Economist Answers U.S. Economy Questions

[00:00:00] Speaker 1: I'm economist Austin Goolsby, president of the Federal Reserve Bank of Chicago. Let's answer your questions from the internet. This is Tech Support U.S. Economy. @TheChrisPringle asks, "How much money is in the Chicago Fed vault?" Asking for a friend, maybe myself, in the Chicago vault, in the many tens of billions at this moment, they'll probably get mad at me if I use the exact number. But there are vaults around the country. All the cash in the economy is distributed through our banks. We keep some for safekeeping in case there's a surge of demand. And then we run hundreds of millions in and out every day. Two banks and we're kind of their ATM. Our subreddit simulator. Is the Fed really just a private bank or is it secretly owned by the government? Seems like they print money whenever they want. The Fed is a part of the government, but it's not really of the executive branch. And the Federal Reserve Act tries to make the Fed as independent from political interference in the setting of rates as possible. It is true that the federal government can print money whenever they want. But judiciously, you don't want to just overprint money because it will lead to more inflation. It is kind of the role of the Fed to print money. It's printed by the Bureau of Engraving and Printing. And all the physical cash in the economy is distributed through those 12 reserve banks. It's worth remembering the Fed itself does a whole bunch of extremely important things in the financial system, which are more than just setting interest rates at this monetary policy meeting. One of them is we are almost literally a bank to banks. So they have an account at the Fed that are bank reserves. When they need cash for ATMs, they'll say to us, "We want an order for $20 million of cash." If they have too much cash, they'll send it in and say, "Deposit this in our account." So every one of the reserve banks is literally running hundreds of millions of dollars a day in and out. And we send out more than we take in. How does that work? The Bureau of Engraving and Printing prints new money that they send to us. So we try to reuse the money that is fit for circulation. If there are more orders than what we have fit, then we add the new money. The money comes in and it's in bags. Our people go in. They look at the bags. They run it through those machines. It counts it to make sure it's exactly what they said. If it's got dirt on it, if it's worn out, they shred it. It goes up the tube. It turns into this, little confetti shreds. People will often say, "Can I have a free sample of money?" And I usually say, "Yes, I'm going to give you $3,000." But it's a little brick of shredded money. If there's counterfeit, the machine kicks that out. It's got to go to the Secret Service. They investigate and try to find the people who are doing it. And we go deduct that from the account of the bank. If the banks send us counterfeit, they don't get credit for that. At Breezy10 Jenny asked, "This is a genuine question. But are gas and food prices ever going to go back down? Or is this our new normal?" Gasoline prices are extremely variable. They go up, they go down. If you get shocks like a war, and then if the war goes away, the price could go back down. But overall, the price level mostly does not go back down. It just slowly inches its way up. That's not all bad. And the Fed and most of the central banks have identified that they want to get inflation, that is how fast prices go up, down to 2% per year. That that's low enough that people don't really have to think about it on a monthly basis or a yearly basis, how much prices are up, but it's not zero, which can have some of its own problems. The way that economists tend to think about it is real income. So if your income goes up 20% and prices went up 15% over that same period of time, you're 5% higher real income, they call it. Your purchasing power went up. When you see a lot of reaction is when people say, look at how much the prices are up. And that's more than I'm getting salary increases. When real incomes are going down, they feel it and you get a lot of questions about affordability. The Prez next door. So when will mortgage rates go down enough so people can buy a home? Asking for everyone. We at the Fed don't control the mortgage rate. That's a 30-year rate. If you're going to get a 30-year mortgage, it's going to partly be determined by your credit. It's going to partly be determined by what the market says. And some component will be the short-term interest rate that the Fed does have an influence on. It's also important to remember that structurally in the U.S. economy, housing's gotten more and more expensive relative to goods over the last 20 to 40 years at a pretty steady rate. And so when you hear people saying, well, geez, you know, when my grandpa, he worked one job, my grandma didn't work. And look at the house they were able to afford. And I can't even afford a condo. That's not wrong. That plus mortgage rates being high. I think that's why people are really feeling the pinch on housing affordability. Now, there's a separate economics question. Why is housing so expensive? Look, as an economist, I think a big part of it is you want prices to go down, you got to build more housing. If you have restricted supply of housing, you know that's going to end up blowing back on you. By the way, on the topic of raising interest rates and people being angry when they see mortgage rates that are really high, I have a piece of historical evidence. The legendary Fed chair was Paul Volcker. He was most famous for being the Fed chair in the early 1980s when