Chicago Fed President Goolsbee: Bar is higher for Fed action as we await clarity on trade policy

Summary of Austan Goolsbee Interview

Key Concepts:

• Tariffs (50% on EU imports, impact on Apple)
• Inflation
• Supply Chain Disruption
• Stagflation
• Monetary Policy (rate cuts, rate hikes, holding steady)
• Uncertainty and Consistency in Economic Policy
• Yield Curve (long end, short end)
• Fiscal Stimulus
• "Put Your Pencils Down" Moment
• Imported Goods as a Percentage of GDP (11%)

Impact of Tariffs and Economic Uncertainty

• Tariff Announcements: The interview begins by addressing President's tariff announcements, specifically a potential 50% tariff on EU imports and implications for Apple.
• Business Sentiment: Goolsbee highlights feedback from the Chicago Fed's "Fed Listens" event, where businesses expressed two primary concerns: aversion to inflation and a desire for consistency in economic policy.
• "Put Your Pencils Down" Moment: A construction company CEO described the current environment as a "put your pencils down moment," indicating that businesses are hesitant to make decisions due to constant policy changes and uncertainty.
  • This phrase signifies a pause in investment and strategic planning due to unpredictable economic conditions.
• Magnitude of Tariffs: Goolsbee emphasizes that a 50% tariff on EU imports is significantly higher than previous levels, potentially disrupting supply chains.
  • He notes that even a 10% tariff was considered the highest in 90 years.
• Supply Chain Concerns: High tariffs could lead to supply chain disruptions, potentially causing a return to rising costs similar to those experienced in 2021-2022 or during the 2020 pandemic.
• Potential Upside: Goolsbee acknowledges the possibility that tariffs could be a stepping stone to new trade deals and market access, but this is uncertain.

Monetary Policy Implications

• Short-Term Policy Response: Goolsbee suggests a "wait and see" approach in the short term, emphasizing that the bar for policy action (rate cuts or hikes) is higher due to the current uncertainty.
• Stagflationary Risk: He warns that tariffs could have a stagflationary impact, slowing output while raising prices, which would be the "central bank's worst situation" as it worsens both sides of the Fed's mandate (price stability and full employment).
• Data Lags: Goolsbee points out that economic data, such as inflation and GDP figures, are released with a lag, meaning that the impact of current policies may not be immediately apparent.
  • He uses the analogy of watching a sports game replay, where knowing the outcome beforehand diminishes the experience.

Yield Curve and Economic Conditions

• Long-End of the Curve: Goolsbee explains that the long end of the yield curve is determined by market conditions and reflects the overall state of the economy.
• Impact on Investment: Tighter conditions on the long end of the curve can affect investment decisions and consumer durable purchases.
• Fiscal Stimulus: He acknowledges that a large fiscal stimulus could influence the yield curve and overall economic conditions.

The 11% Lane

• Imported Goods as a Percentage of GDP: Goolsbee references the fact that imported goods constitute only 11% of U.S. GDP.
• Limited Macro Impact: He suggests that if tariffs remain contained within this 11% lane, their macroeconomic impact may be limited, similar to the tariffs of 2018.
• Vulnerability to Shocks: However, he cautions that further shocks could push tariffs beyond this lane, leading to more significant economic consequences.

Conclusion

Goolsbee's interview conveys a sense of caution and uncertainty regarding the potential impact of new tariffs and economic policies. He emphasizes the need for consistency and clarity to allow businesses to make informed decisions. While acknowledging the possibility of limited impact if tariffs remain contained, he warns of the risk of stagflation and supply chain disruptions. He advocates for a "wait and see" approach to monetary policy in the short term, while closely monitoring the impact of tariffs on prices and economic growth. The interview highlights the complex interplay between trade policy, monetary policy, and overall economic stability.