CNBC's full interview with Chicago Fed President Austan Goolsbee

[00:00:00] Speaker 1: Steve Leisman joins us now with a special interview. Steve? Yeah, Joe, I think it's a good time to have Austin Goolsbee here, the Chicago Fed president. Austin, thanks for joining us this morning. And you can see that headlines are moving fast and furiously. Give us an idea how a policymaker like yourself views the incoming news and what's happening right now in oil markets, the outlook for inflation and the effect on the policy outlook. [00:00:23] Speaker 2: I mean, it's an intense moment. We got a lot that hangs in the balance. As you know, through 2025, we experienced another inflationary shock, people complaining about prices. We stopped making progress on the inflation front, and at best, it stalled out and started inching its way back up. So we've been waiting for that to have proved transitory, to have gone away, and to pile a new inflation shock on top of this, before that one has left the scene. This is going to be a tough moment. [00:01:04] Speaker 1: Austin, I'll just tell you that minutes before the president put out his truth social, I was about to come on air and talk about how the outlook for the Fed funds rate in December had now turned fairly decisively toward a rate hike, in addition to the idea that many of the Fed watchers, who I read every weekend and every day, were kind of capitulating in the sense that even in the face of a weak job market, the inflation story was going to be intense enough that the Fed was going to have to hike rates. What was your view, even before this happened, about the outlook for policy? [00:01:42] Speaker 2: Well, as you know, last year I was a voter and I dissented at the last meeting of the year because we did not have the data to show that inflation was going away. The argument that rates should go down in the immediate term was premised on that the inflation was going to be transitory and go away. I remained fairly optimistic that by the end of 26, rates could go down, but I wanted to see proof that we're back on an inflation headed to 2%. This definitely throws a wrench into the plans. We do need to see progress. Steve, as you know, when I'm thinking about what could lead inflation to turn into something more extended and not be temporary, one of the key mechanisms is if everybody starts expecting inflation is going to remain high and there's a lot of research work that documents that the price of gasoline specifically has a very high impact on individuals' expectations of what inflation is going to be over the next year. So to have already been operating at an inflation rate that was uncomfortably high and stuck well above the target and now to add something that might be a lasting gasoline price shock, I think this is, as I say, an intense moment and we have to hope that this does not prove to be a lasting impact on the economy. [00:03:21] Speaker 1: So the question becomes, how much weakness in the job market are you willing to look through in the fight against inflation? [00:03:29] Speaker 2: That's an interesting way to put it. I would point you to the framework when we did the monetary policy framework. We absolutely thought about the question, what do we do if both sides of the Fed's mandates start going wrong at the same time? And we outlined a process that we would follow. And we voted unanimously in favor of that, which said we'll look at which side is the deviation bigger and how long do we expect each side is going to take to get back to something acceptable. If you look at the unemployment rate, it hasn't gone up much, so the payroll job creation as an indicator of labor market slack I think is a little fraught at a moment when population growth and immigration and there are a bunch of question marks about labor supply. So I prefer looking at rates like the unemployment rate, the layoff rate, the hiring rate, the vacancy rate. Most of those have shown stability and are at levels that are closer to full employment than we are on the target on the inflation side. So at the moment, I think the inflation's got to be a little ahead of the employment. [00:04:49] Speaker 3: Hey, Austin, Steve asked you already and showed us earlier this whipsaw reaction at the Fed futures, you know, suddenly thinking that the odds were far more likely that we would see you all raise rates in December rather than cut. And that turned around really rapidly. Anyway, just erratic behavior. But it's everybody else just trying to figure out what you and your colleagues are actually going to do. Does your own mind follow this whipsaw pattern of like, whoa, we're going to have to hike rates or, oh, my gosh, we're definitely cutting. Does your mindset follow that or is it a much slower, steadier pace? [00:05:26] Speaker 2: No, no, that's not my mindset. Look, Becky, as I always say, the central bank's job is to be the steady hand. If you look at that kind of whipsaw pattern and just ask people, what do you think the next rate change will be? It's constantly up, down, over and around. And if you look at the actual rate, it's much smoother. It's the most important thing is to figure out the through line of what is happening. And that is what makes this a fraught but intense moment is nobody can tell us what's going to happen on the ground in the in the conflict in the Middle East and how long that lasts. If they are able to resolve these issues and there's not a permanent lasting impact on gasoline and energy prices, that will be a far more favorable outcome, of course, than if this is extended. And if we start to see that drifting into inflation expectations, you would see more of this rising long-term interest rates as people are trying to compensate for that. [00:06:34] Speaker 4: You know, Austin, it's almost like a Rorschach test. And we had Waller on. When was that, Steve? Was that Friday? Friday. God, it's only been, I don't know, seems like, yeah. Some people, and they're really smart people, they always come up with this, that inflation looks like it's anchored. They look at different things, spreads and things like that, Austin, and, you know, tariffs are one-off. What's happening now in the straight, that's a one-off. But overall, inflation seems like it's anchored. And then if the labor market isn't