Hello and welcome to another episode of the OddLots podcast. I'm Joe Weisenthal

and I'm Tracy Aloway.

So Tracy, we are recording this on Thursday, August 21st. We are here at Jackson Hall. I need to note at the beginning, we were recording this before the big Paulo speech. I don't really think it matters too much because that's But I just want to like get that out of the way. A little timing context for an econ

conference. We're not going to talk about that speech for obvious reasons. We don't know what's going to be said. But what we can talk about is the economy right now. That's not going to change between, you know, right now and tomorrow morning. Hopefully

whenever this comes out, probably it's not going to change much. But, you know, we've been very lucky lately. We've been talking to a lot of uh regional Fed presidents and it's really cool that we have access to that.

Yes. And it's good to get a range of opinions as well because as we've been discussing,

Yeah. No, it was pretty extraordinary that like look, you could make a point that stock markets near record highs, credit spreads near record lows, employment uh low, and inflation still warm. Why are we talking about rate cuts? Anyway, we got to keep getting more takes and perspectives on this from the people who actually think about this the best. And uh we

do we get a prize if we interview every Fed president?

Well, we should try. There's got to there should be a name for that. But we have a guest, perfect guest, someone we've talked to on the podcast before. very excited to have live here in Jackson Hall, past Oddlot's guest, uh, Chicago Fed President Austin Goulsby. So, Austin, thank you so much. I'm gonna give you a prize. Now, I drove here. I just got here. I just got in an hour and a half ago.

I believe that I've driven the farthest of anybody to get here. And one of the things I did on the way was finish my 50th state, North Dakota. Oh, and it turns out there's a a lot of people North Dakota is their last state and there's officially a club called the Best for Last Club and I joined the Best for Last Club. So, who's going to be your 12th Reserve Bank president? You're going to get a prize.

Congratulations. I saw your road trip like on Twitter. I saw that you were posting. So,

there are some amazing national parks on the on the way.

We have a great country, don't we?

Yeah, we got amazing country.

How's the economy looking to you these days?

Well, it depends which direction you're facing. As you know, I thought for Q1 coming into April, it was looking pretty good. We had a stable full employment, the unemployment rate a little above four. inflation while having been above the target for four years looked to me like it was heading it was coming down and down and down and was headed to 2%.

And so I thought reasonable approximation rates need to start heading down to where we think they're going to settle which is a fair bit below where where we were then where we are today. Then we go through some bumps. I've heard of them. Threw a bunch of dirt in the air. all of this stuff that it's like is the economy still where it was in January, February, March, or are we on some different path?

I still closet hope slash think that we're where we were before and that tariffs, imported goods are only 11% of GDP. Mhm.

If they'll kind of stay in their lane, if we don't keep escalating them, if we don't willy-nilly apply them to intermediate goods so that they turn into higher cost of production, it'd probably be okay. And we had a couple of months of benign inflation numbers and then we got the last inflation number which is a little less benign and the rise of services inflation threw me for a little bit of a cross current. So I'd say I've still got one eye on inflation. We're now 4 and 1/2 years above the target. It's one thing to be four and a half years above the target, but we're still clearly trending down. Yeah. If we start trending up and you start seeing inflation rising in non-tariff affected categories like what we saw in services, then I'm going to get a little more nervous on that side. And on the job side, I still feel like we're something like stable full employment. The revisions, they are concerning. We also know that the labor supply and population growth when there's big immigration things happening add a lot of noise to just monthly payroll. So I don't want to overindex on that. I want to take multiple measures.

The four horsemen of truth and justice in my view are rates. They're less susceptible to the immigration and population labor supply problems. They're the unemployment rate, the hiring rate, the layoff rate, the vacancy rate. If you look at those rates, three of them still say this is basically full employment and it's looking fine. It looks very similar to 2018 2019, a strong job market. The hiring rate is low. And if you talk to parents of kids graduating from college, you hear it's tough.

It's tough to get a job. We're in a low separations, low hiring environment, but that might be full employment. Okay? So that's why I say I don't come to it averse to cutting of rates. If we get through this and we can get some stuff settled on the tariff side, we might easily still be on the golden path. It might still make perfect sense to keep going down, but we've just got a couple of flags at the same time.

I think you just hit all of our talking points in that one question. Thank you for coming out.

We will dig into all these things, but just before we do, I have one question. Maybe it's a bit like asking um someone who their favorite child is, but what's occupying most of your headsp space at the moment?

I thought you were about to say Chicago is your favorite bank and I was going to say good choice. Good choice.

No. Is it inflation or the labor market? What are you thinking most about?

