Austan Goolsbee Is Worried the Economy Is Overheating

**SPEAKER_1** (0:02)
Bloomberg Audio Studios, Podcasts, Radio, News.

**Joe Weisenthal** (0:18)
Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

**Tracy Alloway** (0:23)
And I'm Tracy Alloway.

**Joe Weisenthal** (0:24)
Tracy's still here in Jackson Hall. We are recording this, what is it, the 27th.

**SPEAKER_4** (0:28)
I think that's right.

**Joe Weisenthal** (0:29)
So before Chairman Warsh's big speech, etc. But when we're here in Jackson Hall, we have to talk to as many people as we can about the state of monetary policy, the economy, central banking, all of the good stuff we love to talk about.

**Tracy Alloway** (0:42)
Yeah, definitely. And we don't play favorites on the show, but one of our favorite Fed presidents.

**SPEAKER_4** (0:47)
We don't play favorites.

**Joe Weisenthal** (0:48)
What? If we were to.

**Tracy Alloway** (0:50)
That's right. We're going to be speaking with Austan Goolsbee of the Chicago Fed.

**Joe Weisenthal** (0:53)
That's right. Literally the perfect guest, whom we've had on several times. So, Austan, thank you so much for coming back on Odd Lots.

**Tracy Alloway** (0:59)
Thank you for having me. I'm the chief reset this time. Did you see any moose?

**Joe Weisenthal** (1:02)
No moose.

**Tracy Alloway** (1:03)
I saw a bear.

**Austan Goolsbee** (1:03)
Tracy saw a bear.

**Tracy Alloway** (1:05)
Tracy saw a black bear. Yeah, a little black bear. Along with some of our producers yesterday. It's very exciting. I've never seen one here before, so.

**Joe Weisenthal** (1:11)
Hopefully not indicative of anything in the broader economy. There are so many places to start. How about a simple question? Right now, when you look at where the Fed has rates at, when you look at the curve, when you look at the state of the economy, would you characterize policy as restrictive right now?

**Austan Goolsbee** (1:31)
Depends what you think the underlying inflation rate is.
Let's not forget. What matters is the real rate. Yeah. Rate minus expected inflation or actual inflation over some period. In the long run, where do we think it's going to end up? I loosely think 3% rates with 2% inflation or 1% real is kind of a eventual landing spot.
The real rate, if the inflation rate is 3 plus percent, the real rate is a lot lower than if inflation is headed back to target. So, I don't think you can really answer that without saying, I'm okay with waiting to see, but I'm a little nervous that the inflation side has over the last six months not been looking great. Got it.

**Tracy Alloway** (2:37)
Not to get too technical right at the jump of this conversation, but when we talk about the restrictiveness of monetary policy, I mean, we're talking about where it sits next to our star, and our star is unobservable at the best of times.

**SPEAKER_4** (2:51)
Yes.

**Tracy Alloway** (2:52)
Now, we're in this environment where I don't think anyone would disagree that we have this huge structural change in the form of AI. Do we have any more confidence in the neutral rate of interest and versus where we are in terms of restrictiveness?

**Austan Goolsbee** (3:08)
You know, I was an academic for 30 years, so I love saying, let's get out of the world of theory. Let's get back. I always called our star our Sasquatch, and you know, somehow it feels with this as a background because you can never see it until after it was left, and you know, here was a footprint.
And when I say that, it's because I don't think our star, while the concept exists, I don't find it helpful for me in determining, well, what should the next monetary policy move be because it's not observable. It's even in the best of times, not observable.
That said, I think if you start thinking longer run, what does an increase in the productivity growth rate do to our star? I think it increases it because faster growth, you got to have a higher steady state interest rate. And I gave a speech last year, I mean, at the last Hoover conference, that was kind of thinking about if you think AI is increasing productivity, it makes a big difference to what that means for the here and now our star. Is this expected or is it unexpected? So if it's unexpected landing on you, then inflation goes down and in a way, people aren't adjusting their behavior in the short run and rates can go down. But if the bigger the hype, the more we're about to have a giant bounty that's going to come from technology, you could easily overheat the economy in the short run and you have to raise the rates. And we kind of live that through the mid to late 90s.