inflation was running completely amok. And they literally raised the federal funds rate, the thing that right now is around three and three quarters percent. It was over 20 percent. People started sending into him blocks of wood from two by fours. And this was the original one that they sent him. And it says, please lower these insane interest rates. So it's been a long time that people have been saying that to the Fed. I keep that in my office. What the Fed does is not a game. Just for the stock market to care about, it affects real people. Bogpoilups1234 asked best ways to tell if money is real and not counterfeit. At the Fed, when the money comes in, it goes through the machine. If the machine thinks it might be counterfeit, it kicks it out. And then a human being goes to look at it. There are security features in every bill that are how the machine tells and how you can tell at home. Here's a $100 bill. There's a strip. It's made of plastic. If that's just printed on like toner, that's not a good sign. The other thing, you can touch the money. It doesn't feel like paper. And if you get your thumb in the right spot over here on Benjamin Franklin, you'll feel some raised ridges. If you hold it up, there's a little watermark of Ben Franklin's head. If it's real money, you should see that. If you hold it under the light and wiggle it, this Liberty belt, the ink changes color on the 100. It'll go from green to orange. You can see there's a strip in there that shows up under black light. And if you have a magnifying glass, you can look on his collar and there's tiny printing. Extremely hard to reproduce in a counterfeit setting. That's true on 20s too. If you see those people that are in the movies, they lick it. Please don't lick it. If you go down and look in the machines at what's on the bills that get shredded, you don't want to be licking that. Caker's Got Swag asked, "Do banks actually have vaults with giant round doors like in TV shows and movies?" Our bank doesn't have a round door, but it has a really big door. The door weighs 80,000 pounds and it's got two round combination locks and they're kind of like our nuclear codes. Some of the people know one of the combinations and the other people know the other combination. But other than that, it is kind of like what's in the TV shows and the movies in that the money's in there. It's organized. When I first came to the Fed, I really wanted it to be like a big pile of money. And it was disappointing that it's very organized. If you go down to the vault and you look at one of those containers, it's a big cube. Obviously, it depends what the denomination is. But stacked to the brim of $100 bills, that's $42.5 million in one container. So T. Rose McCoy asks here, "Serious question. Can someone explain how lowering interest rates will negatively affect our economy?" Question mark, question mark, question mark. This gets at the heart of the tension in the setting of monetary policy. If rates are lower, people are more likely to buy a car, more likely to buy a washing machine, construction of houses. But the downside is if you get too hot from what the economy can handle, you generate inflation. So there's always a tension in the central bank over the course of the business cycle of trying to lean against the wind a little bit. The Fed, by law, has what they call the dual mandate, which is we're supposed to do two things when setting monetary policy. Maximize employment and stabilize prices. And usually those aren't in tension. One of the hardest things is when both sides start going wrong at the same time, which can happen. When oil prices start going up or you get stagflation-y shocks. The 1970s, it was epic stagflation with really high inflation and really high unemployment at the same time. There were moments when we literally had an inflation rate that was something like 13, 14% per year, simultaneous with the unemployment rate being almost double digits. That's kind of your central bank nightmare. Bez Yama asks, "So data centers are good for the economy?" Data centers, to the extent that they're enabling improvements in productivity, they're great. Now, at the same time, you also got to think about nothing's free and data centers cost a lot of money. And what you're seeing is the so-called hyperscalers building hundreds of billions of dollars worth of data centers. And so, everywhere you go, data centers are building out, the cost of land is going up. This idea that in the marketplace, people are competing over scarce resources and that can drive up costs, that's a real fear. And to the extent that the data centers are rooted in the future, that people are saying, "Hey, AI is going to be so big. We're going to be so rich. Our stock values are up so much that we should build out data centers as quickly as possible. And we should use the wealth that's embodied in our stock price to buy houses and yachts and whatever else we're going to buy." That can overheat the economy in the short run. That can make the inflation rate go up and people start saying, "Whoa, nothing's affordable. When I'm going down and trying to get somebody to come in and fix my electrical at my house, I can't get them and they're too expensive." That can be the consequence of a competitive economy. LifeWithLexie asks, "What's a recession indicator? The Pussycat Dolls coming back when nobody was asking for them to return." If the Pussycat Dolls coming back when no one asked for a return as a recession indicator, I'll look at it. But the best indicators are the labor market, the unemployment rate, the vacancy rate, the hiring rate, the layoff rate. And then if you ask for those indicators of the labor