Federal Reserve Bank of Chicago President Austan Goolsbee says that three rate cuts are "in line" with his thinking, though he cautions the projections are not "forward guidance."
Goolsbee admits that inflation is where "we [the Fed] have missed." "The main puzzle has been about housing. We have got to get housing inflation coming down closer to where it was before the pandemic," Goolsbee says.
Goolsbee wouldn't say if a rate cut in June is on the table given how much data the Fed will get between now and that meeting, adding that he believes "we should never rule out or rule in anything when we've got a whole lot of data to come."
On the consumer, Goolsbee says, "The consumer has been a strong part of the economy." He highlights the data "has mixed our picture a little of how much consumer spending and what payroll jobs numbers we can sustain for a given rate of inflation has been mixed a little by the recalculation about immigration," pointing to new reports on how there was more immigration than expected since 2022.
When it comes to the balance sheet, Goolsbee says Fed Chair Jerome Powell was "spot on" when he said, "The decision to slow the pace of runoff does not mean our balance sheet will shrink, but allows us to approach that ultimate level more gradually." Goolsbee says he wants interest rates and the balance sheet runoff "on separate tracks." "Our decisions about the balance sheet are not decisions about rate and monetary policy," he adds.
00:00:12 Goolsbee talks "murky" inflation data and getting inflation to the 2% target
00:10:05 Goolsbee talks the consumer, boost from immigration
00:11:44 Goolsbee on the Fed's balance sheet
JENNIFER SCHONBERGER: Joining me now in an exclusive interview is Chicago Fed President Austan Goolsbee. Austin, thanks so much for joining me. Welcome back to the program. It's great to see you.
AUSTAN GOOLSBEE: Hi, Jennifer. Thank you for having me.
JENNIFER SCHONBERGER: Last week, Fed Chair Powell said during his press conference that despite hotter inflation data in the first couple of months of this year, he didn't feel that the overall picture for inflation has changed all that much. Do you share that view?
AUSTAN GOOLSBEE: I think I share that view. I think the big CPI and PCE inflation readings of January remained higher than we wanted them to be and higher than expected in February, but they did come down. We-- They follow on seven straight months of really quite good CPI and PCE readings. So we're in a little bit of a murky period. The overall-- It seems hard for me to view that the seven months previous to this-- the start of this year were just random. So we're in an uncertain state, but it doesn't feel to me like we've changed fundamentally the story that we're getting back to target.
JENNIFER SCHONBERGER: Setting CPI aside for a second because that's been running hotter than the Fed's preferred inflation gauge of core PCE. Core PCE sits at 2.8% as of January, and it's been falling by a tenth of a percent every month. We'll get a new reading on that metric this Friday. But do you expect that that trend could continue at that pace?
AUSTAN GOOLSBEE: Well, it better and let's hope we even start speeding up the improvement. We have to. I mean, 2.8 is well above our target as you know. We're going to get to 2%. We've always known it's going to take place over time. We're-- As I say, we're in this murky period where we've got to strike a balance of the dual mandate. The law gives us the dual job of getting as prices stabilized and maximizing employment. We've been in a restrictive environment I think. If you look at the real federal funds rate, that is the rate minus the inflation rate, as inflation has come down, it means that we're in a historically pretty restrictive territory, and it gets more restrictive as we hold the rates steady and inflation comes down, the real restrictiveness goes up.
So I think in-- with that level of restrictiveness, you will have to start paying attention to the other side of the mandate too if it goes for too long. And you saw Chair Powell discuss the employment side of the mandate at the press conference as well.
JENNIFER SCHONBERGER: I want to come back to that piece of the employment mandate in a moment. But sticking with inflation right now, the committee has projected inflation will end this year at 2.6% on core PCE, that's only 2/10 of a percent away from where we sit right now. Yes, the trend could be slower or bumpier than what we've seen over the last several months, but as you said, the inflation picture hasn't changed that much. Given that, What is the prospect that we could be at that level of 2.6% by the summertime?
