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Federal Reserve Bank of Chicago President Austan Goolsbee joins WIRED to answer the internet’s burning questions about the American economy.
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00:02I'm economist Austin Goolsbee, president of the Federal Reserve Bank of Chicago.
00:07Let's answer your questions from the internet.
00:09This is Tech Support U.S. Economy.
00:16At the Chris Pringle asks,
00:18Shower thought, how much money is in the Chicago Fed vault?
00:23Asking for a friend, maybe myself, in the Chicago vault
00:27in the many tens of billions at this moment,
00:31they'll probably get mad at me if I use the exact number.
00:35But there are vaults around the country.
00:38All the cash in the economy is distributed through our banks.
00:42We keep some for safekeeping in case there's a surge of demand,
00:47and then we run hundreds of millions in and out every day.
00:51Banks to banks, and we're kind of their ATM.
00:56Our subreddit simulator.
00:58Is the Fed really just a private bank, or is it secretly owned by the government?
01:03Seems like they print money whenever they want.
01:06The Fed is a part of the government, but it's not really of the executive branch,
01:11and the Federal Reserve Act tries to make the Fed as independent
01:17from political interference in the setting of rates is possible.
01:22It is true that the federal government can print money whenever they want.
01:28But judiciously, you don't want to just overprint money,
01:33because it will lead to more inflation.
01:35It is kind of the role of the Fed to print money.
01:38It's printed by the Bureau of Engraving and Printing,
01:41and all the physical cash in the economy is distributed through those 12 reserve banks.
01:47It's worth remembering the Fed itself does a whole bunch of extremely important things in the financial system,
01:54which are more than just setting interest rates at this monetary policy meeting.
01:58One of them is we are almost literally a bank to banks.
02:04So they have an account at the Fed that are bank reserves.
02:08When they need cash for ATMs, they'll say to us,
02:12we want an order for $20 million of cash.
02:16If they have too much cash, they'll send it in and say, deposit this in our account.
02:21So every one of the reserve banks is literally running hundreds of millions of dollars a day in and out,
02:28and we send out more than we take in.
02:31How does that work?
02:32The Bureau of Engraving and Printing prints new money that they send to us,
02:37so we try to reuse the money that is fit for circulation.
02:40If there are more orders than what we have fit, then we add the new money.
02:46The money comes in, and it's in bags.
02:49Our people go in, they look at the bags, they run it through those machines,
02:53it counts it to make sure it's exactly what they said.
02:56If it's got dirt on it, if it's worn out, they shred it, it goes up the tube.
03:01It turns into this, little confetti shreds.
03:05People will often say, can I have a free sample of money?
03:08And I usually say, yes, I'm going to give you $3,000,
03:12but it's a little brick of shredded money.
03:14If there's counterfeit, the machine kicks that out.
03:17It's got to go to the Secret Service.
03:19They investigate and try to find the people who are doing it.
03:22And we go deduct that from the account of the bank.
03:25If the banks send us counterfeit, they don't get credit for that.
03:29At Breezy 10 Jenny asks, this is a genuine question.
03:34But are gas and food prices ever going to go back down, or is this our new normal?
03:39Gasoline prices are extremely variable.
03:41They go up, they go down.
03:43If you get shocks like a war, and then if the war goes away, the price could go back down.
03:50But overall, the price level mostly does not go back down.
03:56It just slowly inches its way up.
03:59That's not all bad, and the Fed and most of the central banks have identified that they want to get
04:08inflation,
04:09that is, how fast prices go up, down to 2% per year.
04:14That that's low enough that people don't really have to think about it on a monthly basis or a yearly
04:22basis,
04:23how much prices are up.
04:24But it's not zero, which can have some of its own problems.
04:28The way that economists tend to think about it is real income.
04:32So if your income goes up 20% and prices went up 15% over that same period of time,
04:40you're 5% higher real income, they call it.
04:44Your purchasing power went up.
04:46When you see a lot of reaction is when people say, look at how much the prices are up,
04:53and that's more than I'm getting salary increases.
04:56When real incomes are going down, they feel it, and you get a lot of questions about affordability.
05:02The Prez next door.
05:03So, when will mortgage rates go down enough so people can buy a home?
05:08Asking for everyone.
