Economist Answers U.S. Economy Questions

[metal clanking]

I'm economist Austen Goolsbee,

President of the Federal Reserve Bank of Chicago.

Let's answer your questions from the internet.

This is Tech Support: U.S. Economy.

[upbeat music]

@TheKhrisPringle asks, Shower thought,

how much money is in the Chicago fed vault?

Asking for a friend, maybe myself.

In the Chicago vault, in the many

tens of billions at this moment,

they'll probably get mad at me if I use the exact number,

but there are vaults around the country.

All the cash in the economy is

distributed through our banks.

We keep some for safekeeping

in case there's a surge of demand,

and then we run hundreds of millions in and out every day

to banks, and we're kind of their ATM.

Our Subreddit Simulator.

Is the Fed really just a private bank,

or is it secretly owned by the government?

Seems like they print money whenever they want.

The Fed is a part of the government,

but it's not really of the executive branch,

and the Federal Reserve Act tries to make the Fed

as independent from political interference

in the setting of rates as possible.

It is true that the federal government

can print money whenever they want,

but judiciously, you don't want to just overprint money,

because it will lead to more inflation.

It is kind of the role of the Fed to print money.

It's printed by the Bureau of Engraving and Printing,

and all the physical cash in the economy

is distributed through those 12 reserve banks.

It's worth remembering the Fed itself does a whole bunch

of extremely important things in the financial system,

which are more than just setting interest rates

at this monetary policy meeting.

One of them is we are almost literally a bank to banks.

So they have an account at the Fed that our bank reserves.

When they need cash for ATMs, they'll say to us,

We want an order for $20 million of cash.

If they have too much cash, they'll send it in and say,

Deposit this in our account.

So every one of the reserve banks is literally running

hundreds of millions of dollars a day in and out,

and we send out more than we take in.

How does that work?

The Bureau of Engraving and Printing

prints new money that they send to us,

so we try to reuse the money that is fit for circulation.

If there are more orders than what

we have fit, then we add the new money.

The money comes in and it's in bags.

Our people go in, they look at the bags,

they run it through those machines.

It counts it to make sure it's exactly what they said.

If it's got dirt on it, if it's worn out,

they shred it, it goes up the tube,

it turns into this, little confetti shreds.

People will often say, Can I have a free sample of money?

And I usually say, Yes,

I'm going to give you $3,000,

but it's a little brick of shredded money.

If there's counterfeit, the machine kicks that out.

It's got to go to the Secret Service.

They investigate and try to find

the people who are doing it,

and we go deduct that from the account of the bank.

If the banks send us counterfeit,

they don't get credit for that.

@Breezy10Jenny asks,

This is a genuine question, but are gas

and food prices ever going to go back down,

or is this our new normal?

Gasoline prices are extremely variable.

They go up, they go down.

If you get shocks like a war, and then if the war goes away,

the price could go back down.

But overall, the price level

mostly does not go back down.

It just slowly inches its way up.

That's not all bad.

And the Fed and most of the central banks

have identified that they want to get inflation,

that is how fast prices go up, down to 2% per year,

that that's low enough that people don't really

have to think about it on a monthly basis,

or a yearly basis, how much prices are up,

but it's not zero, which can have some of its own problems.

The way the economists tend to

think about it is real income.

So if your income goes up 20% and prices went up

15% over that same period of time,

your 5% higher real income, they call it,

your purchasing power went up.

When you see a lot of reaction is when people say,

Look at how much the prices are up,

and that's more than I'm getting salary increases.

When real incomes are going down, they feel it,

and you get a lot of questions about affordability.

The Preznextdoor.

So when will mortgage rates go down

enough so people can buy a home?

Asking for everyone.

We at the Fed don't control the mortgage rate.

That's a 30-year rate.

If you're going to get a 30-year mortgage,

it's going to partly be determined by your credit.

It's going to partly be determined by what the market says.

And some component will be the short-term interest rate

that the Fed does have an influence on.

It's also important to remember that

structurally in the US economy,

housing's gotten more and more expensive

relative to goods over the last

20 to 40 years at a pretty steady rate.

And so when you hear people saying,

Well, geez,

you know, when my grandpa,

he worked one job, my grandma didn't work,

and look at the house they were able to afford,

and now I can't even afford a condo.

That's not wrong.

That plus mortgage rates being high,

I think that's why people are really

feeling the pinch on housing affordability.

Now, there's a separate economics question.

Why is housing so expensive?

Look, as an economist,

I think a big part of it is you want prices to go down,

you got to build more housing.

If you have restricted supply of housing,

you know that's going to end up blowing back on you.

By the way,

on the topic of raising interest rates

and people being angry when they see

mortgage rates that are really high,

I have a piece of historical evidence.

