‘Closet optimistic’ Fed official still sees path for multiple rate cuts

The Fed’s Goolsbee said, “If you’re going to be extra restrictive for too long, you’re going to have to start worrying about what’s happening to the real economy”
By Sam Bourgi
•
25 June 2024
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Chicago Fed President Austan Goolsbee isn’t ready to throw in the towel on rate cuts.

In a June 24 interview with CNBC, Goolsbee said the Fed may have underestimated the impact of higher rates on the economy, and that there are “a couple of warning signs” that growth is already slowing.

To support his claim, the central banker pointed to “what seems to be a cooling of consumer spending,” combined with the recent uptick in unemployment and the sudden spike in credit card delinquencies.

These factors suggest the threat of high inflation was quickly diminishing and that, soon, the real concern would be high unemployment and even recession.

In Goolsbee’s view, the Fed needs to balance both sides of its inflation and employment mandates—something economists say the central bank has neglected with aggressive rate hikes.

Goolsbee described himself as “closet optimistic” because the Fed is making progress on inflation, which should open the door to rate cuts in the foreseeable future.

That view diverges from the rest of the Fed’s top brass, which has penciled in just one rate cut for all of 2024. But even those projections should be taken with a huge grain of salt.

Fed will soon join the rate cut party, economists say

So far this year, only central banks in Canada and the eurozone have cut interest rates. But it's only a matter of time before the Fed follows suit, says JPMorgan’s U.S. head of investment strategy, Jake Manoukian.

“We track 37 central banks. Twenty of them are already cutting rates. The Fed’s going to join the party probably at some point this year,” Manoukian told Yahoo Finance, pointing to the growing probability of a September rate cut.

Although the Fed can “kick the can to December [...] It doesn’t change the global backdrop that central banks are in easing mode,” he explained.

Meanwhile, Capital Economics economist Paul Ashworth said, “There’s nothing here that rules out a September rate cut,” referring to the Fed’s June policy decision.

If inflation continues to improve as it did in May, “then two rate cuts this year is still the most likely outcome,” Ashworth said.

The general consensus among economists is that the Fed prefers to lower interest rates but is hesitant to do so because it is worried about reigniting inflation.

According to Queens’ College president Mohamed El-Erian, that flawed thinking is putting the U.S. on a dangerous path toward recession.

In El-Erian’s view, there’s a 35% chance the U.S. enters a recession because the Fed waited too long to lower rates.

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