The economy is on the right path, but it’s likely to remain a bumpy one. That’s the message sent by Austan Goolsbee, president and CEO of the Federal Reserve Bank of Chicago, during a wide-ranging economic discussion Wednesday as part of the 2025 Midwest Economic Forecast Forum presented by the Wisconsin Bankers Association.
Goolsbee told Rose Oswald Poels, WBA’s president and CEO, that inflation has been foremost on the Fed’s mind for some time now, as everybody knows.
“The Federal Reserve Act gives the Fed two jobs, what we call the dual mandate, which is to stabilize prices and maximize employment,” Goolsbee said. “For several years we’ve been doing completely fine — better than fine — on the employment side of the mandate, and worse than fine on the inflation side of the mandate.
“So, we’ve been trying to get the inflation rate down, and I think it’s important to note that the inflation rate fell in the last year and a half dramatically from its heights in an almost unprecedented way. It’s one of the biggest drops in the inflation rate that we’ve experienced in U.S. history in a single year without a recession. That is unprecedented, and normally cutting the inflation rate requires a big increase in unemployment, and we didn’t have that.”
That being said, Goolsbee admitted that the economy in recent years has regularly been taking two steps forward and one step back.
“We experienced a bump up in inflation in the first quarter of last year,” Goolsbee said, adding that is part of a pattern: “We are experiencing multiple years in a row now where inflation is lower in the second half of the year and higher in the first quarter of the [following] year.
“I still see continued progress in that it’s important to take the long view on inflation. It’s a noisy series, so any one month take with a grain of salt; multiple months take as being a trend. And the trend continues to be improvement in inflation.”
According to Goolsbee, the Fed’s 2% inflation target is for a slightly different measure of inflation than the consumer price index. Rather, that target is for personal consumption expenditure inflation. For the last six months, that PCE inflation has been running very close to the 2% target, so Goolsbee is optimistic for 2025 that the nation’s economy can continue growing and have a soft landing.
“I have been describing it as that the golden path was possible, but there are a lot of uncertainties,” said Goolsbee. “There’s been an uptick in business confidence that we’ve observed since the election. But there’s also an uptick in uncertainty, whether it’s around geopolitics, around fiscal policies, or around overall economic conditions, that I think this number is somewhat encouraging and somewhat discouraging in partly equal measure, depending on which parts you look at.”
The encouraging part comes when breaking down the components of where the core inflation comes from — services, housing, and goods. Goolsbee said the biggest puzzle that the country has been facing for the last couple of years is that housing inflation has been dramatically higher than it was pre-COVID. Goods inflation is back down to where it was before, which is mild deflation. Services inflation is still elevated but down a bit, approaching where it was before. Housing’s been the thing that’s been well above where it was, but the country has been making steady progress now for several months on housing inflation. Those are the indicators for why he still thinks we’re on path.
“The part that’s discouraging,” Goolsbee said, “is we are seeing a little bit of a sign of this same seasonal pattern that we’ve had a much improved second half of the year, but now are we going to go through this same seasonal thing in the first quarter of this year. We’re going to have to see how that plays out. The key element the Fed is looking for is whether there are signs that the economy is overheating or are we stabilizing at a full employment sort of level.”
To view the entire hour-long discussion, click here.