AUSTAN GOOLSBEE: Well, the one thing to note is that the 2.6% would be averaged for this whole year. So the fact that we got two big readings in January and February mean that for the next 10 months, they will have to be a fair bit lower to get the 2.6 down by the end of this year. So I think there's a big difference between 2.6, 2.6 repeated for 18 months and what we've been seeing, which is more variability. So we were literally down at 2% for six or seven months at the end of last year. Now we've had two high readings and we need to see progress in that inflation coming down. That's the foremost thing on our mind, on the dual mandate where we have missed, as you know, has been on the inflation side.
The job market has been quite strong, but the inflation side of the mandate is where we've missed. And I continue to highlight the main puzzle has been about housing, that we've got to get housing inflation coming down closer to where it was before the pandemic. You've already seen goods come down to very close to where they were pre-pandemic, services still elevated, but not that much elevated higher than they were pre-pandemic, and the big outlier has been housing. I do think the market rents show that there is progress to be made, but we have yet to see that in the overall data. So I'm very highlighted about that issue.
JENNIFER SCHONBERGER: So still some room for improvement, obviously, but you did say that we're very restrictive here. So I'm curious, Is a June rate cut on the table?
AUSTAN GOOLSBEE: Well, as you know, I don't ever like tying our hands or signaling that we've made up our minds or that I've made up my mind before the meetings when we're going to get a lot of data between now and whenever that decision has to be made. You've seen the evolution of, everyone's thinking and my own thinking, when we had seven months of 2% inflation or even less, the committee statement ends up being fairly prescient to have added language that says, the committee needs to have more confidence that we're on the path to 2%. We then saw this uptick in inflation, and we just got to make sure that we're on trend.
We never-- we-- I believe that we should never rule out or rule in anything when we've got a whole lot of data to come and--
JENNIFER SCHONBERGER: But is it still possible, Austan?
AUSTAN GOOLSBEE: --multiple meetings and multiple months of data.
JENNIFER SCHONBERGER: So--
AUSTAN GOOLSBEE: Sorry, say again.
JENNIFER SCHONBERGER: But is it still possible that we could see June on the table? I mean-- Or is it off the table?
AUSTAN GOOLSBEE: Look, it's-- As I say, I'm not going to-- I don't want to get backed into speculating about what's not even the next meeting, but two meetings from now. Everything's always on the table or off the table. It all depends on the data and the conditions in my opinion.
JENNIFER SCHONBERGER: Let me ask you this. Three rate cuts have been penciled in by the median for this year. Is that in line with your thinking?
AUSTAN GOOLSBEE: That was in line with my thinking this time for the-- As you know, the summary of economic projections is not forward guidance, is not debated, we don't vote, discuss, deliberate on these future meetings. That's-- The things in the statement are what we discuss and debate. The summary of economic projections are individual projections, which we don't have any debate on. I was at the median for this one. And we'll have to see how the conditions develop on that.
JENNIFER SCHONBERGER: Doubling back on what you said in terms of the rate being restricted right now, I have here in my notes, the Atlanta Fed run some numbers using the Taylor rule. And three versions of that rule show that the Fed's target rate should be in the range of 3.9 to 4.7% right now. Do you subscribe to the Taylor rule? What are your thoughts on that? And, yes, I know we have room to improve on inflation. What about cutting now?
AUSTAN GOOLSBEE: OK. There's a lot of important issues in that question. OK. So the Taylor rule is a formula that looks at past history of the Fed and says, you plug in the inflation rate, you plug in the unemployment rate, you make some estimates of what the neutral rate of each of those would be, and it kind of spits out here in the past is how the Fed's has behaved. I'm a loose subscriber to the Taylor rule. But especially at moments where you've got oddities happening like supply shocks or things that make the current situation quite different from previous times that the economy's been in that circumstance, you just got to be a little careful with being too mechanically tied to let's just do whatever the formula says.