I'd say inflation.

I'm still thinking inflation. If we had four benign months of inflation that looked like those kind of early ones, that would have helped me be much more comfortable with the idea. It's not going to be, you know, tariffs stayed in their 11% lane. People aren't freaking out. It's going to be fine. Let's just go think about the employment side now that we seeing a couple of bumps and things ticking up. I fear we gotta we got to think about that inflation side just given what the history was. If we were having this discussion in 2019 and we hadn't had the team transitory and the argu the very same arguments like no no this a one-time thing and so the inflation should just go away real quickly. If that we hadn't had that, I would be much more comfortable making that argument. But now that I don't even like using that word.

Plus, everyone has experienced inflation now.

Everyone's experienced. So, they're more hyped up. They're more amped up. Not hyped up. They're they're amped up to see it. And look, you see this consumer confidence numbers going down somewhat significantly. survey measures of inflation expectations, which I in fairness always said I put less weight on than market-based measures. That said, I don't put zero weight on them. And if you see people in surveys ask, "What do you think inflation is going to be over the next one year, two years, now even longer, they're saying it's higher." So, we we got to think about that. You mentioned those labor market revisions and when we got that last jobs report it was mediocre but even more than mediocre was those it was the pull down of the prior two months and it there's actually strikes me as two ways of looking at this. One is oh you know what the labor market is really decelerating that probably we have to have cut soon if we want to hold on to full employment. But there's another take that actually has come up in a couple of recent episodes which is well yeah that was the postappril 2nd volatility. We're through that now that actually we have more tariff certainty than we we certainly have more tariff certainty than we did. That was maybe the trough. We got a S&P flash PMI today that actually showed a positive employment rating. This came up in our conversation with Jeff Schmid who's throwing this event for the Kansas City Fed that maybe that was the cyclical low for the year just though that the craziness of those couple months.

Fascinating. I thought you were going to go totally different way.

So those are two schools of thought both of which are premised on using monthly payroll as an indicator of where we are in the business cycle. And in normal times, that's perfectly appropriate. My third category is at moments when there are population growth shifts. Yeah.

And labor supply, especially from immigration, be careful using monthly payroll for the business cycle. That wasn't for that wasn't one of because And I have no is it remorse? Not remorse. I have no I don't feel guilty talking about this topic now because you can go back and look a year and a half ago and more when we were getting jobs numbers that were far higher than what we thought the break even was. There was a one group that was saying we're about to have inflation kick way back up because 180,000 jobs a month is faster than break even. break even is like 85,000 a month. So, we're overheating. And at that time, I said,

not pay no attention, but pay less attention than you normally would payroll and jobs numbers say because we know there's a whole bunch of immigration that's happening behind the scenes that is not showing up yet. Now, when we look back, everybody says, "Oh, yeah, obviously that's why we generate as many jobs."

This is just the exact same idea but in reverse. Now it may prove not to be true.

This might be an indicator of the business cycle but we learned the last time around that those four horsemen of truth were rates not aggregates. Okay. So if you don't know what the population growth rate is or if it's different than what you expected, be extra suspicious about total payroll employment and total GDP growth. So if you started to see GDP growth overall is slowing down, but the components don't really suggest that or if you start seeing payroll growth, you characterize it as mediocre. I don't think it was like 75,000. That's right around the break even.

If you're 75,000 plus or minus a 100,000, which is normally what you are for monthly payroll, you're going to get months where you have low payroll. And then if you add this immigration thing on top of it, like I say, I'm not saying ignore it. I'm just saying be very careful. I was a little not puzzled but I was a little concerned that the market reaction seemed to be

let's take our understanding of monthly payroll numbers circa 2018 and say that must mean we're on the verge of recession. Right?

If that's where your head is

that you say well a low monthly payroll in the past has been an indicator of the beginning of recession. Then you got to explain why these other ones don't show that. Why is the layoff rate as low as it is? You have you haven't seen an uptick in layoffs. The vacancy rate is actually rising a little and is better than it was in 2019. I think so. This doesn't look like a normal business cycle yet. If it starts to, I'll be the first one saying this is what re the beginning of a recession looks like. So the idea is that weaker payrolls can be offset or are being offset by weaker labor supply because we're getting less immigration. So the break even rate is

that the break even is lower.

Yeah. Okay. You mentioned the market reaction just then. Can we talk a little bit more about the market because as Joe mentioned, you know, stocks are still kind of near their record highs. I know they've been falling a bit this week. Credit spreads at like a 27-year low. I still hear Fed officials talk about rates being restrictive even though inflation is still above target. But when I look at the market, when I look at financial conditions, it doesn't look that restrictive to me.

