds on the economic horizon. You'll meet the stagflationary impulse and something called the freak out channel. And Austin also tells us why he's not freaking out. The last time I saw Austin Gouldsby was in December. Tariffs were already very much in the conversation. And Austin said then that tariffs don't necessarily have a long-lasting impact on inflation unless there's a retaliatory trade war or some kind of drawn-out supply chain disruption. Those seem like pretty big open questions right now as we watch the news. Like how are you assessing kind of each of those risks?

Yeah, I have some qualms. You're remembering everything I said. But I don't think that was wrong. I don't think that was wrong. I don't think that was wrong, you know, back months ago to highlight in pure theory, a one-time tariff is a one-time increase in cost. And the only problem with that analysis is, that's for the perfect theoretical tariff

that there's no retaliation and there are no supply chain disruptions that spill over from one industry to the next. And the problem is we went through a period in 2020 with massive supply disruptions. Everybody lived through that. Transitory became transitory and partly because if you can't get a computer chip,

you can't make a car. If they can't make a car, then the used car price goes up. If the used car price goes up and there are no new cars, then the rental car company's prices go up. And that kind of chain lasts a lot longer than the theoretical pure tariff.

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

you'd be crazy to do anything, to invest in any way for the next six months until you figure out what are the rules going to be. This uncertainty is making his job even harder. This is not that easy of a time to be a central banker, because at the end of the day, the law gives the Fed two jobs when setting my job, monetary policy. Stabilize the prices, maximize employment. When you get a stagflationary shock,

which is to say something that both reduces employment and increases the prices simultaneously, that's a kind of uncertainty that's not that pleasant. I just want to say, for the record, you said stagflation before I did. So is this something that is a topic de jour these days? Look, I call it a stagflationary impulse because if you back to the future style brought somebody from the 1970s when we had stagflation, the inflation rate was almost double digits and the unemployment rate was 7, 8, 9%. So if they came in a time machine forward and you said, we're worried about stagflation, unemployment is a little over 4% and inflation's in the twos. They would be like, we would love to live in that kind of stagflationary environment.

So let's be careful not to talk ourselves into a worse situation than need be. But it's directionally a stagflationary direction, which is to say big tariffs drive up prices and drive down economic growth. We talked about the transitory versus transitory debate over. inflation with COVID. What are your takeaways from that period as you think about the stagflationary impulse and kind of the new pressures you're seeing now? My fear has been, and what I hear when I'm out talking to people, is this anxiety that if the tariffs do come in place and are this big,

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

that we just went through. Do you also worry about inflation expectations if we're, everyone's still recovering from the trauma of this period you just described. Plus now you see on the news about tariffs, and I will say for myself, we're about to embark on a kitchen remodel, which feels completely curse. And I was going to ask you, like, should I buy my appliances now? And second of all, does this make you worry about inflation expectation? People ask me, well, what keeps you up at night? One of them is if the anxiety over the tariffs starts changing people's behavior, then

it can go through a channel. I call that the freakout channel. Oh, no, the freakout channel. We've now covered the stackflationary impulse. We've talked about the twin towers of terror. Now we're at the freakout level. Here's the thing about the freak out channel. It can be rooted in a completely rational behavior.

That front running and we're going to build up a stockpile of parts and components, as soon as you see a lot of behavior like that, it will start showing up in the aggregate data. Now you should be a little nervous because uncertainty tends to suppress businesses investing, tends to make people not want to spend money. If you start seeing people change their behavior based on these uncertainties, that makes the economy more complicated. And it should make you a little put you on edge. Oh, I am on edge. You're honest. Okay. Just remember, we start from a position of strength. The unemployment rate is very low historically. We worked very hard to get inflation from totally unacceptable to high level down to something close to the target of 2%. And the hard data remains pretty decent. If you started to see, The market-based measures of inflation expectations in the long run going up, that would be a very

disturbing sign. I think the Fed would have to act. So far, we haven't seen that. We have seen short-run expectations go up quite a lot, I think, because of tariffs, but long-run, they aren't. Oh, and as for my kitchen remodel, Austin wouldn't tell me whether I should buy my appliances now or wait. But he did say, if you do buy a fridge, make sure it fits in the new space. Which, honestly, great advice, trade war or no trade war. This episode was produced by Cooper Katz McKim. It was engineered by Harrison Paul and fact-checked by Sierra Juarez. Kate Kincahion is our show's editor and The Indicator is a production of NPR.