Fed's Austan Goolsbee discusses interest rate outlook, how AI fears are spreading beyond software

Services inflation remains stubbornly persistent

Goolsbee highlighted that while goods inflation showed improvement, core services inflation rose 0.4% monthly and remains well above 3%, representing a danger sign since tariffs cannot explain price increases in this category.

Real rates may not be restrictive at current levels

With inflation stuck near 3% rather than the 2% target, the real Fed funds rate provides only modest economic restriction, suggesting less urgency to cut unless inflation declines meaningfully.

December rate cut was premature

Goolsbee defended his dissent against the third 2024 rate cut, noting the decision occurred during a government shutdown without adequate data, and maintained that waiting for more information would have been wiser.

Job market shows stability without recession signals

Despite modest cooling, the labor market exhibits an unusual combination of low layoff rates and low hiring rates that does not indicate imminent recession, with the unemployment rate holding steady near 4.3%.

Consumer spending dominates AI as growth engine

Goolsbee emphasized that U.S. consumer spending, not AI investment, has sustained economic growth throughout 2025, and this trend can continue if the job market remains stable.

Fiscal tailwinds expected this year

Economists anticipate expansionary fiscal policy will inject approximately $130 billion into the economy through tax refunds and cuts, potentially boosting earnings in the second and third quarters.

AI fears spreading beyond software sector

Market anxiety over AI disruption has expanded from software into wealth management and transportation sectors, creating volatility despite established companies maintaining entrenched competitive positions.

Productivity gains remain unrealized in data

While AI represents transformational technology, economists note the economy remains in the large language model era rather than true artificial general intelligence, with total factor productivity gains not yet materializing in macroeconomic statistics.

Rotation favors diversification and value

Investors are increasingly rotating capital from concentrated tech positions into cyclical sectors, value stocks, and non-U.S. markets, utilizing equal-weight strategies to mitigate AI-driven volatility risks.