“Has there ever been a bigger gap” between economic mood and actual numbers? Chicago Fed president asks

As a quick check on the state of play in the U.S. economy, the latest numbers show inflation is down to 3.2%, and core inflation, with food and energy prices removed, sits at 4% — double the 2% mark that the Federal Reserve is looking for.

Meanwhile, the average 30-year mortgage rate is sitting at about 7.8%, and unemployment is at 3.9%.

That’s a lot of numbers to keep in mind and juggle, but the Fed is doing it so you don’t have to.

Austan Goolsbee, president of the Chicago branch of the Federal Reserve, joined Marketplace’s Kai Ryssdal to chat about what he’s hearing in his district and how the Fed’s actions this year look in retrospect. The following is an edited transcript of their conversation.

Kai Ryssdal: Let me take you back to your data dog roots as you talked about the last time you were on this program. I need you to decide on one piece of data you’re looking at to foretell the future of this economy and also what you at the Fed might do.

Austan Goolsbee: Yikes, I say, of all the pieces that right now I’m looking at, what’s happening to housing inflation is probably the most paramount one.

Ryssdal: OK, why? 

Goolsbee: I think as you know, the Fed has, by law, a dual mandate: stabilize prices, maximize employment. Those two goals, we’ve been doing very well on the job market side, and where we have fallen has been on inflation. So the most critical thing over the near term is that we get inflation down to target. And we have been making a lot of progress on getting the inflation rate down. The goods inflation rate has returned to slight deflation, like it was before the pandemic. Services move slower. And so the key component is going to be what happens to housing. And it’s been making some progress. It’s supposed to make more progress. But that’s the forefront. That’s not the only thing I’m looking at. But that’s probably the most important in the immediate term. 

Ryssdal: Why do you suppose it has taken the markets so long to take the Fed at its word, you know? I mean, you guys have said forever, by you guys, of course, I mean, [Chair Jerome] Powell and all y’all, “We’re going to do what it takes, we’re going to be data dependent.” And yet for a very long time, it seemed like the market kind of didn’t believe you. And I wonder why you think that is?

Goolsbee: I guess I think two things about that. But the first is – I don’t know if I totally agree with the premise. Because if you actually look at market behavior, as opposed to just what people say, inflation expectations, as estimated by the market, even as the inflation rate itself got above 9%, unlike basically all previous inflation episodes in this country, the market expectations of where inflation would be in the future never really went up much higher than the target. So there is a fundamental way in which people did believe in the credibility of the Fed when the Fed said we will do what is necessary to get the inflation rate down. Now, that’s a little different than the part of your question that you’re asking, why didn’t the market rates reflect what we were saying in our economic projections the rates were going to be? I don’t totally know why, except to say there are a lot of other things that happen in the world of rates and economic growth than just what the Fed does.

Ryssdal: Thank you for clarifying my question, actually, that was, that was a really good explanation. Um, let me ask you, though, about market rates, right? If you look at the 10-year [Treasury yield] now, the 10-year is starting to bake in the fact that you guys are going to start cutting rates really soon and again, that’s not what you’re saying out loud.

Goolsbee: Yeah, the thing about long rates, the Fed, of course, we directly control the short rates. And so the long rates have a major impact on the economy. We’ve been going through this period where the long rates were going up and up. And then people were asking: “Well, why are the long rates going up?” And now the long rates have come down a bit, but they’re still a fair bit higher than they were, say, in April. My take on what happened to long rates was that the biggest difference between now and April, like when we talked on this program, Kai, in April, the thing that was foremost in our mind was Silicon Valley Bank, credit crunch, might there be a credit contraction or even financial crisis? And that didn’t happen. And mostly GDP growth has been well higher than what we forecast it was going to be back then. So I think that’s the main driver that got longer rates up, is that conditions were more positive than we thought they were going to be. In the last couple of weeks, the long rates have, have come down some. Maybe you are alleging that it’s because they are over concluding that the Fed is going to cut rates, you know, sometime in ‘24-‘25. You know, I’m not a fan of pre-committing what you’re going to do at the next meeting, much less fight about what, what is it going to be a year and a half from now.

