Austan Goolsbee Is Worried the Economy Is Overheating

Goolsbee says AI could raise the long-run neutral interest rate through genuinely higher productivity, but six months of weak productivity growth do not yet establish a permanent shift. He also cautions that technology could push rates lower through productivity or higher through excessive investment and overheating, while data-center bottlenecks remain localized unless they spread into broader wage and price pressures.

Goolsbee loosely identifies a possible long-run landing point of 3% nominal rates, 2% inflation, and a 1% real rate, while emphasizing that recent inflation data make current policy restrictiveness difficult to assess. He says higher long-term Treasury yields could instead reflect inflation expectations, higher-for-longer rate expectations, increased issuance, or some combination—not necessarily a broad loss of confidence in U.S. creditworthiness.

Goolsbee estimates that supply factors accounted for roughly two-thirds of the inflation episode and demand for roughly one-third, arguing that central banks must be prepared for shocks that raise inflation and unemployment simultaneously. He identifies tariffs and a one-time oil-price shock as potentially temporary contributors, while treating services inflation as more concerning because neither shock directly explains it.

Tariffs and war-related uncertainty have contributed to an unusual labor-market combination of low hiring and low firing, according to Goolsbee. That uncertainty sits alongside his broader warning that supply shocks can worsen both inflation and unemployment, complicating the usual demand-management response.

Goolsbee views inflation compensation near 2.3% CPI even when CPI approached 10% as evidence that the Fed’s 2% PCE target remained a credible anchor. He credits the Fed’s recognition that part of the inflation surge was not permanent with enabling disinflation without the extreme rate increases and recession that a purely historical response might have produced.