market, what do they say? They say the labor market is stable without being good is how I'd characterize it. What's weird is that these indicators are saying different things, but saying them with confidence and stability. The hiring rate is extremely low, stable, but low, as low as the hiring rate is and the depths of a recession. But at the same time, the layoff rate is also extremely low. And normally the layoff rate being this low would say the job market is booming. I think it's because there's a lot of uncertainty, so you've seen businesses pull back and say, "We're not going to get rid of anybody, but we're not going to hire any new people until we get some clarity of where things are headed." Ben Poe, 4987, "The Fed meets today. I'm picturing 12 robed elders standing in a circle around a floating pyramid with a glowing all-seeing eye. That's how interest rates work, right? Hashtag Illuminati." Yeah, it kind of is. It looks like this. We go into the room, the shades come down, so nobody can spy on what's going to be said there. There are seven governors who are fed political appointees from Washington, D.C. And there are 12 Reserve Bank presidents sprinkled around the country. And then there are some staff along this side who make presentations about the state of the economy. And that's where we decide on the interest rates. Of those 12 Reserve Bank districts that are spread out around the country, they've divided up the nation, circa the Federal Reserve Act of 1913. The Chicago Fed is here, heart of the Midwest. That's our district. But you see that each one of them has a regional character. And that's a kind of a magic genius sort of behind the Federal Reserve Act. It's not just controlled by the federal government running the entire monetary system of the United States. There's automatic, independent input that comes from the rest of the country. At the meeting, everybody gets to speak their piece. Day one is about the economy. And day two is about what do they think should happen to race. When all those speeches are done, then they have a vote on the statement. And everybody has had their input on the words and what they think should be. And then whoever the voters are at that particular meeting, and it rotates who's voting depending what year it is. They vote yes or no. There's a lot of effort made by the chairman and by the members of the committee to get on the same page. A lot of the votes are unanimous. Sometimes they aren't, and there'll be a few dissents. But for the most part, it's a lot of consensus. I am Dianniador says, "Gen Z confession. We're gaslit into believing we're bad with money. But no one can explain how a $17 per hour wage is supposed to support a $3,500 a month standard cost of living." This is the crux of the pressure that's on young people today. They're getting out of school. The hiring rate by businesses is very low. So where the rubber hits the road is for people whose wages are not rising with prices. And whenever you see that happening in U.S. economic history, that wage growth is below inflation, there's a lot of concern about the issues of affordability. Your feeling is not wrong in the data. And kind of the question there is why haven't wages kept up with the cost of living? There, it can be complicated in two spaces. One, the wage part is sometimes separate from the cost of living part. Cost of living, part of it is we took some heavy blows. We had COVID disrupt the supply chain, driving up the cost of stuff. Then we've got tariffs, wars driving up the price of fuel. Extra stimulus from building out data centers and AI that drive up the costs and increase the pressure in the economy. Those things can increase the cost of living. Then let's think about the other side of the equation, which is wages. Wages are, the economists usually think, are getting determined by what's the output, what's the productivity, what's the bargaining position of the employers versus the employees. We've seen that change pretty dramatically over the course of the pandemic and coming out of it as well across different industries. So overall, in most years, actually wages, on average, have grown faster than inflation. And it's good when that happens. But in some years, it hasn't. That's rare, but it has happened before. I think at two points in the 1970s, when we got serious oil shocks and inflation starts a spiral, I think those are both periods where you experience this unusual aspect that wages are rising, but prices are rising even faster than the wages. And the fear to the central bank, like the Fed, is that when that happens, then people can come back and say, hey, wait a second, last year prices were up 5%, so our wages need to go up 6%. And then the businesses say, oh, man, if our wages are going up 6%, we're going to have to raise prices 7%. And that wage price spiral, they call it, is really hard to get out of that kind of an environment. Here's a question from Quora. What's the economic equivalent of a check engine light? A sign other than inflation or unemployment that makes economists think, uh-oh. And I love this question because this goes back to my day-to-dog roots. What are we sniffing around to figure out where we are? Before every FOMC meeting, the Reserve Bank presidents are constantly out talking to people in their districts. And they compile all that information and put it out in the beige book. You can see it. It's public knowledge. If you start hearing the same thing from business leaders, from small businesses, from civic leaders in your district, that they're saying data centers are driving up the price of land and the farmers are getting hammered. And you start hearing that