WSJ What’s News - Chicago Fed President Austan Goolsbee on Tariffs, Inflation and AI

Episode Date: July 20, 2025

This week we’re bringing you an episode of our podcast WSJ’s Take On the Week, where co-hosts Gunjan Banerji, lead writer for Live Markets, and Telis Demos, Heard on the Street’s banking and money columnist, cut through the noise and dive into markets, the economy and finance. Last Tuesday, and before the Fed entered its dark period when they don’t speak to media they spoke with Austan Goolsbee, president of the Federal Reserve Bank of Chicago and voting member of the 2025 FOMC Committee, to discuss the economy, inflation, tariffs, escalating trade wars and the Federal Reserve's approach to monetary policy. Goolsbee explains how the economic conditions and the Fed’s dual mandate of stable prices and maximum employment plays into his decision making on cutting interest rates. Plus, he discusses the potential for AI to drive long-term productivity gains but cautions against the risk of an "exuberance bubble" similar to the dot-com era.Further Reading:  Latest Tariff Threats Could Delay Rate Cuts, Chicago Fed’s Goolsbee Says  Learn more about your ad choices. Visit megaphone.fm/adchoices

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I'm Alex Osola for The Wall Street Journal. This is What's New Sunday. On today's show, we're bringing you an episode of WSJ's Take on the Week, where we dive into markets, the economy, and finance. Later this week, the Fed will hold its next meeting to decide on interest rates. Last Tuesday, and before the Fed entered its dark period when they don't speak to media, co-host Gunjan Banerjee and Telus Demos spoke with Chicago Fed Chair Austin Goolsbee.

They talked about the US economy's six pack of underlying strength, the impact of tariffs on inflation, what the Fed might decide at its meeting, and baseball. ["The New York Times"] Tell us, I feel like we've been wondering the whole year when we will start to see tariffs reflected in some of this inflation data. Well, we said back in April, was it?

I think it was April. It was a thousand years ago. Liberation Day. I think people were saying then that you really wouldn't see any price impacts from tariffs until the summer or fall. I don't know where you are, audience, but here in New York, it is definitely summer. And it seems like we are starting to see it

in the data a little bit. It's no more of this inflation. Is it in the room with us? Like it's kind of knocking at the door, right? We're having a hot inflation summer. Well, the temperatures outside are matching the always sweltering temperatures inside of our studio here at WSJ's Take on the Week.

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

So Austin, welcome. Thanks for joining us. Thank you for having me. So what are you hearing right now? What's your read on the Chicago economy? And does it tell us anything about the U.S. economy right now? Okay, the district, seventh district is more than just Chicago. It's basically 90% of Iowa, Michigan, Indiana, Illinois, and Wisconsin.

Danielle Pletka Wow. Pete Slauson It's kind of heart of the Midwest. We're the highest manufacturing intensity of all the districts and the highest auto production of all the districts. That historically means we're among the most cyclical of all places. And if you're cyclical because of the manufacturing and durable goods and things like that, we're a little bit the canary in the coal mine of the business cycle. So a lot of times we will, people will be interested in what are we hearing in the Seventh District because it's an indicator of where we are in the business cycle.

That got a little scrambled going through COVID because it was such a weird recession. It's been such a weird period coming out. That said, going into April 2nd, before April 2nd, hair on fire, especially in the auto industry, but throughout manufacturing, about yikes, if the tariffs are going to be this big, it's going to disrupt the supply chain. Then I would characterize over the summer, late spring and summer, the impact of tariffs wasn't as big as they feared. The feeling's been a little less hair on fire and a little more, hey, maybe we got some exemptions, maybe the tariffs won't be as big as we thought. There's not 100% pass-through. We're kind of cost-sharing, burden-sharing, as they described it.

So we were getting a little, I guess I would characterize a little more, maybe this is a sustainable equilibrium. And now I'm hearing more nervousness again that August 1st, another day's coming, we're going to raise tariffs on copper 50% back to the dynamic that was kind of the unfortunate dynamic around April 2nd. You open with my line that we're kicking dirt in the air, I thought coming into April 2nd, we were still on what I was calling the golden path where we're at stable full employment, inflation coming down to the 2% target. In an environment like that, I absolutely thought and continue to think if we can show

that we're still on that path, rates have a fair way to come down. They can come down a fair bit below where they are today. But if we just keep throwing the dust up in the air, then it makes it very difficult to make sure that you're still on that path. And you know, the law requires us anything that affects prices or employment. The law says we have to look at it. So that's that's where we are. So Wall Street, it doesn't seem too concerned, right? The stock market is at a record, despite some of the recent data that we've gotten on inflation. The market freaked out at the same time. Business and consumers seemed to be freaking out, which was Liberation Day and

after. And then the market began to recover, similar with the recovery of people that I was talking to. They said, yeah, I know. I said, you guys told me that it's going to be the end of the world. And inflation's been coming in modestly. And they said, yeah and it's not going to be the end of the world. We think this could be sustainable. And what I'm picking up now in real time, if you want to think of it that way, is if we're going to go back through the same cycle where, well, maybe tariffs are going to be massively higher than they were before. Maybe there is going to be 30 percent tariff put on Canada. And so now a lot of scrambling to figure out what are the rules going to be.

