If the U.S. economy were a game of “red light, green light,” the light has just turned yellow, leaving market participants approaching the intersection with the difficult choice of pumping the breaks or flooring the accelerator.
In a nutshell, that metaphor describes the thrust of a jocular joint appearance by Federal Reserve officials Beth Hammack and Austan Goolsbee on Monday’s edition of the NPR program “Planet Money.”
Asked for her assessment of inflation on a red-orange-yellow-green scale, Hammack, who serves as president of the Federal Reserve Bank of Cleveland, replied “orange,” then changed her answer to “burnt orange.”
Noting that inflation has been above the Fed’s 2% target for almost five years, Hammack said progress toward that goal has been “basically moving sideways” for the past two years.
Goolsbee, the Chicago Fed president, quipped that inflation is “orange with a chance of meatballs.” He then uttered a word that’s the monetary equivalent of yelling “fire” in a movie theater — stagflation, which is the worst-case scenario of rising inflation and high unemployment combined with stagnating economic growth.
Saying that 2025 began with “stagflationary dust thrown in the air” from tariff-driven inflation and a weakening labor market, Goolsbee believes “now we’re at another stagflationary shock on top of it,” calling the global oil shock from the war in Iran “a troubling moment.”
The Chicago-based central banker’s comments stand at odds with remarks Federal Reserve Chair Jerome Powell made in March after the Fed held interest rates steady for the second straight policy meeting.
“When we use the term ‘stagflation,’ I always have to point out that that was a 1970s term at a time when unemployment was in double figures and inflation was really high and the Misery Index was super high,” Powell said. “And that’s not the case right now.”
The Fed has a dual mandate to promote stable consumer prices and maximum employment. On the jobs side, Goolsbee gave a grade of yellow, calling the current low-hire, low-fire labor market “extremely unusual,” and attributing it to economic uncertainty among businesses.
Hammack agreed, though her shade was closer to chartreuse or the yellowish-green hue of Diet Mountain Dew.
“To me, the best indicator is really the unemployment rate, because with all the changes that we’ve had in immigration, it’s hard to know what job creation should be to keep things steady,” Hammack stated. “And the unemployment rate that I see right now is right around my estimates of maximum employment.”
On the question of financial stability, Hammack responded “generally green,” saying “on the whole, I feel good about the state of the banking system.”
Goolsbee gave a two-pronged answer, calling the overall health of the Federal Reserve System “green, solid green, forest green, Amazon green.” But he expressed anxiety about elevated price-earnings ratios among publicly traded companies.
“If you look at prices compared to earnings and things like that, it does look like there is a lot of frothiness that has happened. And I don’t know if that’s [a] bubble or if it’s rooted in actual productivity improvements that have come from AI or other technologies,” Goolsbee cautioned. “But having lived through a few of those cycles, the kind of asset bubble-driven boom-bust, they can end in tears.”