The legendary Fed chair was Paul Volker.

He was most famous for being the Fed chair in the early

1980s when inflation was running completely amuck,

and they literally raised the federal funds rate.

The thing that right now is around

three and three quarters percent.

It was over 20%.

People started sending into him

blocks of wood from two by fours,

and this was the original one that they sent him.

And it says, Please lower these insane interest rates.

So it's been a long time that people

have been saying that to the Fed.

I keep that in my office.

What the Fed does is not a game just

for the stock market to care about.

It affects real people.

BogPoilops1234 asks,

Best ways to tell if money is real and not counterfeit?

At the Fed, when the money comes in,

it goes through the machine.

If the machine thinks it might

be counterfeit, it kicks it out,

and then a human being goes to look at it.

There are security features in every bill that are

how the machine tells and how you can tell at home.

Here's a $100 bill.

There's a strip, it's made of plastic.

If it's just printed on like toner, that's not a good sign.

The other thing, you can touch the money.

Doesn't feel like paper.

And if you get your thumb in the right spot over here

on Benjamin Franklin, you'll feel some raised ridges.

If you hold it up, there's a little

watermark of Ben Franklin's head.

If it's real money, you should see that.

If you hold it under the light

and wiggle it, this Liberty Bell,

the ink changes color on the hundred.

It'll go from green to orange.

You can see there's a strip in there

that shows up under black light.

And if you have a magnifying glass,

you can look on his collar and there's tiny printing.

extremely hard to reproduce in a counterfeit setting.

That's true on 20s too.

If you see those people that in the movies, they lick it.

Please don't lick it.

If you go down and look in the machines

at what's on the bills that get shredded,

you don't want to be licking that.

CakersGotSwag asked,

Do banks actually have vaults with giant

round doors like in TV shows and movies?

Our bank doesn't have a round door,

but it has a really big door.

The door weighs 80,000 pounds

and it's got two round combination locks,

and they're kind of like our nuclear codes.

Some of the people know one of the combinations

and the other people know the other combination.

But other than that, it is kind of like

what's in the TV shows and the movies,

in that the money's in there, it's organized.

When I first came to the Fed, I really

wanted it to be like a big pile of money,

and it was disappointing that it's very organized.

If you go down to the vault and you look

at one of those containers, it's a big cube.

Obviously it depends what the denomination is,

but stacked to the brim of $100 bills,

that's $42.5 million in one container.

So T. Rose McCoy asks here,

Serious question.

Can someone explain how lowering interest rates

will negatively affect our economy???

This gets at the heart of the tension

in the setting of monetary policy.

If rates are lower, people are more likely to buy a car,

more likely to buy a washing machine,

construction of houses.

But the downside is if you get too hot

from what the economy can handle,

you generate inflation.

So there's always a tension in the Central Bank

over the course of the business cycle

of trying to lean against the wind a little bit.

The Fed, by law,

has what they call the dual mandate,

which is we're supposed to do two things

when setting monetary policy.

Maximize employment and stabilize prices,

and usually those aren't in tension.

One of the hardest things is when both sides

start going wrong at the same time,

which can happen when oil prices start going up

or you get stagflationy shocks.

The 1970s, it was epic stagflation,

with really high inflation and really

high unemployment at the same time.

There were moments when we literally had an inflation rate

that was something like 13, 14% per year,

simultaneous with the unemployment

rate being almost double digits.

That's kind of your central bank nightmare.

Bezyama asks, So data centers are good for the economy?

Data centers,

to the extent that they're enabling

improvements in productivity, they're great.

Now at the same time, you also

got to think about nothing's free,

and data centers cost a lot of money.

And what you're seeing is the so-called

hyperscalers building hundreds of billions

of dollars worth of data centers.

And so everywhere you go, data centers are building out,

the cost of land is going up.

This idea that in the marketplace,

people are competing over scarce resources

and that can drive up costs, that's a real fear.

And to the extent that the data centers

are rooted in the future, that people are saying,

Hey, AI is going to be so big,

we're going to be so rich,

our stock values are up so much that we should build out

data centers as quickly as possible,

and we should use the wealth that's embodied

in our stock price to buy houses,

and yachts, and whatever else we're going to buy.

That can overheat the economy in the short run.

That can make the inflation rate go up,

and people start saying,

Whoa, nothing's affordable.

When I'm going down and trying to get somebody

to come in and fix my electrical at my house,

I can't get them and they're too expensive,

that can be the consequence of a competitive economy.

Life with Lexiii asks,

What's a recession indicator?

The Pussycat Dolls coming back when

nobody was asking for them to return.

If The Pussycat Dolls coming back when no one asked

for a return is a recession indicator, I'll look at it.

