Recent stock market turmoil and disappointing July jobs numbers have put many commentators back on recession watch. And some have asserted that the Fed’s been too tentative about lowering interest rates. Austan Goolsbee, president and CEO of the Federal Reserve Bank of Chicago, spoke with CFO Brew about the likelihood of a recession, how recent events might affect the Fed’s calculus, and where CFOs fit into the whole picture.
This interview has been edited for length and clarity.
Some analysts have pointed to the recent volatility in the stock market as a sign that the Fed has been too slow to cut interest rates. What’s your take on that?
I have two takes. One is that the law tells the Fed what we’re supposed to look at, which is inflation and employment. It’s not about stock market gyrations. The Fed’s timetable is the real economy.
That said, I have for some time been saying that the real restrictiveness of the Fed—which is Fed funds rate minus inflation—is the highest it’s been in decades…And you do want to be careful being that tight. You only want to be that tight for as long as you have to be and if you think you’re fighting overheating. But if you look at the real-side economic data, this doesn’t look like an overheating economy.
Are you foreseeing more aggressive rate cuts in the near- to medium-term future?
As you know, I don’t like making promises or binding our hands before meetings, when we are still going to get a lot of information. That said, if you just look at the SEP [Summary of Economic Projections] and the dot plot, it’s clear that the vast majority of the committee believes that…inflation will keep coming down, that unemployment will rise but settle at some something like a steady state, and that there will be multiple rate cuts over the next 12 months…There’s more of an argument about the timing.
Some analysts have seen indicators that we might be heading for a recession. In your opinion, does that seem likely?
To contemplate scenarios where the real side deteriorates, you’ve seen some warning signs. The unemployment rate has slowly inched its way up now to a level that’s a little above what we think of as the steady state unemployment rate. We shouldn’t overreact to one month’s number. We should remember that there’s a margin of error on every monthly number…It’s worth getting a totality of the data, as maybe Chair [Jerome] Powell would call it, before you conclude something.
That said, recession is possible and the Fed needs to be, in our language, concerned with both sides of the mandate. We’ve been dedicated to getting inflation down, because that was a side that was way out of whack. The employment side and the job market have been so strong, we could afford to do that without thinking about the employment side. Now, I don’t think that’s true.
Are there any indicators of strength in the economy that pundits might be overlooking?
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GDP growth was relatively strong overall…The job market overall remains robust, and the productivity growth numbers were quite impressive that just came out…The most important aspect of the economy, and the strongest, is that real incomes are growing quite significantly, and, in a reversal to a 50-year trend, coming out of Covid-19, it’s been the middle class and below that have had the strongest real wage growth.
What would you want CFOs in particular to know about the current state of the economy?
To the extent that the CFOs are thinking about financing…I would reiterate, the Fed takes a long arc of view. Daily gyrations of the stock market are not the thing that drives that action on the economy itself.
This is an unusual recovery. That might not be surprising because it was an extremely unusual downturn that was not driven by cyclical industries, and it was accompanied with a major shift of what consumers were spending their money on, out of services and into physical goods. And so part of what makes this a difficult moment to diagnose…is that you’ve got a bunch of cross currents that people have never seen before that are themselves unwinding at the same time that…consumer spending is shifting back to services.
Are there indicators that the Fed uses when making its rate decisions that go beyond the major indexes?
We look at everything…There are the major series and the minor series of data. Before every FOMC meeting, we are out talking to many, many business leaders around the district, and we put out that information in the Beige Book…They’re not exactly data series; they’re more anecdotal impressions. And we’ve talked to a bunch of CFOs about how they see business going. The advantage of those contacts…is they’re more real time than the data. The data comes out with a one-week, one-month, or one-quarter lag, and the actual business people themselves don’t have any lag.
What are you hearing from CFOs recently?
They’re quite industry specific, overall. A lot of the sentiment has been “more of the same”: that it doesn’t look like recession, but it’s not booming. But there are numerous manufacturing folks who are strongly feeling this, what I’m calling this secular trend…of consumers shifting back to spending their money on services, and that’s having an impact on manufactured goods and the demand they face.
We write about Jerome Powell quite a bit here at the Brew, and we’re curious: What is Chair Powell really like in person?
I’m a huge fan…My mentor and dear friend was Paul Volcker himself, the GOAT of central bankers, and I know Paul Volcker was a big admirer of Jay Powell’s.
My context is from President Obama. I worked in the White House, and Obama had a kind of temperament that doesn’t get real hot and doesn’t get real cold. And I see a similar kind of thing with Jay. He’s also quite funny, which you don’t normally associate with a Fed chair.