Now Less Optimistic on Disinflation Progress Says Fed's Goolsbee

0:00 Did you basically walk away from that thinking, okay.

0:04 Employment is off our worry list for right now.

0:06 Yeah, for the month.

0:08 I mean, it felt like a pretty stable month.

0:12 The unemployment rate is still holding kind of stable,

0:16 decently positive on the on the payroll employment

0:20 growth given the context of of where we've been.

0:23 So, you know, you never want to make too much of one month.

0:28 But but it wasn't a worry point for sure.

0:31 Well a couple months in a row now,

0:32 we've had decent job creation at an unemployment rate that is basically stable.

0:36 So, uh, is inflation the main danger right now?

0:40 It's I've been feeling that, as you know, my I'm optimistic fundamentally,

0:46 if we get some progress on inflation and we show we're headed

0:53 back to the to a path of on our way to 2% inflation,

0:58 I'm optimistic rates can go down.

1:01 We just haven't been having that now for some time,

1:05 and that's makes me more concerned.

1:07 And I'm less I'm less optimistic.

1:10 We've been above the 2% fed inflation target for five years,

1:16 and we were at least making progress for much of that time.

1:20 Last year we stopped making progress and the hope was the pause in progress was

1:27 going to be temporary as the tariffs increased

1:30 one cost one time and then went away.

1:34 Uh, that we would add now an oil shock

1:38 on top of things before the other went away.

1:42 So we're not really sure if or when that part is going to go away.

1:47 I think for me makes inflation the that's the topic of the moment.

1:52 We got to get some clarity within.

1:54 Where do you stand on the bias debate?

1:56 Uh, you didn't join in.

1:57 Uh, you weren't a voter, so you couldn't, uh, you couldn't vote to dissent.

2:01 But, uh, do you support or are you sympathetic to that idea?

2:05 I look before I ever got to the fed.

2:09 I was always a little skeptical about the value

2:14 appropriateness of using forward guidance to begin with, saying

2:18 things that the committee doesn't think it's going

2:22 to do X thing for some number of months,

2:27 or committing itself to two actions well,

2:30 in the future, I think that can that can be unwise

2:35 to use at moments where we're not at the zero lower bound,

2:39 when the that kind of behaviors really started,

2:42 when we're at the zero lower bound, when you can't change the rates.

2:48 Uh, now, we're not in that in that circumstance.

2:52 I usually don't get too worked up about the exact

2:57 wording of the statement in of, of this kind of form,

3:02 because we don't know what the conditions are that the committee

3:05 is going to be facing at even at that next meeting,

3:08 much less multiple meetings in the future.

3:11 Um, so, uh, let's just take a step.

3:14 Take a step back and take a deep breath.

3:18 To the extent that incoming chair Walsh says he

3:22 wants us to think about communications in the statement,

3:26 he's expressed some not regrets, but some reservations,

3:30 let's say, about the use of forward guidance.

3:33 I'm pretty sympathetic with his view.

3:36 Well, is a decision by most people to leave the bias statement

3:41 in, as it was basically sort of not tying the hands of the incoming chairman.

3:46 I don't know, you know, the rules.

3:49 I'm not allowed to.

3:50 I can speak only for what I think,

3:52 not for what anybody else thinks or what's behind their votes.

3:57 Um, I don't see how you can look at the current situation, and at least to me,

4:07 view that the only thing that's on the table, conceivably, are rate cuts.

4:13 Inflation's been above the target for five years.

4:17 Stalled out.

4:18 The progress stalled out last year.

4:20 In the last 3 or 4 months you've seen it deteriorating.

4:24 The inflation rate is rising.

4:26 The new data that are coming in are worse than the than the months before.

4:30 And you're seeing it in categories where it's not supposed to be.

4:34 If it was just tariffs or oil prices like core services um inflation.

4:40 So I'm I'm still hopeful that that's going to prove temporary.

4:45 But we if we start to see a deterioration of inflation expectations

4:52 and the unemployment rate and the job market looks stable, I don't.

4:58 I think for all credibility of the fed,

5:02 we have to be paying attention to the inflation

5:05 rate when it's deteriorating and going the wrong way.

5:07 Well, let me ask you about, uh,

5:09 what you think of expectations right now, because in his last press conference,

5:13 Jay Powell noted that we'd had this series of supply shocks and that people

5:17 were maybe getting used to the idea that inflation is normally this high.

5:23 Yeah.

5:23 That's bad.

