Odd Lots · Podcast summary
Austan Goolsbee Is Worried the Economy Is Overheating
Chicago Fed President Austan Goolsbee discusses the current state of monetary policy, the impact of AI on the economy, and the Fed's communication strategy.
Listen on the show ↗Key takeaways
- 🤔The restrictiveness of monetary policy is complex and depends on the underlying inflation rate, with the real rate being key.00:29
- 👻R-star (natural rate of interest) is unobservable and unhelpful for policy decisions, despite its theoretical existence.00:46
- 🤖AI-driven productivity gains could increase R-star, but the impact on inflation depends on whether these gains are expected or unexpected.00:55
- 💥Transitory supply shocks, like tariffs and oil price increases, can persist longer than expected, contributing to inflation.07:44
- 🔄The increasing frequency of supply shocks challenges traditional central bank playbooks, which are designed for demand-driven business cycles.10:26
- 🏭Sectoral competition from AI investment is not necessarily indicative of economy-wide overheating, as aggregate effects matter more.13:11
Chapters
- 0:16Introduction to Austan Goolsbee and Economic Outlook
- 0:28Is Current Monetary Policy Restrictive?
- 0:46The Role of R-star and AI's Impact on Productivity
- 1:10Decomposing Inflation: Transitory Shocks and Persistent Drivers
- 1:54AI, Investment, and the Risk of Overheating
- 4:09The Bond Market and Fed Communication Strategy
- 30:13The Immaculate Disinflation and the Fed's Aggressive Action
- 48:19Rethinking Fed Communication Tools
- 1:04:00The Goolsbee Reaction Function and Future Outlook
The digest
Austan Goolsbee, President of the Federal Reserve Bank of Chicago, joined Joe Weisenthal and Tracy Alloway on the Odd Lots podcast to discuss a wide range of economic topics, from the nuances of monetary policy to the transformative potential of AI and the evolving communication strategies of the Federal Reserve.
The Restrictiveness of Monetary Policy: A Sasquatch in the Room?
The conversation kicked off with a fundamental question: Is current monetary policy restrictive? Goolsbee immediately highlighted the complexity of this question, emphasizing that it "depends what you think the underlying inflation rate is." He stressed that what truly matters is the real rate (rate minus expected or actual inflation), and that if the underlying inflation rate is higher than perceived, then the real rate is effectively lower.
Goolsbee expressed his skepticism about the concept of R-star (the natural rate of interest), humorously referring to it as "R-Sasquatch." He explained that R-star is unobservable, even in the best of times, making it an unhelpful guide for determining the next monetary policy move. "I don't find it helpful for me in determining, well, what should the next monetary policy move be, because it's not observable," he stated.
However, he acknowledged that if AI is indeed increasing productivity, it would likely increase R-star, as faster growth necessitates a higher steady-state interest rate. This led to a discussion about the implications of expected versus unexpected productivity growth. If AI-driven productivity gains are unexpected, inflation could initially go down as people don't immediately adjust their behavior. But if the hype is big and these gains are anticipated, there's a risk of overheating the economy, necessitating higher rates.
Keep reading in The Digest
The full 6-minute article, 5 more sections, and every new episode from Odd Lots and the creators you follow.
- Decomposing Inflation: Transitory Shocks vs. Deeper Concerns
- AI, Investment, and Overheating: A New Dynamic?
- The Bond Market and Fed Communication: A Delicate Balance
- The Immaculate Disinflation and the Fed's Role
- Looking Ahead: Uncertainty and the Goolsbee Reaction Function
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