Look, be careful. We're just in the weird glass onion version of the same discussions we've been having for several years now that I've been in the Fed. I'm coming on three years. At that time it was positive supply shocks and the whole question was are we about to reoverheat?

Do we need to maintain do we need to keep raising? Do we need to maintain the rates this high or can we start cutting? I kind of think that a large component of what's in expectations and what's in the market's reaction is the reflection problem. that if they think that the Fed is going to succeed,

then you could see conditions loosen,

but that wouldn't be a reason that the Fed should raise necessarily because they're premised on thinking that it's going to work. That's what I was saying before and I kind of now think in the same way. It might be an indication, but if you just look at rates and you look at kind of the traditional credit channels of monetary policy, I still think that rates are relatively restrictive. And so that's why I say if you start to see deterioration in the labor market, you start to see layoffs going up and it starts looking more like a the turning point in the labor market, then I think we're going to have to seriously contemplate cutting of rates. If we're in an environment where we're actually in pretty stable full employment and the only thing that's happening is population is making the break even monthly jobs number 40,000 instead of 100,000 and inflation is going up in a bunch of categories that are not tariff related. Uh now we got to be a little more circumspect.

So I want to ask you a question. It's something that I'm very increasingly interested in and want to talk to a lot more people about etc. But there are aspects of this economy that as you say may kind of resemble 2018, 2019 etc. One thing that strikes me as very different is the long-term rate and and the implied therefore what people will call the the neutral rate or whatever and maybe rate cuts are coming soon but the market is not expecting a deep cutting cycle of that terminal rates. What's changed? What's the fundamental difference in 2025 verse 2018 such that for the Fed to hit its 2% inflation target the market is pricing in so much higher rates than what it had anticipated prior to co

I don't I should ask you you've talked a lot of people

I'm asking you you're there no I'm not

I would say there's one way to look at that that if you asked historically which of those is weird

2018 2019 is what's weird you know what I mean like this the long rates now are look very

very similar to kind of historical patterns.

There's a whole tremendous almost industry in research trying to diagnose that and that bleeds into the question of are we going back to super low rates, ultra low rates because is it global savings glut? Is there something happening with productivity? Do they think demand is going to be low? Is there a feeling that Treasury is going to have to issue so much debt? I mean, there's been a big increase in debt to GDP ratios worldwide. I do find informative this increase in loan rates is not exclusive to the US.

You see it in a lot of countries. So, I don't I don't totally know. Mhm.

There's probably some of many of those explanations. And for whatever reason, what the market thinks the Fed is going to do in short rates does seem to have a outsized impact on 30-year rates. So, that's part of it is probably just reflecting how steep or how shallow a path do they think the Fed is going to take. So just going back to inflation for a second. You've mentioned a couple times now that you're worried about maybe, you know, tariff induced inflation in goods starting to seep into services. Can you talk a little bit more about how you see that channel actually working? And then also, you're head of the seventh district and you have some interesting states in there. You've got Michigan, which still makes cars. You've got Iowa, which has farmers. like what are you seeing in terms of the pass through from goods to services there?

Okay, these are both important topics for us to think through. Let's go backwards in order. The seventh district headquartered in Chicago is the most manufacturing intensive of all the districts and by far the most auto production of all the districts.

It's one of the big agricultureheavy districts, but Kansas City, Minneapolis, there there's a couple of others. I would say in the runup to April 2nd and through April 2nd into May almost to June, they their hair was on fire.

I mean, this is going to wipe us out. If anything's like the rates of what they just announced, the auto suppliers that we had small margins to begin with, we're going to die. we we don't know you we don't know what's going to happen. That's why I was getting amped up about it at the time

as we kind of got some clarity on what the rates were going to be and particularly when they began exempting if it's USMCA compliant it's not going to apply for a bunch of intermediate goods it's not going to apply commer influence

I would say as I talk to people now for manufacturing and for agriculture they're still in that space in agriculture. They were particularly heartened by as some of the negotiations got concluded, even if they weren't going back to no tariffs,

the fact that they were going to something that would not lead to retaliation was a very big thing for agriculture because a lot of their biggest markets are overseas.

I was just recently in Iowa though there's still nervous in that space that in some ways the damage is already done and it takes a long time to build up these export relationships and if you smash that and they start buying soybeans from Brazil that even if you go back to zero tariffs they might have already set it up. So there is like a nagging that the longer run impact will be different than the shortrun impact. But I would characterize shortrun impact scaled down from I always get the defcons backward. Defcon five is the worst. Right. So

is that

I thought defcon one was the worst.

