What the Fed Fears Most Is Not Tariffs but Unanchored Inflation Expectations
Chicago Fed President Goolsbee points to inflation as the biggest current risk: five and a half years above target, and an AI story that in the short run may push rates up rather than down. His key advice to rate-sensitive industries is to watch the data, not the stock market.
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The argument · tap a timestamp to hear it
19 chairs exist to produce argument, not consensus
He explains why the FOMC is worth keeping at 12 regional Reserve Banks plus 7 Board members, 19 chairs in all: not to manufacture consensus, but to let different worldviews collide when uncertainty is high. Goolsbee says colleagues can yell at him, and can change how he reads the data. The structure also insulates rate decisions from the political cycle as far as possible, because 14-year staggered terms mean no one can replace the whole table at once. The direct lesson for founders is that on big calls you want people around you who will push back, not an echo chamber.
— Austan GoolsbeeWhat the Fed fears is not price rises but unanchored expectations
The genuinely dangerous part of tariff and oil-price shocks is not the one-off increase in prices, but getting people to believe high inflation is here to stay. Once that expectation sets in, workers ask for 6% wage increases and firms price at 7%, and the only way the Fed can then bring inflation down is to break the expectation with a deep recession. Goolsbee calls this the unanchoring of inflation expectations, and says it is exactly the self-fulfilling mechanism he watches most closely. For founders, the logic implies that judging whether a cost increase is one-off matters more than how large the increase is.
— Austan GoolsbeeFive and a half years above target: the Fed's own record is not pretty
Goolsbee volunteers that the Fed's performance over this stretch has not been pretty: it is coming up on six years, of which at least five and a half have been spent above the 2% target, and the past year has even moved backwards. He cites what he hears on the ground in the Seventh District, the Midwest: firms say input costs have jumped sharply, farmers say they cannot raise their selling prices while costs squeeze them, and everyone is talking about affordability. His conclusion is that when the public is this sensitive to prices, any fresh supply shock — tariffs, Middle East oil prices, chip shortages, AI data centers — is more likely to be read as long-run inflation.
— Austan GoolsbeeThe new chair is taking back the Fed's forward promises
New chair Kevin Walsh has started reshaping how the Fed communicates: he does not like forward guidance, the explicit "if X happens we hike or cut" kind of commitment. Goolsbee has observed that FOMC statements have gotten noticeably shorter, and Walsh has also set up five working groups covering inflation, AI and productivity, the balance sheet and other areas, staffed with well-known people he trusts. The reports are not out yet, but this could become Walsh's signature reform. What markets have to adjust to is a Fed that makes fewer promises, and expectations that may swing more as a result.
— Austan GoolsbeeSwapping people to move rates is the real independence red line
Goolsbee sorts today's pressure into two kinds: personal attacks on people like Powell and Lisa Cook, extending to criminal investigations and attempts to remove them; and direct public demands that rates must come down. He says Fed independence has traditionally meant only a narrow thing — freedom from political interference in setting rates. Once a sitting administration influences rates by changing who holds the seats, "any economist would think that is a problem." He does not push the point all the way, but it is his clearest statement on the White House.
— Austan GoolsbeeIn the short run AI is an argument for higher rates
He first cools the AI narrative with facts from his district: manufacturing accounts for a larger share here than in any other Fed district, yet firms are still hunting for use cases and complaining that tokens are too expensive; productivity growth, after two and a half years of acceleration, has been soft again for about half a year. Then comes the counterintuitive call: if everyone pours money into building data centers at the same time, betting big with IPO proceeds or with future revenue they expect to earn, the economy overheats in the short run. A central bank's day job is preventing overheating, not judging whether AI will be revolutionary 20 years from now — so AI's near-term policy implication may be to push rates up, not down.
— Austan GoolsbeeAI taking every job is the lump of labor fallacy
He files the story that AI will put everyone out of work under the lump of labor fallacy: treating the total amount of labor as an immovable rock, so that once AI exceeds it people can never find new work again. He says this claim has been proved wrong every time before; he grants that "maybe this time is different," but is willing to bet the other way: 20 years from now there will not be a 95% unemployment rate, and there will not be just 6 people owning all the AI companies. He describes himself as a grim optimist — not dodging the short-run pain, but optimistic about long-run income growth.
— Austan GoolsbeeRates land near 3%, but only if inflation turns
Goolsbee offers a rare quantitative anchor: his own loose view is that if inflation is on a path back to 2%, rates converge toward the neutral level — what he calls star — roughly 3% nominal, made up of 2% inflation plus a 1% real rate. But the precondition is that inflation must turn downward, and after five and a half years above target the past year has still been moving the wrong way. For rate-sensitive industries, his advice is to watch the data and inflation rather than the stock market — the people around the FOMC table are discussing the real economy, and equities are only a secondary reference.
— Austan GoolsbeeIn their own words · checked verbatim
I think that 19 people sitting around the table. Each one with a different worldview is pretty important.
Austan Goolsbee4:15
If.People.Become convinced.That inflation is going to be with them for an extended period.The job of the Fed becomes a hundred times harder.
Austan Goolsbee9:25
the chairman doesn't like forward guidance let's do less explicit promises let's not tie your hands
Austan Goolsbee14:44
if a sitting administration is trying to remove Fed officials to get interest rates down or to influence interest rate decisions, that's a problematic circumstance
Austan Goolsbee20:34
The more hype there is, the more chance there is that it overheats things today
Austan Goolsbee25:00
I guess I'm a grim optimist.
Austan Goolsbee29:35
Low hiring, low firing is extremely unusual environment.
Austan Goolsbee31:09
We've been above the target for five and a half years.
Austan Goolsbee35:00
Figures
| People at the Fed's rate-setting table | 19 (12 regional Reserve Banks + 7 Board appointees) | 4:15 |
| Term for politically appointed FOMC governors | 14 years, staggered | 4:15 |
| Time spent above the 2% inflation target | About to reach 6 years, of which nearly 5.5 | 10:31 |
| Working groups set up by Walsh | 5 (inflation, AI and productivity, the balance sheet, and others) | 14:44 |
| Manufacturing's standing in the Chicago Fed's district | Largest of any Fed district in the country | 23:58 |
| Observation window for productivity weakening after its pickup | 2.5 years of pickup, then about 6 months that were unimpressive | 25:00 |
| Loose target for the neutral rate | 3% nominal = 2% inflation + 1% real rate | 35:00 |
Glossary
- Forward guidance
- A central bank's explicit commitment about the future path of rates; new chair Walsh dislikes it and argues for making fewer promises.
- Core inflation
- Inflation excluding food and energy, which the Fed sees as a better read on the underlying true rate.
- Unanchoring of inflation expectations
- Inflation expectations losing their anchor, so wages and prices chase each other and the expectation becomes self-fulfilling.
- Stagflation
- A situation where inflation and employment deteriorate at the same time, putting the two mandates in conflict.
- Lump of labor fallacy
- The mistaken assumption that the total number of jobs is fixed, so technology that replaces work creates no new work.
- FOMC
- The Federal Open Market Committee, the Fed's rate-setting body, with 19 people voting around the table.
How to listen
Founders, CFOs and investors who care about financing costs and the path of rates; anyone planning AI capital expenditure or hiring decisions.
The opening ads and the Jackson Hole travel small talk (roughly the first 4 minutes) can be fast-forwarded; the substance is in the middle and later sections.