Fed Official: Inflation Isn't Gone, Don't Bet on a 'Temporary' Rate Cut
Goolsbee worries the economy is overheating: the inflation decline is mostly supply-side, services still show no effect; cuts below neutral require evidence, not preemption.
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The argument · tap a timestamp to hear it
If inflation stays above 3%, rates aren't tight
Asked whether current policy is restrictive, Goolsbee declined to answer directly. He said the key is the real rate, i.e., the nominal rate minus inflation expectations or actual inflation. His long-run landing point is 3% nominal, 2% inflation, 1% real. If inflation is above 3%, the real rate is much lower than it appears. He is willing to wait, but he is nervous about the past six months of inflation performance. This opening sets the tone for the whole episode: you can't discuss tightness without reference to inflation.
— Austan GoolsbeeSaying 'wait three more months' every quarter isn't temporary
Goolsbee breaks down current inflation into parts: tariffs and war-driven oil prices are one-off price level shocks that should fade, but he cautions from the COVID experience that a large enough supply shock can persist much longer than initial forecasts. What really worries him is services inflation, which is neither tariff- nor oil-driven and represents a deeper problem. His test: you can't say 'just wait three more months' every quarter; he needs to see actual evidence of fading.
— Austan GoolsbeeStealing electricians isn't overheating; wage spillover is
On AI data center construction, Goolsbee says what he hears from Midwest businesses are complaints: data centers buy up land, push up prices, and make it hard to find electricians and HVAC workers. But he stresses that industry-level resource competition doesn't equal economy-wide overheating. Only if AI investment pushes wages and prices beyond its own sector, raising national unemployment and metrics beyond GDP, would it count as traditional aggregate demand excess. If it gets to that point, current policy is not restrictive enough.
— Austan GoolsbeeTwo-thirds of this inflation cycle came from supply, not demand
Looking back at the aggressive hikes of 2022-23, Goolsbee offers a split: roughly two-thirds of this cycle's inflation rise and fall came from supply, one-third from demand. He credits the Fed for ensuring 'the other shoe didn't drop': TIPS inflation compensation stayed stable at 2.3% even as CPI approached 10%, showing the 2% target anchor held. He admits the Fed was slow to start, but insists you can't have it both ways—you can't blame stimulus for the rise and credit supply chain repair for the fall.
— Austan Goolsbee5.25% long-end yields aren't a credit panic
Facing rising long-term Treasury yields, Goolsbee says it takes time to distinguish drivers: it could be inflation expectations, market expectations of sustained high Fed rates, or increased bond supply. He rejects the 'market is panicking about US credit' reading, because if there were genuine default concerns, 5.25% yields would be historically normal. He quotes Volcker: the Fed acts, the market reacts, and the order can't be reversed. Market signals can be informative, but the market shouldn't tell the Fed what to do.
— Austan GoolsbeeThe dot plot isn't a reaction function; the median isn't from one person
Goolsbee separates forward guidance from reaction function. He opposes forward guidance that 'promises a hike or cut at a specific meeting,' as it ties hands and increases volatility. But markets need to understand how the Fed views economic data—that's the reaction function. The problem with SEP and the dot plot: the median inflation and median rate don't necessarily come from the same person, so the dot plot can't truly serve as a reaction function. He says he's opposed to SEP for years because members write down forecasts and get burned later, hurting credibility.
— Austan GoolsbeeWithout evidence of inflation fading, don't cut early
He gives his own reaction function: highly attentive to the inflation side; if he sees inflation genuinely falling back toward 2%, he's willing to return to the '3-2-1' path; if especially services inflation is still rising with no progress, he gets nervous. He explains his dissenting vote late last year: with the government shutdown and missing data, he was uncomfortable preemptively cutting without evidence, not wanting to act on the assumption that 'inflation will disappear on its own.' This explains his divergence from the current majority.
— Austan GoolsbeePowell moved a few seats; the FOMC has shifted gears
Asked how an FOMC chaired by Warsh differs from the Powell era, Goolsbee says the personal feel is very different. The new chair's demeanor at press conferences, worldview, and willingness to revisit communication tools all differ; Powell is still on the committee, just moved a few seats over. He won't comment on the chair's personal reaction function, saying everything awaits the verbatim minutes four years and nine months from now. For listeners, this signals the Fed is in a transition period, and market speculation about the reaction function will continue.
— Austan GoolsbeeIn their own words · checked verbatim
I always called our star our Sasquatch and you know somehow it feels with this as a backdrop because you can never see it until after it was left
Austan Goolsbee3:06
It has to get out of its lane of just direct competition and drive up wages, drive up prices outside of just its lane.
Austan Goolsbee11:17
I wasn't there when it went up, so you can't blame me.
Austan Goolsbee18:28
Paul Volcker used to tell me, our job is to act and the market's job is to react and let's not get the order mixed up.
Austan Goolsbee22:36
The reason I dissented in the last meeting of the year when they cut rates was I'm not comfortable front loading the rate cuts, counting on this inflation to be transitory and go away.
Austan Goolsbee33:54
If inflation is going to be persistent, then it's going to force action by the Fed or by any center. If it's going away on its own, or if you even feel like it could go away on its own, then. It puts us in a very different circumstance.
Austan Goolsbee41:11
Figures
| Goolsbee's long-run neutral path | 3% nominal, 2% inflation, 1% real | 2:03 |
| Recent productivity growth | Six consecutive months of poor performance | 15:24 |
| Attribution of inflation rise and fall | Roughly two-thirds supply, one-third demand | 18:28 |
| Historical CPI-PCE relationship | CPI 2.3% roughly corresponds to PCE 2.0% | 18:28 |
| TIPS inflation compensation at inflation peak | Stable at 2.3% (CPI basis) | 19:30 |
| Taylor rule suggestion at zero lower bound | Negative 6% | 44:11 |
Glossary
- R-star / neutral rate
- The theoretical real neutral rate that measures whether monetary policy is restrictive; not directly observable.
- SEP / Summary of Economic Projections
- The Fed's quarterly compilation of members' forecasts for inflation, unemployment, and rates; the dot plot is part of it.
- Forward guidance
- Central bank communication that pre-commits to a future rate path; Goolsbee thinks it was needed at the zero lower bound but should be reduced now.
- Reaction function
- The rule by which a central bank responds to economic data; Goolsbee stresses it is not the same as a specific rate commitment.
- Taylor rule
- An empirical rule mapping inflation and output gaps to a suggested rate; at the zero lower bound it once suggested negative rates.
How to listen
Traders and macro hedge fund researchers focused on Fed policy paths, as well as primary market practitioners trying to judge whether AI investment poses overheating risks.
The opening R-star theory discussion can be fast-forwarded; the focus starts with the inflation decomposition and AI spillover sections.