05:10We at the Fed don't control the mortgage rate.
05:13That's a 30-year rate.
05:14If you're going to get a 30-year mortgage, it's going to partly be determined by your credit.
05:19It's going to partly be determined by what the market says.
05:23And some component will be the short-term interest rate that the Fed does have an influence on.
05:29It's also important to remember that structurally in the U.S. economy, housing's gotten more and more expensive relative to
05:39goods over the last 20 to 40 years at a pretty steady rate.
05:46And so, when you hear people saying, well, geez, you know, when my grandpa, he worked one job, my grandma
05:54didn't work, and look at the house they were able to afford, and I can't even afford a condo, that's
06:00not wrong.
06:01That, plus mortgage rates being high, I think that's why people are really feeling the pinch on housing affordability.
06:09Now, there's a separate economics question.
06:13Why is housing so expensive?
06:15Look, as an economist, I think a big part of it is you want prices to go down, you've got
06:19to build more housing.
06:20If you have restricted supply of housing, you know that's going to end up blowing back on you.
06:27By the way, on the topic of raising interest rates and people being angry when they see mortgage rates that
06:33are really high, I have a piece of historical evidence.
06:36The legendary Fed chair was Paul Volcker.
06:40He was most famous for being the Fed chair in the early 1980s when inflation was running completely amok.
06:46And they literally raised the federal funds rate, the thing that right now is around 3.75%.
06:53It was over 20%.
06:56People started sending into him blocks of wood from 2x4s, and this was the original one that they sent him.
07:04And it says, please lower these insane interest rates.
07:08So, it's been a long time that people have been saying that to the Fed.
07:12I keep that in my office.
07:13What the Fed does is not a game.
07:15Just for the stock market to care about, it affects real people.
07:22bogpoilups1234 asked best ways to tell if money is real and not counterfeit.
07:26At the Fed, when the money comes in, it goes through the machine.
07:31If the machine thinks it might be counterfeit, it kicks it out.
07:35And then a human being goes to look at it.
07:36There are security features in every bill that are how the machine tells and how you can tell at home.
07:42Here's a $100 bill.
07:44There's a strip.
07:45It's made of plastic.
07:46If that's just printed on like toner, that's not a good sign.
07:50The other thing, you can touch the money.
07:52It doesn't feel like paper.
07:54And if you get your thumb in the right spot over here on Benjamin Franklin, you'll feel some raised ridges.
08:01If you hold it up, there's a little watermark of Ben Franklin's head.
08:05If it's real money, you should see that.
08:08If you hold it under the light and wiggle it, this Liberty Bell, the ink changes color on the 100.
08:14It'll go from green to orange.
08:15You can see there's a strip in there that shows up under black light.
08:21And if you have a magnifying glass, you can look on his collar and there's tiny printing.
08:28Extremely hard to reproduce in a counterfeit setting.
08:32That's true on 20s, too.
08:34If you see those people that are in the movies, they lick it, please don't lick it.
08:38If you go down and look in the machines at what's on the bills that get shredded, you don't want
08:43to be licking that.
08:45Caker's Got Swag asked,
08:47Do banks actually have vaults with giant round doors like in TV shows and movies?
08:52Our bank doesn't have a round door, but it has a really big door.
08:57The door weighs 80,000 pounds and it's got two round combination locks and they're kind of like our nuclear
09:07codes.
09:07Some of the people know one of the combinations and the other people know the other combination.
09:12But other than that, it is kind of like what's in the TV shows and the movies in that the
09:17money's in there, it's organized.
09:18When I first came to the Fed, I really wanted it to be like a big pile of money.
09:23And it was disappointing that it's very organized.
09:27If you go down to the vault and you look at one of those containers, it's a big cube.
09:32Obviously, it depends what the denomination is, but stacked to the brim of $100 bills, that's $42.5 million in
09:42one container.
09:44So T. Rose McCoy asks here,
09:47Serious question, can someone explain how lowering interest rates will negatively affect our economy?
09:53Question mark, question mark, question mark.
09:55This gets at the heart of the tension in the setting of monetary policy.
10:01If rates are lower, people are more likely to buy a car, more likely to buy a washing machine, construction
10:06of houses.