It's worth remembering imported goods are only 11 percent of US GDP. So there is a sense in which the US is overwhelmingly a domestically driven economy, and even substantial tariffs might not have that material and impact on the aggregate in the US. And the three places that you should be worried of how does it jump out of the 11% lane are, A, if there's retaliation from other countries, now you just spread it to all our exports, B, if you put the tariffs on intermediate goods and parts and components and supplies, now you just jumped it out of its lane and it's raised the cost of production for domestic

manufacturing. And then three, the most important, if people start freaking out, businesses and or consumers and change their behavior, then the impact of tariffs can get, can be a lot larger than just the 11% line. We seem to be making progress, it felt like, on all three of those fronts over the early summer. Less freaking out, more exemptions on intermediate products and parts and components, and backing down from the escalation and retaliation cycle.

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

seen in the data. Just the impact of tariffs, I do think you started to see it in the last inflation report. And in this inflation report, imported goods, you're starting to see pretty significant accelerations of inflation. The caveat and why it took us on a long journey about the 11% lane of imported goods is it's worth remembering imported goods aren't that big of a deal. And so the fact that we've continued to make progress on services and on housing, that's fabulous. That's what I want to see.

And it's entirely possible that if we don't overdo the price impacts of tariffs on goods, that the – I'll call it the residual seasonality that for the last several years, for Q1 inflation has bumped up, but the later parts of the year, we made real progress on inflation. And if that continues this time of a magnitude that kind of drowns out or overwhelms what's coming from tariffs, I would feel good. Like I say, I think underneath there is still that golden path and we just need to not get bumped off of it. We're gonna take a quick break.

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

My reference to what's encouraging in housing is that the inflation rate of shelter in the CPI, core housing inflation, has been moderating. And that was, for a very long time, the biggest puzzle was why has that been as persistent as it was? And there were, as you know, there were a bunch of arguments way down in the weeds of maybe it's how they're calculating it and the market measures, the inflation rate already fell, so maybe it's

just a matter of time before that starts to come down. That has been coming down and that tends to be a persistent component. So when you see improvement in the inflation rate on core services and core housing, that doesn't flip around as much as goods can. I do think that that transitions us into the important political dimension of what's going on here. The president and a lot of people around the president would like the cost of – would like mortgage rates to come down. And one pathway

that some people see towards that is that the Fed should be cutting rates. Do you think that there is a pathway to lowering mortgage rates through what the Fed does in its policy? And is that a sensible economic policy to you? The rules of the FOMC say I'm not allowed to speak for anybody else on the committee. I speak for the chair. I don't speak for the committee as a whole. Just my own opinions. That's all I'm allowed to talk about.

My observation, and you can go look at the minutes or you can go look at the word for word transcripts of the FOMC, what drives the interest rate decisions is exactly what it should be, and that is the economic conditions and the economic outlook facing the country. We have a mandate by law that when we're setting monetary policy, we do two things and two things only. We're supposed to stabilize prices and maximize employment. So do you think the Federal Reserve should cut rates at its next meeting? I don't like tying our hands before we get all the data and before I've heard what my colleagues say.

The most important thing at this, at the FOMC gatherings and for a central banker is to figure out the through line. So it's not about this meeting or that meeting or what, it's to figure out, okay, what is the path we're on? And if we had comfort, if I had comfort that we're definitely on the path back to 2%, then as I said, I think rates can come down a fair amount. If we have a meeting and then two days later, tariffs are scheduled to have a massive jump, and so everybody we talk to says, yikes, I think within a month after that prices are going to be rising significantly again then

We had to take that into account too and in periods of uncertainty You just got be a little careful Moving certain ways and then finding out that you're you're in the wrong spot So you've talked about this dual mandate right between employment and inflation What is your read on the broader economy and some of the jobs reports that we've seen? Pretty good. I mean, like I said, coming into April, I thought on dual mandate grounds was looking quite good.

We have an unemployment rate that's around a little above 4 percent, and it's been stable there for quite a while. To me, that looks like the kind of maximum employment, full employment baseline that we look for. And the worst thing that had faced the economy is no secret. It's that price inflation got out of control and we've spent literally years bringing that back down and I felt like it was to me looked like a path to get to 2% and the added bonus we've had a real surge of productivity growth in this country in the last couple years and that makes And that makes it, that makes everything better. That makes wages can grow faster without generating inflation. We can have more growth. We can

raise our standard of living. So that combination is pretty positive. And that's what I hope is underneath there. But I made the analogy. At one point, I hired a trainer at the gym, and the trainer said, ah, you can do this, you can do sit-ups, you can do push-ups. And I said, well, how much you lifting, how many sit-ups I got to do to get a six-pack? And the trainer politely said, everyone has a six-pack underneath. That was the beginning. And said, the problem is not how much lifting

that muscle does. The problem is getting what's on top of that muscle off of there if you want to get a six pack. And I kind of feel like that coming into April 2nd, there is a six pack of muscle in the economy. It's just we're layering things on there that make it hard to see that muscle, and I just want us to get back to that muscle. Well, you anticipated my next question, which is going to be about productivity, because I know you've talked a lot over the years about the role that that plays in the inflation picture. So maybe just unpack for us a little bit what's happening in the productivity of our workforce.

