Geoff: As we reported, inflation
is easing, but still high.
The federal reserve has been
laser-focused on bringing down
prices, raising interest rates
10 times in the last 14 months.
But economic uncertainties
remain, including the
consequences of much higher
interest rates, a debt limit
standoff, and recent bank
collapses.
To discuss the challenges ahead
we are joined by Austan
Goolsbee, president of the
federal reserve bank of Chicago.
It is great to have you here.
Let's start with this news on
inflation, because inflation
slowed for a 10th straight month
in April, according to the
consumer price index.
That is great news for families
who have been struggling with
higher costs.
But inflation still remains too
high.
What indicators do you and other
fed policy makers need to see to
know that we're finally breaking
the back of inflation?
Austan: Well, you described it
exactly right.
Inflation was way too high.
It is still too high but it is
at least coming down and so that
part is encouraging.
Mostly when the fed looks at
prices and inflation, they do
not look at this looking
backward for a year, which is
what the number is usually
quoted as.
They are usually, we are looking
at the monthly inflation, what
is the new information, and we
are tending to not look at food
and energy prices because they
are so volatile.
And by those measures of core
prices, we have seen progress,
but it still shows that
inflation is too high and we are
just trying to balance out the
dual mandate.
That is, the law gives the fed
two jobs, maximize employment
and stabilize prices.
Employment has been going very
well.
That is the strongest part of
the economy.
And inflation has not been going
as well, let's call it the
weakest part of the economy.
And I think we have to just keep
getting more price information
across these categories before
we can say with comfort we are
on a path back to normal.
Geoff: Cannot I draw you out on
the federal reserve's dual
mandates.
Can the fed keep prices stable
without tilting the economy into
recession?
Austan: We certainly hope so,
and that is the goal.
The complication with that is we
all know that it takes time for
monetary policy choices likely
10 interest rate increases you
described over the last year.
Five full percentage points in
the interest rate takes time for
that to work through the
economy.
In a way it is like having a
conversation with somebody in
Asia where there is a little bit
of a delay and it is sometimes
hard to have a conversation like
that.
You don't want to land the plane
nose-down, so we are trying to
balance off, can we slow the
inflation without sending it
into a recession?
We've had some promising
indicators on that front, but
it's always a possibility when
you are in a rate-rising
environment like this and you
have had bank stresses like the
one we have seen, the silicon
valley bank and others.
And you add on top of it
wildcards like fights about the
debt ceiling and stuff like
that, and you cannot rule out
that recession is a possibility.
Geoff: You were chairman of
then-president Obama's council
of economic advisers in 2011,
when just the mere notion of
brinkmanship led to the U.S.
Having its credit rating
downgraded.
What do you see as the impact of
this current debt limit
standoff, or a potential default
on this economy which is still
recovering from the pandemic?
Austan: Yikes.
You are giving me indigestion,
to think back to what that was
like.
Let's hope we don't get into
that environment.
As chair Powell said, there
really is not any alternative.
We have to raise the debt
ceiling.
How congress is going to sort
that out, the two parties going
to have negotiations or legal
strategies, I don't know.
If you look back at times when
we encounter these crises, there
was in 2011, a dramatic drop in
consumer confidence.
You can see interest rate
spikes.
And I guess I still cannot get
past what is going to happen.
Are we not going to pay the
military, we are not going to
pay social security?
We are going to add on top of
already the financial stresses
about bank capital, that the
safest asset in the world,
treasuries, is going to somehow
be questioned, the value of
treasuries that we might
default?
I just think it does not make
sense.
If you think through the actual
practical details of how it
is nothing good about it.
It would be really bad for the
economy.
I am just hopeful we do not get
to that.
Geoff: We have about one minute
left and I want to ask you about
how the fed sort of navigates
raising interest rates.
Because you in a speech last
month said that the central bank
should proceed cautiously with
any additional interest rate
increases.
You said at moments like this,
the right monetary approach
calls for prudence and patience.
You voted earlier this month to
raise rates by a quarter-point.
Why?
Why was that the right approach?
Austan: I did.
The second sentence in the
speech I gave before the meeting
was, the most important thing is
to gather as much data as you
can, because we are in an
environment where the tightening
in the bank sector and the
credit squeeze takes place when
banks are trying to conserve
their capital and trying to
raise lending standards, that
does a lot of the work that
monetary policy would normally
do in a moment like this when
inflation is high.
And so, it is totally
appropriate to watch the
conditions to figure out how
much of your work has already
been done for you.
In this last meeting, I felt
that if you looked at the
conditions, you have yet to see
that the credit tightening, the
credit crunch, was not on the
minds of people yet.
And so two meetings ago we had
outlined a plan, taking somewhat
into account that credit was
going to be tightening, and it
made sense to stay on that plan.
I think now you are starting to
get more information that the
credit squeeze is beginning, and
so let's be on alert and be
prudent and patient in our
decisions.
Geoff: Austan Goolsbee is
president of the federal reserve
bank of Chicago.
Always great speaking with you.
Thank you for being with us.
Austan: Great to see you.