SCOTT SIMON, HOST:
New data says that consumer sentiment is down, and prices are to blame. That's from a University of Michigan survey and a CNN poll. It is a sharp reversal from the post-election hopes that Donald Trump would bring household costs down. Austan Goolsbee is president of the Federal Reserve Bank of Chicago. He chaired President Obama's Council of Economic Advisers and joins us now from Chicago. Thanks so much for being with us.
AUSTAN GOOLSBEE: Hi, Scott. Great to talk to you again.
SIMON: It is 30 days into the Trump administration. Is it a little too early to expect a turnaround?
GOOLSBEE: When the Fed is fighting inflation, it's not actually trying to get the price level back to what it was five years ago. It's trying to get the inflation rate down to 2%. And that can drive my mom crazy. You know, well, what do you mean you're not trying to get the prices back down? But that's because the level of prices kind of grows over time, and the goal is that income would grow faster than the prices are growing. That's what you want, for real incomes to be increasing. How long it's going to take for inflation to truly get back down to the level that it was at before COVID. We're still fighting inflation, and we're going to keep fighting inflation, but it's going to take longer than 30 days.
SIMON: What effect does consumer sentiment have on the economy?
GOOLSBEE: It historically has been a pretty good indicator of how people would choose to spend in the near future, and it's why people paid a lot of attention to it. In recent years, it's become a little bit less good as a predictor of behavior. So you've had people saying the economy stinks. I'm upset. But they would still go out and spend money when they got a paycheck. So consumer sentiment indicates something, but it's no longer the specific economic indicator that it was in the past, I'd say.
SIMON: Are you suggesting that consumers would most wisely adjust to higher prices as long as their earnings go up, too?
GOOLSBEE: I don't know about the wisdom. The reality has been that over long periods of time - you know, you'll remember, I had a grandpa who would refuse to go take us to the movies. And his thing was, when I was a kid, the movies cost a nickel. I'm not going to go to the movies that cost $15. That idea that the price level is thought of some way separate from what incomes are, that's a different way to look at it than mostly how the economists are looking at it. And I absolutely understand why people are as upset about inflation as they have been.
That said, there are certain public prices that have a outsized impact on consumer confidence, like the price of gas, the price of groceries, which the Fed mostly doesn't look at energy and food prices. It tends to concentrate on what they call core inflation because energy and food prices are so variable and up and down that they don't give you as good an indicator of what's the underlying trend going on there.
SIMON: But, I mean, that, of course, introduces the question, is the Fed (laughter) measuring results in a way that doesn't affect individual consumers and congratulating itself for having an effect when individual consumers are saying, wait, I can't afford groceries?
GOOLSBEE: That's a fair criticism. In a way, the Fed is bound by the Federal Reserve Act and the law - what is it supposed to look at when it's setting monetary policy? And the law says what the Fed is supposed to do is stabilize the prices and maximize employment. There's still a substantial amount of work to do even on the limited criteria of getting the inflation rate back to 2%. We have not yet succeeded in doing that.
SIMON: I have to ask you a question of the moment because you're now part of a largely independent part of the government, the Federal Reserve, which dates back to 1913. Trump administration is dismantling many other independent agencies. Do you think you're - the Federal Reserve Bank of Chicago or other Feds are at risk the way the Consumer Financial Protection Bureau is?
GOOLSBEE: I don't know much about the legal side of those things. I've been in the Fed for a little over two years. Before I ever got to the Fed, I was an economist. And its virtual unanimity about the importance of central bank independence in setting monetary policy, that it be separate as much as possible from sitting administrations. And the reason economists are unanimous about that is because if you look around the world at countries where that's not true, the inflation rate is higher. The growth is slower. Job market performance is worse. And so I think Fed independence is really quite important.
SIMON: Austan Goolsbee, president of the Federal Reserve Bank of Chicago. Thanks so much for being with us.
GOOLSBEE: Thank you, Scott. It was a real treat. Transcript provided by NPR, Copyright NPR.
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