really sizzling, it seems like you're not going to get, like, a wage pressure inflation component. Is it anchored? And what do inflation hawks, what do they have that maybe someone who's not as concerned has? What are they looking at that makes them think it's really ready to be back to 4%? [00:07:29] Speaker 2: I don't totally know, and you know, I don't want to violate the rules. I'm not supposed to say what's in anybody else's mind on the FOMC or what the committee's going to do, just myself. I've been optimistic over the longer term and a little more pessimistic on inflation in the shorter term because it seemed to me that there were a number of things that could make this a repeat of the team transitory mistake where everyone assumed, ah, the supply chain will just fix itself real quick and the inflation will go away. So far, inflation expectations do seem anchored, but it's a little bit of the sunburn theory of inflation expectations. Once they start to go wrong, you're going to wish you put on sunscreen, it's a little hard to just put the cat, you know, once a cat is out of the bag, it's hard to get it. [00:08:26] Speaker 4: Wasn't there more, there was some, you know, there was throwing a lot of money at a supply-constrained world back then, too. I mean, I know you're, you know, you probably don't admit it. I think you're right. [00:08:40] Speaker 2: It's certainly not a twin. It's at most a cousin of that previous issue. I would say at the times when I've been the most pessimistic, have been looking at the components of inflation that aren't tariff-related, like services, that we got several months in a row of inflated services inflation, which couldn't be coming from tariffs and historically doesn't go away quickly. Those are the times that made me nervous. And the more that it was concentrated in goods and looked like it was a tariff thing that might be one and done, the better I felt. With this, the thing that's worrisome is gasoline scares people. [00:09:23] Speaker 1: I wouldn't know about that, Joe. I find it interesting that you do. Like forthcoming. Right. For Ohio. I'm not saying anything about any state. But what I want to ask Austin about is, Austin, we're looking at now a 30% probability of a hike by December. And we're trying to look further down the road to kind of smooth out some of the oscillations in the near term here. And that's been as high as 60%. So I'm just wondering, is a hike something that is in the arsenal in your mind of some way that the Fed might end up addressing this surge in oil prices and other inflation that may come from it? [00:10:04] Speaker 2: Well, look, Steve, you know, I always say, if you look in that room, it's a gigantic table, biggest table I've ever seen in my life. So everything is always on the table. We could be back to the environment with multiple rate cuts for the year if we see, if inflation behaves, we could see circumstances. I could see circumstances where we would need to raise rates if it was going a different way and inflation was getting out of control. The key is, historically, oil shocks have been a stagflationary direction shock. That is, make employment worse while at the same time they're making inflation worse. And that's a worse kind of shock. That's the most uncomfortable thing for a central bank to have to face because there's not an obvious playbook. It absolutely depends how it plays out and whether it's going to last or not last. [00:11:05] Speaker 1: You know, the work that I've done over the history of these things, Austin, is that there used to be a rule on this, which is you addressed the inflation. And that came from the 80s, where inflation was in double digits and really out of control. But since then, it's been very sort of, I guess you call it an economic state dependent, which translates into what the heck is going on around at the time. And to answer Joe's question, what the hawks, I think, have been saying is you look through tariff inflation, you've abided inflation above target for a long time, and that maybe you've reached the end of your rope on that and it's time to think about addressing the oil shock. [00:11:47] Speaker 2: I think I agree, but it wasn't a question. I mean, the thing from the 80s, be a little careful with the intuition that comes from the 70s and the 80s, because the U.S. was not nearly as big a producer of energy as it is today. So on the output side, if the price of oil goes way up and stays up, there will be at least some part of the U.S. economy that benefits from that. You'll probably start to see a significant amount of investment that would be coming from fracking and energy production. Whereas in the 70s, it was more like a purely cost shock that was having a worse impact on employment relative to inflation than it would today. [00:12:35] Speaker 1: Austin, you have one of the great research departments in the Federal Reserve System. So I wonder if you would share with us what have you asked your researchers to look at relative to what's going on right now so we can start thinking about what you're thinking about? [00:12:49] Speaker 2: Well, I'm trying to think through, A, this issue of what will be the impact. If we had an extended impact of higher oil prices, how long does it take before that starts showing up in greater investment than on the employment and output side of our mandate? Is this a thing that if it's a, let's call it a short-lived conflict in the Middle East and prices go back down, might we be stuck in the situation that consumers respond immediately, that gas is $4.89 a gallon in Chicago and that affects consumption? But the investment part takes a few months because they want to establish that before they go out and do the fracking investments and restart the wells, they want to be sure that the price is going to remain high. We're trying to think through those dynamics and what's the overall magnitude output effect of higher oil prices that might balance off against the inflation part. [00:13:53] Speaker 1: Austin, we really appreciate your coming and puzzling through this with us. I think every investor, every analyst, everybody watching is trying to figure out very much the kind of thing, struggling with the same issues that you are. Austin Goolsbee, thanks very much. Great to see you again.