Austan Goolsbee dismisses the practical utility of R-star (the neutral rate of interest) for making immediate monetary policy decisions. He likens it to Sasquatch: a concept that exists but is unobservable in real-time, making it unhelpful for deciding the next policy move.
AI's productivity gains could lower inflation long-term. However, Goolsbee warns that the current massive investment in AI infrastructure can overheat the economy in the short run by driving up demand for resources and labor, forcing the Fed to raise rates, similar to the 1990s tech boom.
Goolsbee identifies the unusual combination of low hiring and low firing in the labor market not as a sign of stability, but as a key indicator of widespread uncertainty among businesses. This hesitance to either expand or contract reflects a wait-and-see approach driven by shocks like tariffs and war.
Goolsbee argues the Fed’s aggressive rate hikes deserve credit for enabling recent disinflation. By acting decisively, the Fed kept long-term inflation expectations anchored (as seen in TIPS data), preventing a wage-price spiral and allowing supply-side healing to bring inflation down without a major recession.
The dot plot fails to serve as a true reaction function because its median projections for inflation and interest rates aren't necessarily from the same FOMC member. This aggregation problem means you cannot link a specific rate path to a specific economic outlook, making the tool less useful than it appears.
Austan Goolsbee clarifies a key distinction in Fed communication. He supports communicating the Fed's "reaction function"—its worldview and how it interprets data. He opposes "forward guidance," which he defines as pre-committing to future rate moves, as it ties the Fed's hands and increases volatility.
Goolsbee pushes back against the idea that high wage growth prevents inflation from falling. He argues the dynamic is the reverse: prices are less sticky and rise first in response to a shock, followed by wages. This means seeing high wage growth while inflation falls is a normal part of the disinflationary process.
From a short-term policy perspective, the source of excess demand doesn't matter. Whether it's a housing boom, consumer spending, or an AI investment surge, if it threatens to overheat the economy, the Fed's response is the same: raise interest rates. The long-term productive benefits of investment are a separate consideration.