Goolsbee Advocates for SEP Overhaul Amid Rising Inflation Concerns

Chicago Fed President Austan Goolsbee has called for an overhaul of the Federal Reserve's forecasting tools, specifically the Summary of Economic Projections (SEP), also known as the 'dot plot'. The SEP is a quarterly exercise where policymakers publish their individual forecasts for growth, unemployment, inflation, and interest rates. However, the current system has been criticized for being more confusing than clarifying due to inconsistent assumptions.

Goolsbee argued that large supply shocks have become regular occurrences, making it essential for the Fed to reassess its policy path. The US inflation rate stood at 3.7% in July, nearly double the Fed's 2% target. Goolsbee pointed out that the service sector is experiencing elevated inflation, which tends to be stickier and harder to bring down than goods inflation.

He also highlighted the potential for massive AI-related capital expenditures to overheat aggregate demand. Companies are investing billions in data centers, chips, and infrastructure to support artificial intelligence workloads, adding fuel to an already warm economy. Goolsbee emphasized that the Fed's job is to respond to economic conditions, not markets or the president.

The Fed's independence is crucial for maintaining anchored inflation expectations. If markets or politicians believe they can influence the Fed's rate decisions, businesses and consumers start behaving as though higher inflation is permanent, making it even more challenging to control. With inflation running at 3.7%, any perception of the Fed trimming its sails to accommodate political headwinds would compound the problem.