10:08But the downside is if you get too hot from what the economy can handle, you generate inflation.
10:16So there's always a tension in the central bank over the course of the business cycle of trying to lean
10:24against the wind a little bit.
10:25The Fed, by law, has what they call the dual mandate, which is we're supposed to do two things when
10:33setting monetary policy.
10:35Maximize employment and stabilize prices.
10:38And usually those aren't in tension.
10:40One of the hardest things is when both sides start going wrong at the same time, which can happen.
10:45When oil prices start going up or you get stagflation-y shocks.
10:51The 1970s, it was epic stagflation with really high inflation and really high unemployment at the same time.
11:00There were moments when we literally had an inflation rate that was something like 13%, 14% per year simultaneous
11:10with the unemployment rate being almost double digits.
11:14That's kind of your central bank nightmare.
11:17Bez Yama asks, so data centers are good for the economy?
11:22Data centers, to the extent that they're enabling improvements in productivity, they're great.
11:30Now, at the same time, you also got to think about nothing's free and data centers cost a lot of
11:38money.
11:38And what you're seeing is the so-called hyperscalers building hundreds of billions of dollars worth of data centers.
11:46And so, everywhere you go, data centers are building out, the cost of land is going up.
11:51This idea that in the marketplace, people are competing over scarce resources and that can drive up costs.
11:58That's a real fear.
12:00And to the extent that the data centers are rooted in the future, that people are saying, hey, AI is
12:08going to be so big.
12:09We're going to be so rich.
12:10Our stock values are up so much that we should build out data centers as quickly as possible.
12:17And we should use the wealth that's embodied in our stock price to buy houses and yachts and whatever else
12:24we're going to buy.
12:25That can overheat the economy in the short run.
12:28That can make the inflation rate go up.
12:31And people start saying, whoa, nothing's affordable.
12:35When I'm going down and trying to get somebody to come in and fix my electrical at my house, I
12:41can't get them.
12:42And they're too expensive.
12:43That can be the consequence of a competitive economy.
12:49LifeWithLexie asks, what's a recession indicator?
12:52The pussycat dolls coming back when nobody was asking for them to return.
12:56If the pussycat doll is coming back when no one asked for a return as a recession indicator, I'll look
13:02at it.
13:03But the best indicators are the labor market, the unemployment rate, the vacancy rate, the hiring rate, the layoff rate.
13:14And then if you ask for those indicators of the labor market, what do they say?
13:18They say the labor market is stable without being good is how I'd characterize it.
13:25What's weird is that these indicators are saying different things, but saying them with confidence and stability.
13:33The hiring rate is extremely low.
13:35Stable, but low.
13:37As low as the hiring rate is and the depths of a recession.
13:42But at the same time, the layoff rate is also extremely low.
13:47And normally the layoff rate being this low would say the job market is booming.
13:53I think it's because there's a lot of uncertainty.
13:55So you've seen businesses pull back and say, we're not going to get rid of anybody, but we're not going
14:00to hire any new people until we get some clarity of where things are headed.
14:06Ben Poe, 4987.
14:08The Fed meets today.
14:09I'm picturing 12 robed elders standing in a circle around a floating pyramid with a glowing all-seeing eye.
14:16That's how interest rates work, right?
14:19Hashtag Illuminati.
14:21Yeah, it kind of is.
14:22It looks like this.
14:24We go into the room.
14:25The shades come down.
14:27So nobody can spy on what's going to be said there.
14:30There are seven governors who are fed political appointees from Washington, D.C.
14:37And there are 12 Reserve Bank presidents sprinkled around the country.
14:42And then there are some staff along this side who make presentations about the state of the economy.
14:49And that's where we decide on the interest rates.
14:52Of those 12 Reserve Bank districts that are spread out around the country, they've divided up the nation circa the
15:00Federal Reserve Act of 1913.
15:02The Chicago Fed is here, heart of the Midwest.
15:05That's our district.
15:06But you see that each one of them has a regional character.
15:10And that's kind of a magic genius sort of behind the Federal Reserve Act.
15:15It's not just controlled by the federal government running the entire monetary system of the United States.
15:22There's automatic independent input that comes from the rest of the country.
15:26At the meeting, everybody gets to speak their piece.
15:30Day one is about the economy.