But the best indicators are the labor market,

the unemployment rate, the vacancy rate,

the hiring rate, the layoff rate.

And then if you ask for those indicators

of the labor market, what do they say?

They say the labor market is stable without being good,

is how I'd characterize it.

What's weird is that these indicators

are saying different things,

but saying them with confidence and stability.

The hiring rate is extremely low.

Stable, but low,

as low as the hiring rate is in the depths of a recession.

But at the same time, the layoff

rate is also extremely low.

And normally the layoff rate being this low

would say the job market is booming.

I think it's because there's a lot of uncertainty.

So you've seen businesses pull back and say,

we're not going to get rid of anybody,

but we're not going to hire any new people

until we get some clarity of where things are headed.

BenPo4987, The Fed meets today.

I'm picturing 12 robed elders standing in a circle

around a floating pyramid with a glowing all-seeing eye.

That's how interest rates work, right?

#Illuminati.

Yeah, it kind of is.

It looks like this.

We go into the room, the shades come down,

so nobody can spy on what's going to be said there.

There are seven governors who are Fed

political appointees from Washington DC,

and there are 12 reserve bank

presidents sprinkled around the country,

and then there are some staff along this side

who make presentations about the state of the economy.

And that's where we decide on the interest rates.

Of those 12 reserve bank districts

that are spread out around the country,

they've divided up the nation circa

the Federal Reserve Act of 1913.

The Chicago Fed is here, heart of the Midwest,

as our district.

But you see that each one of them has a regional character.

And that's kind of a magic genius

sort of behind the Federal Reserve Act.

It's not just controlled by the federal government

running the entire monetary system of the United States.

There's automatic independent input

that comes from the rest of the country.

At the meeting, everybody gets to speak their piece.

Day one, it's about the economy,

and day two is about what do they

think should happen to rates.

When all those speeches are done,

then they have a vote on the statement,

and everybody has had their input on the words,

and what they think should be.

And then whoever the voters are at that particular meeting,

and it rotates who's voting depending what year it is,

they vote yes or no.

There's a lot of effort made by the chairman

and by the members of the committee to get on the same page.

A lot of the votes are unanimous.

Sometimes they aren't, and there'll be a few dissents.

But for the most part, it's a lot of consensus.

I Am DeOnyae Dior says,

Gen Z confession.

We're gaslit into believing we're bad with money,

but no one can explain how a $17 per hour wage

is supposed to support a $3,500

a month standard cost of living.

This is the crux of the pressure

that's on young people today.

They're getting out of school.

The hiring rate by business is very low.

So where the rubber hits the road is

for people whose wages are not rising with prices.

And whenever you see that happening in US economic history,

that wage growth is below inflation,

there's a lot of concern about the issues of affordability.

Your feeling is not wrong in the data.

And kind of the question there is why haven't

wages kept up with the cost of living?

There, it can be complicated in two spaces.

One, the wage part is sometimes

separate from the cost of living part.

Cost of living, part of it is we took some heavy blows.

We had COVID disrupt the supply chain,

driving up the cost of stuff.

Then we've got tariffs, wars driving up the price of fuel,

extra stimulus from building out

data centers and AI that drive up the cost

and increase the pressure in the economy.

Those things can increase the cost of living.

Then let's think about the other side

of the equation, which is wages.

Wages are, the economists usually think,

are getting determined by what's the output,

what's the productivity, what's the bargaining

position of the employers versus the employees.

We've seen that change pretty dramatically

over the course of the pandemic,

and coming out of it as well across different industries.

So overall, in most years,

actually wages on average have grown faster than inflation.

And it's good when that happens,

but in some years it hasn't.

That's rare, but it has happened before.

I think at two points in the 1970s,

when we got serious oil shocks

and inflation started to spiral.

I think those are both periods where you experience

this unusual aspect that wages are rising,

but prices are rising even faster than the wages.

And the fear to the central bank, like the Fed,

is that when that happens, then

people can come back and say,

Hey, wait a second.

Last year prices were up 5%, so our wages need to go up 6%.

And then the businesses say, Oh man,

if our wages are going up 6%,

we're going to have to raise prices 7%.

And that wage price spiral, they call it,

is really hard to get out of that kind of an environment.

Here's a question from Quora.

What's the economic equivalent of a check-engine light?

A sign other than inflation or unemployment

that makes economists think, uh-oh.

And I love this question, because this

goes back to my data dog roots.

What are we sniffing around to figure out where we are?

Before every FOMC meeting,

the Reserve Bank presidents are constantly

out talking to people in their districts,

and they compile all that information

and put it out in the beige book.

You can see it, it's public knowledge.

If you start hearing the same thing from business leaders,

from small businesses, from civic leaders in your district,

that they're saying data centers are driving up the price

of land and the farmers are getting hammered,

and you start hearing that over and over,

a lot of times that can make economists go, uh-oh,

let's start paying real attention to the data.