And the thing that jumps to mind for me certainly is artificial intelligence. So maybe just lay out for us like what you see happening in productivity and what, how that will or either will keep us on that golden path or maybe things that could move us off of that golden path in the productivity picture. Okay. As you know, you talk to the economists, they will tell you this is a single most important number that nobody talks about is what's the productivity growth rate. One of the reasons people don't emphasize the number as much as they do, as much as they do, say, CPI or jobs numbers, is it's also the noisiest number, among the noisiest of all the data series that we have. So if you key on, well, what did the data show this quarter, it's going to be all over the map.

Over a longer run, there are these productivity trends that can be significant and substantial. I started as a skeptic that it was AI because AI is just not big enough. But I will say we had folks here at Chicago Fed doing research, what industries had the biggest increase in productivity growth from before COVID to after COVID. And a large fraction of the ones that had the biggest increase are AI-related. They're in technology or they're big users of technology. And the good news about that is

if it is a technology-driven productivity boom, that can have legs because that doesn't happen right away. It spreads through the economy. Here's the only shadow. I won't say it's a downside. It's just a shadow. And we learned this lesson in the 90s. If the productivity growth boom is mostly in the future.

And everybody's anticipating these productivity increases. And the market is forward looking. And so they're giving massive valuations to productivity. They're counting on the productivity growth delivering. You can overheat the economy in the short run. You can get out far in front of your skis because suddenly the entrepreneurs are all rich because they're counting on trillion dollar improvements in the future. And we saw in the 2001 recession, everybody remembers

that as the internet bubble popped and that caused the recession. I was working on internet economics back at that time. It should have been impossible. The internet was not big enough to cause a recession. The adoption had not been enough. And the way it did was the exuberance of business investing and of consumers spending out of their newly acquired stock market wealth. As soon as the growth rate of the internet, it became clear it's not going to be 20% a year, maybe it'll be 5% a year, there was a huge overhang and a collapse of confidence.

So I just want to caution us on AI. Let's not repeat that bubble and bust cycle. So it seems like despite what we discussed about tariffs, you are expecting the US economy to make it through this path, right? Or you are expecting the US economy to not tip into a recession. It's got a six-pack underneath everything going on. I think it's got a six-pack under there and I just want let's show the muscle. People still credibly believe that the when when the Fed says we're

gonna get inflation back to 2% and you go look at what the market thinks the inflation rate will be in 10 years is basically 2%. So that hasn't moved. I find an encouraging sign that the world does not think tariffs are going to blow up everything. We are going to take a short break. And when we come back, we have one very important question for Austin Goolsbee. Ooh.

Summer is what you make of it and Tim Horton's fruit quenchers have something for every mood. So choose from a variety of fruity flavors in sparkling, frozen or lemonade. Order yours on the Tim's app today at participating restaurants in Canada for a limited time. What is one economic trend or blind spot that's keeping you up at night right now? If the question is what keeps you up at night, I always say that the job of the central bank is to be the night's watch and not sleep at night because there shouldn't be anything that goes wrong that we haven't at least thought through the possibility and worked out a scenario. Now that said, I think the nightmare scenario for central banks is anything that pushes us in a stagflationary

direction, which is to say employment gets worse at the same time inflation is rising. And historically we think of those as supply shocks, so if geopolitics start driving up the price of energy a lot, but now it's the thing that makes me nervous about escalating trade wars and tariffs is they can have that stagflationary direction too, that they can slow output at the same time they're driving up prices. And that's just not a fun place to be because there's not a there's not a well-established playbook of what should the what should the central bank do and in response? Thank you so much. This has been great. Thank you If you enjoy the show, please give WSJ podcasts a follow on YouTube

And that's everything you need to know for this week. This show is produced by Jess Jupiter, Jessica Fenton, and Michael LaValle. Additional support from Coleman Standifir. Michael LaValle and Jessica Fenton are our sound designers, and Michael also wrote our theme music. Aisha Al Mouzline is our development producer, Scott Salloway and Chris Zinsley are the deputy editors and Philana Patterson is the head of news audio for the Wall Street Journal. For even more, head to wsj.com. I'm Gunjan Banerjee.

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

as having picked a team? Is that something that you have to do as kind of the leading economic voice in the region? I can't profess allegiance to either team now, but I am going to throw the first pitch out at the White Sox game in August. Oh wow! Congratulations. Tellus has been waiting for an opportunity to bring a baseball. That's the main reason we call these, actually.