5:24 I mean, if we start to see that in the data, as you know,

5:27 we've got a long history in the United States and in other countries that if

5:33 people begin assuming that inflation is going

5:36 to continue at higher than than desired rates,

5:39 it becomes a lot harder to get rid of the inflation.

5:44 And it puts the central bank in a in a lot tougher.

5:48 Do you think that's what people are thinking these days?

5:50 I hope not, but the in in history when the price

5:55 of oil specifically price of gasoline very public price when it goes up,

6:01 there is a lot of consumer level expectation that responds

6:06 to the price of gasoline in kind of an outsized way.

6:09 So before it showed up in the data,

6:11 as soon as the war began and the price of oil surged,

6:15 I said I would not be surprised if

6:18 we saw a significant deterioration of consumer confidence,

6:21 which we then did see.

6:24 And we better keep an eye on the on the inflation expectations,

6:29 because a lot of times it has had its lowest Michigan numbers ever today.

6:34 Uh, but if you raise rates, it's not going to open the Strait of Hormuz.

6:39 It's not going to be tariffs.

6:40 So great.

6:41 So is that a viable strategy at this point or are you risking,

6:47 uh, demand destruction?

6:48 Yeah.

6:48 You are risking demand destruction.

6:50 And, you know, you're just restating rediscovering what makes stagflation shocks

6:57 among the worst things that a central bank has to deal with.

7:02 Because if you face a negative supply shock that destroys

7:06 employment and drives up prices at the same time,

7:10 raising the rates doesn't solve your problem.

7:12 Cutting the rates doesn't solve your problem,

7:14 and leaving your rates where they are doesn't solve your problem.

7:17 So the monetary framework that we passed unanimously.

7:23 In it, we thought about, well, what will we do if we get shocks that are

7:27 hitting both sides of the mandate at the same time?

7:29 And we said quite reasonably.

7:31 We'll look at, well, which side is deviating more,

7:35 and how long do we think the deviation is going to last?

7:38 I still think that's the reasonable way to to think about it,

7:42 but I will emphasize,

7:43 as I say, the job market has been stable for a year, year and a half.

7:49 The part that is deteriorating,

7:51 and what has moved me from optimistic about rate cuts to less optimistic,

7:57 is that inflation alone is getting worse.

8:01 It's no it's not even stalled out in progress.

8:04 It's getting worse.

8:05 Where is the job market has been stable.

8:07 So I, I kind of think by the criteria we

8:11 we outlined in in that framework review, we got to it.

8:15 It behooves us to take a serious look at what's happening on the inflation side.

8:20 What we assume a week from today there will be a new

8:23 chairman of the fed and away from policy in terms of policy making.

8:28 There are changes he wants to make.

8:30 Uh, let me run through a few of them and see what you're thinking.

8:33 Uh, one of the things he's concerned about is the dot plot in the Sep.

8:37 And the fact that, uh, everybody focuses on the median.

8:40 Would you be in favor of eliminating or changing either one of those?

8:45 I could be I mean, I'm going to be interested to see what,

8:49 uh, presuming he's confirmed as chairman.

8:51 See what he proposes.

8:53 I've written, uh, in past years about some dissatisfaction

8:58 that I've had about the the release of the dot

9:03 plots and the ways in which it doesn't help

9:06 to identify what the reaction function is of the committee.

9:10 So, uh, uh, I think that Kevin Warsh is going

9:14 to come in with a lot of new ideas on monetary policy,

9:19 on balance sheet communication, and those I think it's good.

9:22 We need let's let's have some let's have

9:25 some new ideas and think those wrote well.

9:27 The balance sheet, of course, is the big question.

9:29 He wants to bring it down.

9:31 There's a couple different ways you can do it.

9:33 Uh, do you think the balance sheet needs to be smaller?

9:36 And if so, uh, how would you go about it?

9:39 I don't know, but needs to be smaller.

9:43 Can't can't be smaller.

9:44 Depends in large measure how you conduct monetary policy, as you know.

9:50 But in the older days, up to 2008,

9:54 we conducted monetary policy mostly through open market operations.

9:59 Now we've shifted to this, as we call it, the ample reserves regime.

10:03 We pay interest on reserves.

10:05 That's a different way of doing monetary policy.

10:08 And it's corresponds with a bigger balance sheet.

10:11 Uh, that than the old way.

10:13 You could do it any number of ways.

10:15 And like I say, it's not it's not my position to weigh in and say,

10:20 I want us to do it A, B or C direction.

10:24 Uh, I'm interested in seeing what,

10:26 what the new chair has in mind and evaluating that.