A longer term think that I pay a lot of attention to

is the productivity growth rate.

High productivity growth is manna from heaven.

It's what makes us rich.

And what we've seen in the last two or three years

actually is productivity growth

stepping up from where it was pre-COVID.

That would be fabulous if it's sustained.

The Chicago Fed itself tries

to combine real time information.

Like, we put out what we call the carts data,

where we get private sector credit card information

about what people are spending money on

in total on their credit cards and correlate it

with consumer spending at the national level

to give us insights in real time about

where consumer spending is going to go.

And since consumer spending is

70 plus percent of the whole economy,

any insights in that space are really important.

The main driver of economic growth that kept us

out of recession is the unstoppable US consumer

continuing to spend based on their incomes and wages rising.

As long as the consumer remains healthy,

I think the economy's going to remain healthy.

The overall economy has been pretty remarkably stable.

Prices and affordability, that's the biggest

problem that we're facing right now.

DeeMo.64 says,

Honestly, I think I'd rather take the 2008 recession

over whatever the boop is happening right now.

At least they had $1 McChickens,

and Wii Sports, and Lady Gaga.

I got to be honest, I wouldn't take that.

In the 2008 financial crisis and recession,

I was working at the Council of Economic Advisors.

It was horrible.

Millions of people losing their homes.

We are having 800,000 jobs lost per month.

The unemployment rate is shooting up the double digits.

And that was a really scary moment.

There were a lot of people that I knew,

economic research historians calling me and saying,

You should stop saying we're going

to avoid the Great Depression,

because it's inevitable that this

is going to turn into a depression.

You should be saying you have

a plan to get out of the Depression.

Look, I feel you on the McChickens.

The biggest problem facing our economy right now

is not the collapse of industry and the collapse of jobs,

it's that the prices have been rising too fast.

We got an inflation problem, and people hate inflation.

Abrandis asks,

Why is the US stock market at all time highs and climbing

when there's so much economic strife in the world?

Because the stock market is not the economy.

Let's say it again.

The stock market is not the economy!

And if you ever want the proof of that,

go back to that day in 2020 at the start of the pandemic.

I remember, it was my mom's birthday.

May 8th, they announced that there were

20 million jobs lost in a single month.

The worst data announcement in

the history of the United States.

And on the day they announced that,

the stock market went up.

Why?

Because the value of any company's stock

is all the future profits that you

think that company's going to make.

You've got a lot of euphoria in the stock market about AI,

about the prospects that they would make these profits.

That has little to do with the economic strife in the world.

It's based on the fundamentals of

how much do they think these stocks

are going to make going forward.

And it's always worth remembering,

in the Central Bank, as I say,

the job is written down in the law.

Maximize employment, stabilize prices.

It doesn't say anything in there about

make sure the stock market is happy.

Santazzzua says, The dollar isn't backed by gold anymore,

so who's to say any of this is real?

In my world,

the gold standard is bad, not good.

Gold doesn't have an inherent value.

It's driven by supply and demand.

Money today is based on public trust

in the governments that are issuing it,

that the US government will always accept US dollars

in payment of US taxes means that our dollars

will always have a value as long as you think

that the government is not going to

inflate them away or monetize the debt.

It's Alim8Zuber who asks,

If AI takes our job, how would the economy work?

If it took everybody's job, the economy wouldn't work.

But be careful, Alim,

There's an old fallacy.

It's called the lump of labor fallacy.

And it says all of workers are just a lump that can't move.

There's a fixed number of jobs in the economy,

and as soon as there's a machine, or an AI,

or a computer that can do these better than people,

everyone will be unemployed and will be doomed.

And it's a fallacy because it's never been true.

If AI comes in, it's going to affect

different industries differently.

But if you've looked in the past at technological changes,

electricity, computers,

the telephone, the internet,

internal combustion engines,

the unemployment rate hasn't gone to 100%.

It's still 4.3%.

If they had told you when they invented the telephone,

here's how many phone lines there's going to be

in the United States circa 2026,

400 million, 500 million phone lines.

The people would have laughed at you!

They'd have said, What?

Oh, there's going to be more than one phone per person?

It's going to be physically impossible,

because every man, woman and child in America

would have to be a phone operator,

pulling out cords and plugging it back in.

It could never work.

The fact that machines replaced telephone operators

in America did not lead the unemployment rate to go up,

even in the telecom sector.

It did change the nature of work.

I think if AI takes some jobs,

it will take the tasks in those jobs,

but I'm still pretty hopeful and expecting

that we're going to figure out how to keep people employed.

So those are all the questions for today.

Thank you for watching.

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