15:32And day two is about what do they think should happen to race.
15:36When all those speeches are done, then they have a vote on the statement.
15:40And everybody has had their input on the words and what they think should be.
15:45And then whoever the voters are at that particular meeting, and it rotates who's voting depending what year it is.
15:53They vote yes or no.
15:55There's a lot of effort made by the chairman and by the members of the committee to get on the
16:01same page.
16:02A lot of the votes are unanimous.
16:04Sometimes they aren't, and there'll be a few dissents.
16:08But for the most part, it's a lot of consensus.
16:28This is the crux of the pressure that's on young people today.
16:35They're getting out of school.
16:36The hiring rate by businesses is very low.
16:39So where the rubber hits the road is for people whose wages are not rising with prices.
16:48And whenever you see that happening in U.S. economic history, that wage growth is below inflation,
16:55there's a lot of concern about the issues of affordability.
17:00Your feeling is not wrong in the data.
17:04And kind of the question there is why haven't wages kept up with the cost of living?
17:08There, it can be complicated in two spaces.
17:13One, the wage part is sometimes separate from the cost of living part.
17:18Cost of living, part of it is we took some heavy blows.
17:23We had COVID disrupt the supply chain, driving up the cost of stuff.
17:27Then we've got tariffs, wars driving up the price of fuel, extra stimulus from building out data centers and AI
17:37that drive up the cost and increase the pressure in the economy.
17:40Those things can increase the cost of living.
17:43Then let's think about the other side of the equation, which is wages.
17:46Wages are the economists usually think are getting determined by what's the output, what's the productivity, what's the bargaining position
17:55of the employers versus the employees.
17:58We've seen that change pretty dramatically over the course of the pandemic and coming out of it as well across
18:06different industries.
18:07So overall, in most years, actually wages on average have grown faster than inflation.
18:14And it's good when that happens.
18:15But in some years it hasn't.
18:17That's rare, but it has happened before.
18:21I think at two points in the 1970s when we got serious oil shocks and inflation starts a spiral.
18:28I think those are both periods where you experience this unusual aspect that wages are rising, but prices are rising
18:36even faster than the wages.
18:38And the fear to the central bank, like the Fed, is that when that happens, then people can come back
18:45and say, hey, wait a second.
18:46Last year prices were up 5%, so our wages need to go up 6%.
18:51And then the businesses say, oh man, if our wages are going up 6%, we're going to have to raise
18:56prices 7%.
18:57And that wage price spiral, they call it, is really hard to get out of that kind of an environment.
19:03Here's a question from Quora.
19:04What's the economic equivalent of a check engine light?
19:08A sign other than inflation or unemployment that makes economists think, uh-oh.
19:13And I love this question because this goes back to my day-to-dog roots.
19:17What are we sniffing around to figure out where we are?
19:21Before every FOMC meeting, the Reserve Bank presidents are constantly out talking to people in their districts.
19:29And they compile all that information and put it out in the beige book.
19:34You can see it. It's public knowledge.
19:36If you start hearing the same thing from business leaders, from small businesses, from civic leaders in your district, that
19:44they're saying data centers are driving up the price of land and the farmers are getting hammered.
19:50And you start hearing that over and over.
19:52A lot of times that can make economists go, uh-oh, let's start paying real attention to the data.
19:58A longer-term think that I pay a lot of attention to is the productivity growth rate.
20:04High productivity growth is manna from heaven.
20:08It's what makes us rich.
20:09And what we've seen in the last two or three years actually is productivity growth stepping up from where it
20:16was pre-COVID.
20:17That would be fabulous if it's sustained.
20:20The Chicago Fed itself tries to combine real-time information, like we put out what we call the CARTs data,
20:29where we get private sector credit card information about what people are spending money on in total on their credit
20:37cards and correlate it with consumer spending at the national level to give us insights in real time about where
20:47consumer spending is going to go.
20:48And since consumer spending is 70-plus percent of the whole economy, any insights in that space are really important.
20:59The main driver of economic growth that kept us out of recession is the unstoppable U.S. consumer continuing to
21:08spend based on their incomes and wages rising.
21:12As long as the consumer remains healthy, I think the economy is going to remain healthy.
21:17The overall economy has been pretty remarkably stable.