There are many Taylor rules, Taylor style rules, let's call them, and some of them are for lower rates, but there are also some Taylor rules that are arguing the rates should be higher. So all of those are inputs, let's pay attention to. But I don't think that a formula should convince us, aah, if the machine says, you know, that ChatGPT tells us we should go cut the rates right now or we should wait until next year to do it, I don't think we should be overly enthusiastic to embrace those rules because we know that 2023, for example, was extremely unusual, really quite substantial drop in inflation with no recession at all virtually without precedent.
Given that we just got through the year in which that happened, let's be a little circumspect of using the old rules to determine what the rate should be right now.
JENNIFER SCHONBERGER: And to your point, let me ask you about the pulse of the consumer right now because we did see retail sales come in a little bit more tepid. What's your sense of the strength of the consumer now and consumer spending as we go through this year? Do you expect any weakening?
AUSTAN GOOLSBEE: Yeah. I think you're right. I like that you used tepid. You've seen two to three months where consumer spending was weaker than it was expected to be. I mean, it's still-- The consumer has been a strong part of the economy and you've seen a lot of growth. I would highlight it's mixed our picture a little of how much consumer spending and what payroll jobs numbers we can sustain for a given rate of inflation has been mixed a little by the recalculation about immigration. So you've now seen the CBO and others saying there was a lot more immigration last year than they had initially calculated. And if true, larger population, there's no question about it, is going to lead to more aggregate GDP is going to lead to more aggregate consumption.
So I think we've still got to get a handle on when we're trying to make calculations that are not per capita that are about the aggregate, I think we've got-- we're going to have to pay a little closer attention to what was in the denominator as it were not just the numerator.
JENNIFER SCHONBERGER: And let me ask you about the balance sheet because last week, Chair Powell said that he thought it would be appropriate to begin slowing the pace of shrinking the balance sheet run off, quote, "fairly soon." Do you share that view? And how soon is fairly soon?
AUSTAN GOOLSBEE: Yeah. Look, I don't know the exact date. I do share that view. And I thought Chair Powell's-- the second part of Chair Powell's comment is also quite important, which is to say slowing the rate of the balance sheet runoff is not the same question as what will be the ultimate size of the balance sheet. And the issue that we want to pre-announce and approach in a regular-- in a regularized way, a slowing down so we can tell what is the point or where do we think the range of banks having ample reserves is because that's quite important for our rate control. So I thought the Chair was spot on from my view on what should happen with the balance sheet.
JENNIFER SCHONBERGER: And I know that rate cuts on a separate track from the balance sheet. But would you begin slowing that run off before cutting rates, or no?
AUSTAN GOOLSBEE: I would keep them totally separate. I think-- If you remember back in the bad old days where at every meeting it felt like the market is demanding to know, What are you going to do on balance sheet? And what are you going to do on rate cuts? that was confusing, it added a lot of volatility, I felt like. And I think it was an accomplishment to get on the balance sheet side, get it separate, and get it on a regularized path. And I felt with the Chairman's statement it was an indication in my view of correct policy. I think we want to get on a regularized path doing it a little slower as we get closer to the point at which the reserves-- the point at which reserves are ample.
JENNIFER SCHONBERGER: Real quick, Austan, I got to go. But--
AUSTAN GOOLSBEE: --we should keep that separate from rates. Yeah.
JENNIFER SCHONBERGER: Real quick, I got to go. But do you think one would come before the other, or it just depends?
AUSTAN GOOLSBEE: I think it just depends. Like I say, I want them on separate tracks. Our decisions about the balance sheet are not decisions about rate and monetary policy. I think it's important we keep those separate.
JENNIFER SCHONBERGER: All right. Well, Austan, thank you so much for your insight. It's great to speak with you. Hope to speak with you again soon.
AUSTAN GOOLSBEE: Great to see you, Jennifer.