Ryssdal: So let me get it out of the realm of rates and markets and all of this and get into sort of brass tacks about how people are feeling in this economy, right? The economy is by almost every objective measure really, really good. Right? It’s growing, joblessness is down. I mean, yes, it’s historic lows, it’s been lower. But whatever, unemployment is doing really well. Right? Wages are up in comparison to inflation, all of those things. And yet survey after survey after survey says people feel lousy about this economy. And I want to know, why?

Goolsbee: Look, Kai, you do the numbers every day, has there ever been a number, a bigger gap in the numbers between feelings and reported? I don’t know, this might be the biggest ever. It’s not just among consumers. I would say if you look at business sentiment, you see a similar thing. We just had GDP growth that was close to 5%. In our business contacts at Chicago Fed, we talked to hundreds of business people around the district. Virtually no one was saying, ‘“Wow, this is a 5% growth economy that we’re experiencing right now.” And so that’s, that remains a bit of a puzzle. 

The only bright side, that it’s not even a bright side, the only caveat I will say is, I always say as the data dog caucus, the No. 1 job that the central banker faces, is you got to be able to look at the data and sniff around and figure out what does it mean. And that means you got to know what data series are most accurate, and what data series are leading indicators versus lagging indicators and things like that. And it is the case that we know that sentiment data of this form, A) tends to lag heavily actual events in the economy, B) it has an outsized influence of very public prices,  like the price of gasoline or the price in the grocery store, have a very strong impact on people’s perceptions of what the inflation rate is or how the economy is doing. And the relationship of sentiment as a predictive variable for consumer spending has largely broken down over the last 10 or 12 years. For reasons we partly understand and partly don’t. But as a result, the Fed’s job, our dual mandate is on the actual numbers. So I can’t really tell you the explanation of why the discrepancy is as big as it is. But I can tell you, what we need to see is the actual inflation data, getting down to target and the actual employment data. Those are the things that we got to pay attention to.

Ryssdal: Last thing and then I’ll let you get back to work. Without asking you to pre-commit as you are loath to do about what might be on the table at the next meeting in a couple of weeks, what is your level of concern about overshooting, about keeping rates too high for too long?

Goolsbee: Look, it’s definitely of some concern. We just came out of Thanksgiving season, Kai. And [former Federal Reserve Chair] Paul Volcker, my old mentor, was a great turkey cook, and he took a lot of pride in cooking his turkey. And the thing anybody who cooks a turkey knows is that you got to pull it out of the oven before it’s to the point where you want it to be because it’s going to have residual heat. And if you just keep cooking the thing for too long, they’re gonna be like, “Mommy, why is Uncle Kai’s turkey so hard to chew?” You know, so we definitely should think about that. We’ve been in restrictive territory because we’ve got to get inflation down. That’s our sacred vow, and we’re going to do it. Once you, once you believe that you are on the path to get inflation to target, then the amount of restrictiveness that you need to apply needs to be less and it was already in the projections that the median dot in the dot plot was saying rates would, by the end of ’24, be down 100 basis points. And you know, we’ll see what it looks like in the next one at the next meeting. We’re going to, we’re going to have another projection. 

Ryssdal: Right. Sorry, I said that was the last one. It’s not. One more quickie. When you get where you’re going, um, how quickly do you suppose the policy response will be made, right? Once we get to 2% and [the personal consumption expenditures report] comes out, or [the consumer price index] or whichever one you choose to look at comes out and says, bing, bing, bing 2%! Is it, like, next meeting, boom? Do you think?

Goolsbee: In a way, it’s too hypothetical to answer that. And you wouldn’t want to apply a policy which is just keep slamming the brake until you literally have wage and price inflation all the way down to 2%. You don’t want to land the plane nose down. But look, the other part of the job of central bankers, as Paul Volcker used to say, there is no silver lining that is bright enough that he could not think of a dark cloud that could block it out. And part of the job is to think through what are the risks? And how will we play it? How will we react? And so we meet every six weeks precisely so that we don’t have to pre-commit how fast we’re going to do things. It’s going to depend on how the data go.