21:22Prices and affordability, that's the biggest problem that we're facing right now.
21:28Demo64 says, honestly, I think I'd rather take the 2008 recession over whatever the boop is happening right now.
21:36At least they had $1 McChickens and Wii Sports and Lady Gaga.
21:42I gotta be honest, I wouldn't take that.
21:44In the 2008 financial crisis and recession, I was working at the Council of Economic Advisors.
21:52It was horrible.
21:53Millions of people losing their homes.
21:56We're having 800,000 jobs lost per month.
22:02The unemployment rate is shooting up to double digits.
22:04And that was a really scary moment.
22:07There were a lot of people that I knew, economic research historians, calling me and saying,
22:16you should stop saying we're going to avoid the Great Depression because it's inevitable that this is going to turn
22:22into a depression.
22:23You should be saying you have a plan to get out of the depression.
22:26Look, I feel you on the McChickens.
22:28The biggest problem facing our economy right now is not the collapse of industry and the collapse of jobs.
22:36It's that the prices have been rising too fast.
22:39We got an inflation problem and people hate inflation.
22:43A Brandes asks, why is the U.S. stock market at all-time highs and climbing when there's so much
22:50economic strife in the world?
22:51Because the stock market is not the economy.
22:55Let's say it again.
22:57The stock market is not the economy.
22:58And if you ever want the proof of that, go back to that day in 2020 at the start of
23:08the pandemic.
23:09I remember it was my mom's birthday.
23:11May 8th, they announced that there were 20 million jobs lost in a single month.
23:20The worst data announcement in the history of the United States.
23:25And on the day they announced that, the stock market went up.
23:29Why?
23:30Because the value of any company's stock is all the future profits that you think that company's going to make.
23:38You've got a lot of euphoria in the stock market about AI, about the prospects that they would make these
23:46profits.
23:47That has little to do with the economic strife in the world.
23:51It's based on the fundamentals of how much do they think these stocks are they going to make going forward.
23:58And it's always worth remembering in the central bank, as I say, the job is written down in the law.
24:07Maximize employment.
24:09Stabilize prices.
24:11It doesn't say anything in there about make sure the stock market is happy.
24:16Santa Zua says,
24:18The dollar isn't backed by gold anymore, so who's to say any of this is real?
24:22In my world, the gold standard is bad, not good.
24:25Gold doesn't have an inherent value.
24:28It's driven by supply and demand.
24:29Money today is based on public trust in the governments that are issuing it.
24:36That the U.S. government will always accept U.S. dollars in payment of U.S. taxes means that our
24:44dollars will always have a value
24:46as long as you think that the government is not going to inflate them away or monetize the debt.
24:52It's Aleem 8 Zuber who asks if AI takes our job, how would the economy work?
24:58If it took everybody's job, the economy wouldn't work.
25:02But be careful, Aleem.
25:04There's an old fallacy.
25:07It's called the lump of labor fallacy.
25:10And it says all of workers are just a lump that can't move.
25:16There's a fixed number of jobs in the economy.
25:18And as soon as there's a machine or an AI or the computer that can do these better than people,
25:24everyone will be unemployed and will be doomed.
25:27And it's a fallacy because it's never been true.
25:30If AI comes in, it can affect different industries differently.
25:33But if you've looked in the past at technological changes, electricity, computers, the telephone, the internet, internal combustion engines, the
25:45unemployment rate hasn't gone to 100%.
25:48It's still 4.3%.
25:50If they had told you when they invented the telephone, here's how many phone lines they're going to be in
25:58the United States circa 2026.
26:01400 million, 500 million phone lines.
26:04The people would have laughed at you.
26:06They'd have said, what?
26:07Oh, there's going to be more than one phone per person?
26:09It's going to be physically impossible because every man, woman, and child in America would have to be a phone
26:15operator pulling out cords and plugging them back in.
26:17It could never work.
26:18The fact that machines replaced telephone operators in America did not lead the unemployment rate to go up even in
26:26the telecom sector.
26:27It did change the nature of work.
26:30I think if AI takes some jobs, it will take the tasks in those jobs, but I'm still pretty hopeful
26:38and expectant that we're going to figure out how to keep people employed.
26:45So those are all the questions for today.
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