Everybody says

how often are we declaring Defcon?

Whatever it is

there was a high defcon

a bad defcon. dangerous devcon as high as you could be and now it's gone back not background noise but the sentiment like we can live with this if this is what it is as long as this stops when we're we're not going to face new ones

we can deal with this now that said it sort of goes to your second to your original

defcon 1 is the highest state of military right now

defcon 1 is the highest so they were at defcon 1 and we're back to defcon on five.

I just looked that up.

Okay.

All right. I I I add it backward, which is embarrassing because I'm always like, "No, no." You know, that's the that's the opposite. But now I I opposite it myself. Yeah.

Yeah. I get I've done that.

Okay. So, the question about what is the mechanism that the tariff inflation turns into services inflation? Permit me a slight detour. Mhm.

What is the mechanism that tariffs turn into inflation of goods

as opposed to just a one-time price increase?

Because there is an argument that for the platonic ideal of a theoretical one and done tariff,

it's just a one-time price increase. So no matter what it is, just look through it,

right? And a one-time price increase, just to be clear, doesn't count as inflation under traditional economic frameworks

because basically if you go measure inflation, inflation would be high for one year.

Yeah.

And then the inflation would go away. But that was the very argument of team transitory in 2021 was yes, here this thing hits supply. We're going to let bygones be bygones. will eat the inflation for one year and then it's going to go away. Now remember this is for a oneandone tariff and this is not one and this is not done. So let's be a little more circumspect of just saying hey theoretically it's just going to go away. We learned in COVID that if it's a big enough impact on the supply chain and especially if it's going industry A to industry B, industry B makes inputs for C, that process takes a lot longer than we thought it would in 2019 and 2020. When we got to 2021, we're like, yeah, hey, it'll fix itself, you know, probably six months. That was the argument of transitory. So I'm a little concerned about just the impact of tariffs on goods inflation itself lasting longer than we wanted to and people getting mixed up. You'll recall the perfectly valid arguments in 21 and 22 and into 23 where people said it doesn't matter if it's supply shock induced inflation. If it's high for too long, it's going to fold into expectations and then we'll never get rid of it. That didn't prove true this last time, but if people are more attuned to price increases, it could. And we just got to be careful on that front. Now ask the question, how does it turn into services inflation? One part, what if the services inflation isn't coming from tariffs? Okay, so that's the the danger of services inflation is you kind of can't really give a simple mechanism of why services inflation would be rising. The new month of services inflation was quite terrible and some part of that are non-market determined. So I put a little less weight on those but it wasn't good. That probably the mechanisms that you think through how would tariffs cause that. I think you'd be hardressed to figure out how it would cause it. But that doesn't make you feel better. That makes you feel worse because it's like whoa whoa wait a minute. Maybe some inflationary dynamic was never put out and you ever like make the campfire

and it's like ah yeah it's done and then you look way it's it's back it's back on fire again. We can't let that happen. We've been four and a half years above the target. We were making progress. Now we've stopped making progress.

If it's spreading into services inflation this immediately it's probably not coming from tariffs. the other mechanisms. How does it move into services inflation

is sort of wage-price spiraling where people say, "Well, I think prices are going to go up, so I'm I'm going to be that much more aggressive in my wage negotiations with the employer."

The only reason I'm hesitating to go down this lane is then you're probably going to say, "Well, what about wages? Are wages compatible with 2% inflation?" And you can't answer that until you know what the productivity growth rate is, which has been one of the bright spots. But that's actually my one of my bigger fears about the tariffs is there's a long literature of research in economics showing you raise tariffs, especially on components, supplies, it drives down productivity growth.

Yeah. Tracy and I were in Alaska recently and I feel like we heard multiple ways whether it's like the company's making tubular goods for the oil patch out there and that's going to make it increase break evens whether it's like just the uncertainty

just doing the paperwork for customs sounds like a huge lift.

Okay. It sounds like a productivity destroying you know factor.

I have one last question and I'm turning this into my question that I ask every Fed president that we can uh talk Is that why Tracy is rolling her eyes?

Yeah, probably.

I wasn't rolling my eyes.

This is This is my

theoretical question, but I think it might be important down the line. Why are dissents rare at the uh FOMC?

Why are dissents rare? I I haven't I've only been there a short time. Fed years are like reverse dog years or something like you'd be there seven years. They're like, "Ah, he's the new guy." Okay. So, I'm coming up on three years.

Yeah.

There have been some dissents. I

can I tell you what I'm trying to get at?

Yeah.

