MNI: Fed’s Goolsbee Warns Against Frontloading Rate Cuts

The Federal Reserve must be cautious about cutting interest rates too quickly in response to signs of weakness in the labor market because inflation remains well above the central bank’s target, Chicago Fed President Austan Goolsbee said Thursday.

“The reason why I'm uneasy with too much frontloading of cuts is because we still need to get the information and have confidence that the rise of the inflation rate, after four and a half years of being above the target, we have to be convinced that that's transitory,” he told reporters in a virtual briefing. 

“The answer to the question of when and how rapidly we can get down from where we are right now to where I think the settling point is will, in large measure, be determined by the success at demonstrating that inflation is not going to go up a lot, that the tariffs are going to stay in their lane and are not going to be persistent. If we start to see the opposite happening then I would be uneasy in doing too much in the way of cutting.” (See MNI INTERVIEW: Fed Easing Constrained By High Inflation-Sahm) 

He said even keeping rates steady while inflation continues to rise would amount to effectively lowering the real cost of borrowing. 

“If you’re holding the rates where they are while inflation is going up and up you're cutting, the real is shrinking, and you just have to be careful, in a high inflation or higher than target inflation environment, how rapidly you're cutting the real rate,” said Goolsbee. 

Still, Goolsbee is optimistic that, barring some additional lagged effects from tariffs on inflation or a resurgence of price pressures in services, the economy can return to a “Golden Path” of falling inflation with stable employment that allows for additional rate cuts. 

Goolsbee reiterated that the Fed is likely around 100-125 basis points away from neutral based on the FOMC’s own long-term forecasts, but argued against setting policy based on a measure he suggests is effectively impossible to gauge accurately in real time. 

“I joke that R-star should be called our R-Sasquatch, because it is unobservable as a statistic,” he said.

GUARDED OPTIMISM 

Goolsbee said he supported last week’s quarter-point interest rate cut and is heartened by relatively muted spillover effects from tariff policies onto inflation.

“You haven't seen as much of the secondary impact at this point as was feared in the most pessimistic cases. So that's partly contributed to my optimism that it won't and we now have several months under our belt with the tariffs applying,” he said.

At the same time, he is not particularly alarmed by the decline in payroll growth because he thinks structural factors like a decline in labor force participation due to immigration restrictions are overstating the weakness. Instead, he’s playing closer attention to the rates of unemployment, vacancies and layoffs. 

“It's important to be careful not to over-index on aggregate job growth at moments when things are happening that you cannot observe on the supply side,” Goolsbee said.