Watch CNBC's full interview with Chicago Fed President Austan Goolsbee

Key Concepts

• Tariffs and their economic impact (inflation, supply chains)
• Monetary policy decisions in the face of uncertainty
• Stagflation
• The Fed's dual mandate (price stability and full employment)
• The yield curve and its implications
• Fiscal policy and its impact on the economy
• Fed independence

Tariffs and Economic Uncertainty

• New Tariff Announcements: The interview begins by addressing the recent tariff announcements from the President, including a potential 50% tariff on the EU and implications for companies like Apple.
• Business Reaction: Businesses, particularly in the Chicago Fed district, express concerns about the "non-consistency" of these announcements, leading to a "put your pencils down moment" where they delay investment decisions due to uncertainty.
  • Example: The CEO of a construction company stated they are in a "put your pencils down moment" due to the constant changes.
• Magnitude of Tariffs: A 50% tariff is described as a "completely different order of magnitude" compared to the previous highest rate of 10%.
• Supply Chain Disruption: High tariffs could disrupt supply chains and lead to rising costs, similar to the inflationary environment of 2021-2022 or the supply disruptions of 2020.
• Potential Upside: There's a possibility that these tariffs are a "stepping stone" to new trade deals and market openings, but anxiety remains about potential disruptions.

Monetary Policy Implications

• Short-Run vs. Long-Run: In the short run, the Fed needs to "wait for the dust to come out of the air" before making policy decisions. The "bar for action" is higher due to the uncertainty.
• Stagflationary Impact: If tariffs lead to stagflation (slowing output and rising prices), it creates the "central bank's worst situation" because it negatively impacts both sides of the Fed's dual mandate.
• Data Lags: Goolsbee emphasizes that economic data (price data with a one-month lag, GDP data with a one-quarter lag) comes out with a delay, meaning the impact of tariffs might already be occurring but not yet reflected in the data.
• Imported Goods as a Percentage of GDP: Imported goods are only 11% of GDP in the United States. If tariffs don't cause this percentage to significantly increase, the macroeconomic impact might be limited, similar to the 2018 tariff situation.

The Yield Curve and Fiscal Policy

• Long-End of the Curve: The market determines long-term interest rates, reflecting economic conditions. These rates can be causes or symptoms of economic changes.
• Impact on Investment: Tighter conditions on the long end of the yield curve can directly affect investment decisions and consumer durable purchases.
• Fiscal Stimulus: A large fiscal stimulus could push back against the tightening conditions on the long end, requiring the Fed to weigh these considerations.
• Financial Stability: Goolsbee believes concerns about the U.S.'s ability to finance its debt are "a bit overblown" because current interest rates are historically normal. He suggests taking a long view of rate movements.

Rate Cut Outlook

• Prior Outlook (April 2nd): Before the recent economic shifts, Goolsbee believed that if full employment remained stable and inflation continued its path back to 2%, rates could come down significantly over the next 12-18 months.
• Modified Outlook: Due to the new uncertainties, Goolsbee modifies his timeline to 10-16 months. He remains "hopeful" that the underlying economy is still strong and that rates could be "a fair bit below where they are today" if the tariff and uncertainty threats don't materialize.
• Avoiding Tying Hands: Goolsbee emphasizes the importance of not committing to specific rate actions too far in advance, given the evolving economic landscape.

Fed Independence

• Supreme Court Ruling: The Supreme Court's decision to insulate Fed members from being fired by the administration was discussed.
• Importance of Independence: Goolsbee reiterates the importance of Fed independence from political interference to prevent inflation.
• Future Fed Chair: When asked about the potential replacement of Jay Powell, Goolsbee states that as long as the new chair is "smart" and embraces the Fed's dual mandate, it shouldn't significantly change how the Fed operates.

Conclusion

Austan Goolsbee's interview highlights the significant challenges facing the Federal Reserve in the current economic environment. The uncertainty created by new tariffs and evolving fiscal policy requires a cautious and data-dependent approach to monetary policy. While Goolsbee remains optimistic about the underlying strength of the U.S. economy, he acknowledges the potential for stagflationary pressures and the need to carefully monitor economic data for signs of inflationary acceleration. The interview underscores the importance of Fed independence and the need for policymakers to remain flexible in the face of evolving economic conditions.