over and over. A lot of times that can make economists go, uh-oh, let's start paying real attention to the data. A longer-term think that I pay a lot of attention to is the productivity growth rate. High productivity growth is manna from heaven. It's what makes us rich. And what we've seen in the last two or three years actually is productivity growth stepping up from where it was pre-COVID. That would be fabulous if it's sustained. The Chicago Fed itself tries to combine real-time information, like we put out what we call the CARTs data, where we get private sector credit card information about what people are spending money on in total on their credit cards, and correlate it with consumer spending at the national level to give us insights in real-time about where consumer spending is going to go. And since consumer spending is 70-plus percent of the whole economy, any insights in that space are really important. The main driver of economic growth that kept us out of recession is the unstoppable U.S. consumer continuing to spend based on their incomes and wages rising. As long as the consumer remains healthy, I think the economy is going to remain healthy. The overall economy has been pretty remarkably stable. Prices and affordability, that's the biggest problem that we're facing right now. Demo64 says, "Honestly, I think I'd rather take the 2008 recession over whatever the boop is happening right now. At least they had $1 McChickens and Wii Sports and Lady Gaga." I got to be honest, I wouldn't take that. In the 2008 financial crisis and recession, I was working at the Council of Economic Advisors. It was horrible. Millions of people losing their homes. We're having 800,000 jobs lost per month. The unemployment rate is shooting up to double digits. And that was a really scary moment. There were a lot of people that I knew, economic research historians, calling me and saying, you should stop saying we're going to avoid the Great Depression because it's inevitable that this is going to turn into a depression. You should be saying you have a plan to get out of the depression. Look, I feel you on the McChickens. The biggest problem facing our economy right now is not the collapse of industry and the collapse of jobs. It's that the prices have been rising too fast. We got an inflation problem and people hate inflation. A Brandis asks, "Why is the U.S. stock market at all-time highs and climbing when there's so much economic strife in the world?" Because the stock market is not the economy. Let's say it again. The stock market is not the economy. And if you ever want the proof of that, go back to that day in 2020 at the start of the pandemic. I remember it was my mom's birthday. May 8th, they announced that there were 20 million jobs lost in a single month. The worst data announcement in the history of the United States. And on the day they announced that, the stock market went up. Why? Because the value of any company's stock is all the future profits that you think that company's going to make. You've got a lot of euphoria in the stock market about AI, about the prospects that they would make these profits. That has little to do with the economic strife in the world. It's based on the fundamentals of how much do they think these stocks are going to make going forward. And it's always worth remembering in the central bank, as I say, the job is written down in the law. Maximize employment, stabilize prices. It doesn't say anything in there about make sure the stock market is happy. Santa Zua says the dollar isn't backed by gold anymore. So who's to say any of this is real? In my world, the gold standard is bad, not good. Gold doesn't have an inherent value. It's driven by supply and demand. Money today is based on public trust in the governments that are issuing it. That the U.S. government will always accept U.S. dollars in payment of U.S. taxes means that our dollars will always have a value as long as you think that the government is not going to inflate them away or monetize the debt. It's Aleem 8 Zuber who asks if AI takes our job, how would the economy work? If it took everybody's job, the economy wouldn't work. But be careful, Aleem. There's an old fallacy. It's called the lump of labor fallacy. And it says all of workers are just a lump that can't move. There's a fixed number of jobs in the economy. And as soon as there's a machine or an AI or the computer that can do these better than people, everyone will be unemployed and will be doomed. And it's a fallacy because it's never been true. If AI comes in, it's going to affect different industries differently. But if you've looked in the past at technological changes, electricity, computers, the telephone, the internet, internal combustion engines, the unemployment rate hasn't gone to 100%. It's still 4.3% if they had told you when they invented the telephone. Here's how many phone lines there are going to be in the United States circa 2026. 400 million, 500 million phone lines. The people would have laughed at you. They just said, what? Oh, there's going to be more than one phone per person? It's going to be physically impossible because every man, woman, and child in America would have to be a phone operator pulling out cords and plugging them back in. It could never work. The fact that machines replaced telephone operators in America did not lead the unemployment rate to go up even in the telecom sector. It did change the nature of work. I think if AI takes some jobs, it will take the tasks in those jobs, but I'm still pretty hopeful and expectant that we're going to figure out how to keep people employed. So those are all the questions for today. Thank you for watching.