At some point the chair is going to be replaced. And what I'm trying to understand is when there's the new guy is in that position,

to what degree does the fact that most of the time the voting members align with Powell? How much of it is the fact that you more or less think about the economy in roughly similar ways with and looking at the same data? And how much is it about Powell has done a good job of

navigating? Yeah. Navigating the board. And so this is why I'm asking the question because I'm thinking about what those dynamics are going to be.

It's more the latter. I feel like it's more the latter. You know the rules. I'm not allowed to speak for anybody else. Speak for the committee. Speak for the chair. You know, I'm a longtime fan of Jay Pal. I think he's a first ballot hall of fame fed chair and he has a great judgment. He has also navigated a pretty diverse set of worldviews on that committee. That's what makes me feel it's less the first thing. Everybody just has the same world view. You can see from a minute

that that's not true. People have different worldviews.

He's been remarkably skilled at whether it's through statements, whether it's through like what's what's written on the page that everybody you coming from different sides, but you can agree. Yes, I agree with that. And I think that's why there are fewer

Yeah.

descents, but in the time I've been there, there have been two at the last. No, I know. Yeah. Yeah. Can I ask in general, what are the vibes like right now when you guys are getting together?

Is Joe going to roll his eyes? That one.

The presidents get together pretty frequently. The presidents of the reserve banks get together pretty frequently. We have a conference of presidents. There are a whole bunch of operational things that we have to do and we're a quirky bunch and is usually the vibe is pretty fun from that. The FOMC meeting itself is much more formal

and it's probably secret information for me to tell you what the vibes are. If it's not stated in the minutes what the vibes are probably not supposed there's a normal way for that to be expressed if it was going to be expressed.

Austin Goulby, thank you so much for coming back.

Always a pleasure. Before you guys were ever famous, I was in here. I was friend of the show before.

That's right. No, that was fantastic. And definitely won't be the last time we have you on the show.

Thank you so much.

Thank you.

Tracy, it really is pretty striking the degree to which it feels like the rate cut question is not settled at all. No, not at all.

Not at all. And at this point, I mean, I guess we have to talk to more Fed presidents, but it does seem like maybe the market has gotten a little ahead of itself in terms of expectations. Again, we're recording this on Thursday, August 21st, and we're going to get the PAL speech tomorrow. So, who knows what he's going to say. Maybe markets will recalibrate their expectations after that. But you do hear a lot of convincing arguments for why you should look through things like weaker payrolls, right? I really really liked the four horsemen of truth and this idea that in the time of volatile population measures you want to look at rates. I'm going to I'm going to like remember that that it was very clearly articulated by Austin there. So like vacancy rates, hiring rates, firing rates, these are the things that actually give us clean signal across the cycle when population levels are in flux. Well, Pal made a similar argument in the questions after the last meeting, right? Didn't he say like he's looking at the unemployment rate because he thinks that's more meaningful at a time when you are having these changes?

Yeah. No, I I do think um I have to I have to actually take that. Yes, I have to internalize this a little.

I could be hallucinating statements from Pal because that's been has remained fairly low and I think that's important. But I like Austin's point is like that he said at the end

that if you can't tie sort of the services inflation in some way to the tariff that's even like the fact that we don't have a good story for it like if you have a good story for it that's one thing but this idea that's like well what if this is just that ember that didn't go out you like throw a cigarette in the trash or whatever and there's that little spark or that like that is a little bit more ominous.

Yeah. And I do think like the starting level is important here. So, you have to remember the Fed spent the past 3 years fighting inflation. It's still not down to 2%. And everyone has higher prices on their minds. Like, we've all experienced it at this point. And so, the concern is that like the impulse to raise prices and tolerate more high prices is uh is higher than it once was. I think that's important. It doesn't get discussed enough potentially. All right. Shall we leave it there?

Let's leave it there.

This has been another episode of the OddLotss podcast. I'm Tracy Aloway. You can follow me at Tracy Aloway.

And I'm Jill Weisenthal. You can follow me at the stalwart. Follow our guest Austin Goulsby at Austin Goulsby. Follow our producers Carmen Rodriguez at Kerman Arman, Dashel Bennett at Dashbot, and Kale Brooks at Kalebrooks. For more OddLots content, go to bloomberg.com/odlotss where we have a daily newsletter and all of our episodes. And you can chat about all of these topics 24/7 in our Discord, discord.gg/odlots. And if you enjoy OddLots, if you want us to interview all the Fed presidents and win a prize, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely adree. All you need to do is find the Bloomberg channel on Apple Podcast and follow the instructions there. Thanks for listening.