FED: Chicago's Goolsbee Eyes Neutral Rates 100-125bp Lower
Chicago Fed's Goolsbee (2025 voter) in a CNBC interview calls current policy "mildly restrictive" and points to a neutral rate 100-125bp lower than current rates. However he says that rates should come down at a "gradual" pace and with inflation stubbornly above target, the Fed needs to be "a little careful". In sum it wouldn't surprise us if his rate outlook was for another 2 cuts this year (in line with the median 3.6% dot submitted in September) and for another 2-3 cuts next year for a total 125-150bp of easing to 2.9 or 3.1% by end-2026 including the 25bp delivered last week.
- He says: "I think we are restrictive, mildly restrictive. It's worth noting, if you hold the rate at some level and inflation creeps up, you're passive cutting. So I don't see that the real rate is as restrictive as it was before we started getting this inflation. But I still think in the period before April 2, before we started getting some of the some of these shocks, I thought as inflation comes down to 2% we could still go down a fair amount with the rate. What's neutral, I think, is below where we are now by 100, 125 basis points, something like that."
- Asked if he considered supporting a 50bp cut, Goolsbee says: "No, I'm still okay with moving to be in a better spot. And I think eventually, at a gradual pace, rates can come down a fair amount if we can get this stagflationary dust out of the air. But with inflation having been over the target for four and a half years in a row and rising, I think we need to be a little careful with getting overly upfront aggressive."
- "If you look at the dot plot, where everybody gives an opinion of where do they think rates are going to settle, there's a big mass of almost everyone on the committee saying that rates can go down something lay as I say, that ultimately the rate might settle around 3% with inflation at 2%. And I'm comfortable with that, with that, as a marker."
- Goolsbee advertises his Chicago Fed's latest labor market indicators - asked if it's possible that the US is past the low point in the labor market and economic activity, as suggested earlier by ex-St Louis Fed Pres Bullard, Goolsbee doesn't totally discount the possibility:
- "If you look at these new Chicago Fed labor market indicators, they don't totally suggest that. So the labor market continues to cool at a sort of a mild to modest pace, if you look at the aggregate jobs numbers, they turned decidedly sour compared with where they were, say, a year ago. But my caution on just looking at that, of course, is that the supply side is moving all around with immigration and and some some other things. So it is possible.... You've got to manage the risk. And so I think to the extent that Bullard or others are highlighting that the economy doesn't have to just deteriorate, it could be getting hotter, and if it got hotter and inflation has already been above the target for almost five years you would you would need to think about that, right?"
Want to read more?
Find more articles and bullets on these widgets:
Historical bullets
FED: NatWest Now Sees Cuts In 2025, Starting In September
As with Deutsche earlier, NatWest has changed its Fed call after the Powell Jackson Hole speech to reflect a 25bp September cut. Previously, the call was for no cuts in 2025. The new baseline outlook includes further 25bp cuts in December and March, bringing rates closer to neutral ("however, the changing composition of the committee becomes far less clear once Powell term expires in May").
- "While the August jobs and CPI reports will be watched carefully, it is clear to us that Powell has already seen enough to decide renewed action to counter downside economic risks is likely warranted, and so we now look for a 25 basis point rate cut on September 17th.
- "We expect officials will very much downplay the likelihood of a 50bp rate cut leading up to the jobs data, but we have to admit if the report is "weak enough" (e.g., the unemployment rate increases by 0.3pct to 4.5% (where officials had it at year end) anything can happen and wouldn't rule anything out. However, given the latest pivot and with financial markets pricing (86% of a 25bp rate cut) a lot has to happen (unemployment rate 3-handle and core CPI +0.5%) for the FOMC to undeliver and hold off from a rate cut in September. "
USDCAD TECHS: Bull Cycle Hindered
- RES 4: 1.4111 High Apr 10
- RES 3: 1.4019 38.2% retracement of the Feb 3 - Jun 16 bear leg
- RES 2: 1.3968 High May 20
- RES 1: 1.3925 High Aug 22
- PRICE: 1.3840 @ 16:55 BST Aug 22
- SUP 1: 1.3794 20-day EMA
- SUP 2: 1.3769/22 50-day EMA / Low Aug 22
- SUP 3: 1.3576 Low Jul 23
- SUP 4: 1.3557/40 Low Jul 3 / Low Jun 16 and the bear trigger
Gains this week in USDCAD and the breach of resistance at 1.3879, the Aug 1 high, marked a positive development, however the slippage into the Friday close undermines this sentiment - for now. Moving average studies have crossed and are in a bull-mode position, reinforcing current conditions. An extension higher would signal scope for a climb towards 1.4019, a Fibonacci retracement. On the downside, support to watch lies at 1.3769, the 50-day EMA - a level not yet challenged by the correction lower.
CANADA: Q2 Expected To See GDP Contraction, BOC's Estimate Looks Too Negative
The June retail sales release helps wrap up the last major data before Canadian Q2 GDP is released on Friday August 29.
- Current Bloomberg analyst consensus shows Q2 is expected to show a 0.7% Q/Q annualized contraction, versus +2.2% in Q1. The private sector consensus is more optimistic than the Bank of Canada's -1.5% estimate in its July Monetary Policy Report (which MNI thinks is too low) but the component-by-component breakdown is similar if of differing magnitudes.
- Widely expected are: a softening in household consumption growth (+1.2% in Q1), with a pickup in government spending, continued weakness in fixed investment (-3.0% in Q1) though with residential outperforming business capital formation, and a reversal of Q2's positive contribution from net exports. In short, the data are expected to confirm that trade activity was brought forward to Q1 ahead of tariffs, with the effects reversing in Q2.
- Going forward, the BOC envisages growth resuming in Q3 (+1.0% in its "current tariff" scenario). In the meantime, a weak Q2 reading could provide Governing Council with more conviction to resume easing rates in September, with the July meeting decision noting "If a weakening economy puts further downward pressure on inflation and the upward price pressures from the trade disruptions are contained, there may be a need for a reduction in the policy interest rate".
