Austan Goolsbee, President of the Federal Reserve Bank, discusses the possibility of a 'golden path' to a soft landing in the uncertain macro environment. Topics include bond market sell-off, achieving economic performance, managing inflation expectations, and the risks involved in both 'no landing' and re-acceleration scenarios.
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Quick takeaways
Austan Goolsbee believes in the possibility of achieving a 'golden path' or a soft landing for the economy, and emphasizes the Fed's commitment to getting inflation down to its target rate and maintaining maximum employment.
Goolsbee highlights the importance of anchored inflation expectations, as they play a crucial role in bringing down inflation and avoiding the challenges faced by the Fed in the 1970s when expectations became unhinged. Current market expectations are seen as well-anchored for achieving the desired inflation outcome.
Deep dives
The Fed's Commitment to Achieving the Golden Path
Austin Goolsbee, President of the Chicago Fed, discusses the possibility of achieving a soft landing or the 'golden path' for the economy. He emphasizes the Fed's commitment to getting inflation down to its target rate and maintaining maximum employment. Goolsbee believes that the Fed will do whatever it takes to achieve this goal and points out that the market expects the Fed to stick to its target and believes it can pull it off. He also addresses concerns about rising interest rates and the potential impact on financial markets, stressing that the Fed will monitor the conditions and adjust its policies accordingly.
The Role of Supply Shocks and Inflation Expectations
Goolsbee highlights the impact of supply shocks on inflation and the importance of anchored inflation expectations. He argues that during periods of supply shocks, the normal relationships between economic conditions and future inflation break down. Goolsbee emphasizes the need for expectations to remain anchored at the central bank's target rate, as it plays a crucial role in bringing down inflation. He discusses the historical experience of the 1970s, where expectations became unhinged, leading to a challenging period for the Fed. He reassures that current market expectations are well-anchored and favorable for achieving the desired inflation outcome.
The Balance between Tightening and Maintaining Flexibility
Goolsbee addresses the balance between tightening monetary policy and maintaining flexibility. He points out that keeping interest rates steady while inflation is coming down is a form of tightening, and that the Fed needs to strike a balance between proactive action and allowing time for the impact of previous actions to be fully realized. He emphasizes the importance of monitoring conditions and responding accordingly to unemployment rates, inflation, and any external shocks that may impact the economy. Goolsbee also mentions the significance of fiscal policy but refrains from commenting on specific fiscal policies, reiterating the Fed's focus on its mandates of maximizing employment and stabilizing prices.
The Possibility of a 'No Landing' Scenario
Goolsbee dismisses the idea of a 'no landing' scenario, where inflation remains high and rates also stay high without achieving the Fed's target. He asserts that the Fed will not allow such a scenario, emphasizing the Fed's determination to get inflation down to target levels. He highlights the lessons learned from past experiences, stressing that the Fed's commitment to achieving its mandates will not waver. Goolsbee also discusses the importance of the Fed's credibility and the role of expectations in influencing wage and price determinations, reinforcing the need for anchored inflation expectations to facilitate the achievement of the desired outcome.
Can a soft landing be achieved? This is still a wide open question, given the highly uncertain macro environment. On the one hand, you have had a continued deceleration is most US inflation measures and the unemployment rate is below 4%. On the other hand, there are concerns over re-acceleration, more inflation, and a bond market where yields seem to be screaming higher day after day. On this episode of the Odd Lots podcast, we speak with Austan Goolsbee, the president of the Federal Reserve Bank of Chicago, who sees the possibility of, in his words, a "golden path" -- or the "mother of all soft landings." We discuss why and how it can be achieved, what the Fed can do to deliver a positive outcome, and what the market is telling us about the work that still needs to be done.