Bloomberg Audio Studios, podcasts, radio news and now to the West Coast Bloomberg and TV and Radio. International economics and Policy correspondent Michael McKee is out there catching up on the sidelines of the Hoover Institution Monetary Policy Conference at Stanford University. That's where we find him sitting down with the President of Chicago Fed Austin Goolsby.
Thanks guys, and thank you very much Austin for joining us taking time out from the conference here. Obviously we all got up early to watch the jobs report here come out at five thirty Pacific time. Did you basically walk away from that thinking, Okay, employments off are worry list for right now?
Yeah?
For the month, I mean, it felt like a pretty stable month. The unemployment rate itself holding kind of stable, decently positive on the payroll employment growth given the context of where we've been, so you never want to make too much of one month, but.
It wasn't a worry point for sure.
Well, a couple of months in a row now we've had decent job creation and an unemployment rate that is basically stable. So is inflation the main danger right now?
It's I've been feeling that as you know, Mike, I'm optimistic fundamentally if we get some progress on inflation and we show we're headed back to the to a path of on our way to two percent inflation, I'm optimistic rates can go down. We just haven't been having that now for some time, and that makes me more concerned and I'm less I'm less optimistic. We've been above the two percent fed inflation target for five years, and we were at least making progress for much of that time.
Last year we stopped making progress.
And the hope was the pause.
And progress was going to be temporary as the tariffs increased one time cost one time and then went away, that we would add now an oil shock on top of things before the other went away. So we're not really sure if or when that part's going to go away. I think for me makes inflation the that's the topic of the moment.
We got to get some clarity.
Well, then, where do you stand on the bias debate? You didn't join in. You weren't a voter, so you couldn't you couldn't vote to dissent, But do you support are you sympathetic to that idea?
I look, before I ever got to the FED.
I was always a little publicly skeptical about the value slash appropriateness of using forward guidance to begin with saying things that the committee doesn't think it's going to do X thing for some number of months, or committing itself to to actions well in the future.
I think that that can.
Be unwise to use at moments where we're not at the zero lower.
Bound when you were.
That kind of behavior really started when we're at the zero lower bound, when you can't change the rates. Now we're not in that in that circumstance, I usually don't get too worked up about the exact wording of the statement of this kind of form, because we don't know what the conditions are that the committee is going to be facing even at the next meeting, much less multiple meetings in the future. So let's just just take a step,
take a step back, and take a deep breath. To the extent that incoming chair Wash says he wants us to think about communications in the statement, he's expressed some not regrets, but some reservations, let's say, about the use of forward guidance.
I'm pretty sympathetic with.
His view well as a decision by most people to leave the biased statement in as it was basically sort of not tying the hands of the incoming chairman.
I don't know, you know the rules, I'm not allowed to. I could speak only for what I think, not for what anybody else thinks or what's behind their votes. I don't see how you can look at the current situation and at least to me, view that the only thing that's on the table conceivably are rate cuts. Inflations have been above the target for five years, stalled out, the progress stalled out last year. In the last three or
four months, you've seen it deep deteriorating. The inflation rate is rising, The new data that are coming in are worse than the months before, and you're seeing it in categories where it's not supposed to be if it was just tariffs or oil prices, like core services inflation. So
I'm still hopeful that that's going to prove temporary. But we if we start to see a deterioration of inflation expectations and the unemployment rate and the job market looks stable, I don't I think for all credibility of the FED, we have to be paying attention to the inflation rate when it's deteriorating and going the wrong way.
Well, let me ask you about what you think of expectations right now, because in his last press conference, J. Powell noted that we'd had this series of supply shocks and that people were maybe getting used to the idea that inflation is normally this high.
Yeah, that's bad.
I mean if we start to see that in the data. As you know, we've got a long history in the United States and in other countries that if people begin assuming that inflation is going to continue at higher than desired rates, it.
Becomes a lot harder to get rid.
Of the inflation, and it puts the central bank in a lot tougher.
Do you think that's what people are thinking these days?
I hope not.
But in history, when the price of oil, specifically price of gasoline, very public price, when it goes up, there is a lot of consumer level expectation that responds to the price of gasoline in kind of an outsized way.
So before it showed up in the data, as soon as the war began in the price of oil surge, I said, I would not be surprised if we saw a significant deterioration of consumer confidence, which we then did and we better keep an eye on the on the inflation expectations because a lot of times.
It has open its lowest Michigan numbers yep.
Ever today but if you raise rates, it's not going to open the strait of Hormuz.
It's not going to be agree.
So is that a viable strategy at this point or are you risking demand destruction?
Yeah, you are risking demand destruction, and you know you're just restating slash rediscovering what makes stagflationary shocks among the worst things that a central bank has to deal with, because if you face a negative supply shock that destroys employment and drives up prices at the same time, raising the rates doesn't solve your problem.
Cutting the race doesn't solve your problem, and leaving your rates where they are doesn't solve your problem.
So the monetary framework that we passed unanimously. In it, we've thought about, well, what would we do if we get shocks that are hitting both sides of the mandate at the same time, And we said, quite reasonably, we'll look at which side is deviating more and how long do we think the deviation is going to last. I still think that's the reasonable way to think about it. But I would emphasize, as I say, the job market has been stable for a year, year and a half.
The part that is deteriorating, and what has moved me from optimistic about rate cuts to less optimistic is that inflation alone is getting worse. It's not even stalled out in progress, it's getting worse, whereas the job market has been stable. So I kind of think by the criteria we outlined in that framework review, we got to it behooves us to take a serious look at what's happening on the inflation side.
Well, we assume a week from today there will be a new chair of the FED and away from policy. In terms of policy making, there are changes he wants to make. Let me run through a few of them and see what you're thinking. One of the things he's concerned about is the dot plot and the SEP and the fact that everybody focuses on the media. And would you be in favor of eliminating or changing either one of those?
I could be.
I mean, I'm going to be interested to see what, presuming he's confirmed his chairman, see what he proposes.
I've written.
In past years about some dissatisfactions that I've had about the release of the dot plots and the ways in which it doesn't help to identify what the reaction function is of the committee. So I think that Kevin Walsh is going to come in with a lot of new ideas on monetary policy, on balance sheet, on communication and those.
I think it's good.
We let's have some Let's have some new ideas and think those through.
Well.
The balance sheet, of course, is the big question. He wants to bring it down. There's a couple different ways you can do it. Do you think the balance sheet needs to be smaller? And if so, how would you go about it?
I don't know about needs to be smaller, can be smaller depends in a large measure, how you conduct monetary policy. As you know, in the older days, up to two thousand and eight, we conducted monetary policy mostly through open market operations. Now we've shifted to this, as we call it, the ample reserves res GIM. We pay interest on reserves. That's a different way of doing monetary policy, and it corresponds with a bigger balance.
Sheet than the old way.
You could do it any number of ways, and like I say, it's not my position to weigh in and say I want us to do it a B or C direction, in I'm interested in seeing what the new chair has in mind and evaluating.
That it's gonna be a fun new voyage. He'll take over maybe next Friday. We'll have you back Monday to talk about how everything has changed, right, but hopefully we will have you back soon. Austin Gilsby. He is the president of the Chicago Federal Reserve.