The Golden Path
Reduce inflation without sacrificing full employment
- Difficulty
- Advanced
- Time to result
- ~months to results
- Steps
- 5
- Confidence
- 94%
The Golden Path describes disinflation achieved without a large rise in unemployment. Its mechanism begins by identifying inflation as substantially supply-driven rather than treating every episode like a conventional demand boom. When damaged supply chains heal, labor-force participation expands, and productivity improves, the economy gains capacity while price pressure falls. Credible monetary policy keeps long-run inflation expectations anchored during that adjustment, reducing the need to suppress demand through a deep recession. The framework is conditional rather than automatic: renewed negative supply shocks, persistent expectation increases, or weak central-bank credibility can close the path. Its practical value is preventing analysts from mechanically applying historical demand-cycle models to an unprecedented supply-led cycle.
Origin
Austan Goolsbee developed the Golden Path framing after joining the Federal Reserve in early 2023, when forecasters widely expected that reducing post-pandemic inflation would require a recession.
Core principles
- 01Distinguish supply-driven inflation from demand-driven inflation
- 02Preserve credible long-run inflation expectations
- 03Look for supply recovery before assuming demand destruction is necessary
- 04Treat labor participation and productivity as inflation-relieving capacity
- 05Stay humble when the current cycle differs from historical precedents
How to run it
- 1
Diagnose the inflation shock
Determine whether inflation primarily reflects excess demand, impaired supply, or both. Examine which industries and constraints drove the cycle rather than relying only on historical averages.
Pro tip Study whether normally recession-resistant or non-cyclical industries behaved unusually.
Watch out Treating a supply shock as a standard demand cycle can produce an unnecessarily pessimistic forecast.
- 2
Test policy credibility
Check market and survey measures of long-run inflation expectations. A credible commitment to price stability allows temporary headline inflation to subside without expectations becoming embedded.
Pro tip Give persistent market-based expectations more weight than a single survey observation.
Watch out If long-run expectations rise persistently, painless disinflation becomes much less likely.
- 3
Measure supply healing
Track bottlenecks, delivery constraints, intermediate inputs, and other indicators of supply-chain recovery. Healing supply creates room for output to expand while prices moderate.
Pro tip Follow critical components through their downstream industries to identify delayed spillovers.
Watch out Complex supply chains can transmit one shortage for years rather than weeks.
- 4
Measure capacity gains
Look for higher labor-force participation and stronger productivity growth. These positive supply shocks increase productive capacity without generating equivalent inflation pressure.
Pro tip Inspect participation among groups benefiting from flexible work arrangements.
Watch out Do not infer labor capacity from the unemployment rate alone.
- 5
Verify the dual outcome
Confirm that inflation is declining while employment remains near full employment and output remains healthy. Revise the assessment if stagflation, weakening credibility, or renewed supply damage appears.
Pro tip Judge the trajectory across several indicators instead of demanding a perfect monthly reading.
Watch out The Golden Path is an observed conditional path, not a guarantee that every inflation episode will resolve painlessly.
In the wild
In 2023, inflation fell sharply while the unemployment rate remained below four percent. Supply chains healed, labor-force participation rose among several groups, and productivity growth improved while long-run inflation expectations stayed near the Federal Reserve's target-consistent level.
→ The United States achieved substantial disinflation without the recession many forecasters considered unavoidable.
A manufacturer faces tariffs on steel and components that repeatedly cross borders during production. Input costs rise, downstream output slows, and delays spread through suppliers, making inflation more persistent even as growth weakens.
→ The negative supply shock raises the risk of stagflation and reduces the scope for painless rate cuts.
Common mistakes
Reusing the wrong historical model
Models trained mainly on demand-driven cycles may falsely assume that all disinflation requires severe unemployment.
Ignoring supply-side capacity
Focusing only on interest rates misses the disinflationary effects of supply-chain recovery, participation, and productivity.
Assuming transitory means immediate
A supply shock may eventually heal while still producing effects that persist for years.
Is it for you?
Best for
It is best for evaluating supply-driven inflation after an unusual disruption such as a pandemic or trade shock.
Not ideal for
It is not ideal when inflation expectations are unanchored and excess demand is clearly the dominant cause.
From the transcript
“What I called the Golden Path was in twenty three we had as almost as large ad in inflation that we have ever had.”
“That combination was a lovely combination that allowed inflation to come down without a recession.”
“this really wasn't a demand shock induced business cycle.”
From the episode
At the Money: Chicago Fed President Austan Goolsbee on Tariffs, Supply Chains and Inflation
Austan Goolsbee