In an exclusive interview with MarketWatch on Thursday, Chicago Fed President Austan Goolsbee said that the longer-term trends in the job market and inflation show that the Federal Reserve should lower interest rates soon and then slowly over the next year.
Goolsbee said, “The long arc shows that inflation is coming down very significantly and the unemployment rate is rising faster” than the Fed thought it would in June.
Because inflation data is better and unemployment data is worse, Goolsbee said, “it is pretty clear that the path is not just rate cuts soon.” Instead, he said, there will be multiple cuts over the next 12 months, which is what the Fed predicted in its most recent dot plot.
Goolsbee said he saw “more” signs that the job market was slowing down.
For months, officials have been happy that the job market has been slowing down, saying that it could lead to a long-term growth.
Goolsbee said that the ongoing weakness in the job market has made it more likely that it will keep cooling off and could “turn into something worse.”
The August jobs report from the Labour Department will be out on Friday, and he said that the numbers will help answer this important question.
He said that the August jobs report could help figure out the size and speed of the planned interest rate cuts.
However, Goolsbee said that they would not put too much stock in the amount of jobs they saw in one month.
He said, “I don’t want us to make decisions based on one piece of data.”
For more than a year, the Federal Reserve has set the interest rate at 5.25% to 5.5%.
Since inflation has been going down at the same time, Goolsbee said that the Fed’s target rate has been putting more and more downward pressure on economic demand.
He said that policy is now the strictest it has been since the cycle of tightening began in early 2022.
Goolsbee said, “If we stay tight for too long, we are going to have to deal with the employment side of the mandate.” This means that higher rates will hurt the job market.
The unemployment rate has slowly gone up over the past year. In July, it reached 4.3%, which was the highest number since October 2021.
In general, Fed officials thought that the jobless rate would only go up to 4.2%.
“That doesn’t mean there has to be a downturn.” “But it does mean that we need to be very careful about the employment part of the mandate,” he said.
Goolsbee said he was more sure that inflation would reach the Federal Reserve’s goal of 2%.
He said that a “soft landing,” in which prices drop without a recession, is still possible.
The info has had flows that go in different directions. Goolsbee said that the most recent Fed report on the economy, called the “Beige Book,” showed “a little more disquiet” about the future.
Nine of the 12 Fed areas surveyed said their growth was flat or negative.
The head of the Chicago Fed said it was hard to figure out what the economic picture meant because this expansion since the pandemic has been so different from others.
Fed Chairman Jerome Powell made it clear two weeks ago in a speech in Jackson Hole, Wyoming, that the bank is ready to lower interest rates.
The size of the expected move at the Fed’s meeting on September 17th and 18th is what traders are just arguing about. Most economists think the Fed will make a 25-basis-point cut, but some believe that a bad jobs report on Friday could lead them to make a 50-basis-point cut instead.
