Fed official says the quiet part out loud as markets brace for rate cuts
Chicago Federal Reserve Bank President Austan Goolsbee said last week that the justification for keeping interest rates elevated had disappeared, likely in reference to July’s dismal employment report.
In an interview with National Public Radio, Goolsbee said, “You don’t want to tighten any longer than you have to,” referring to the need to keep rates higher.
“And the reason you’d want to tighten is if you’re afraid the economy is overheating, and this is not what an overheating economy looks like,” he said.
Signs of “overheating” have quickly disappeared in recent months as unemployment rose and broad indicators of economic activity, such as manufacturing and services output, declined.
Goolsbee also flagged an uptick in small business defaults as “a cause for concern,” but didn’t elaborate further.
Until recently, Goolsbee had tip-toed around the idea of rate cuts as the Fed sought to manage expectations about monetary policy. But that was before his recent interview with Bloomberg News, in which he admitted that he’s getting “more concerned about the employment side” of the economy.
The Chicago Fed Bank president’s remarks highlight policymakers’ evolving priorities. For the first time in three years, inflation has taken a back seat.
Slow and steady at first
While investors and economists are urging the Fed to steer the economy away from recession by cutting interest rates aggressively, Goolsbee still prefers a slow and steady approach.
He said the shift to lower rates will “depend on many factors,” but the process should be “gradual” instead of aggressive.
The Federal Open Market Committee (FOMC) will hold its next policy meeting on Sept. 17-18, where it’s widely expected to cut interest rates for the first time in more than four years.
The September meeting is also significant because it will include the Fed’s updated projections for inflation, unemployment, and GDP growth. The Fed’s infamous “dot plot” chart will also summarize policymakers’ forecasts for interest rates.
For now, markets seem to have given up on the idea of jumbo-sized rate cuts, with CME Group’s FedWatch tool placing 75% odds of a standard 0.25% cut. Banks like JPMorgan Chase and Citigroup remain two of the remaining holdouts calling for a larger rate cut next month.
Although the Fed’s meeting isn’t for another five weeks, markets will see plenty of action this week when the central bank convenes its annual Jackson Hole summit in Wyoming.
Fed Chair Jerome Powell will deliver a speech on the country’s economic outlook on Aug. 23. The speech will be closely scrutinized for any information about the central bank’s plans for September.
“Fed’s Powell will set the stage for the first rate cut in years at Jackson Hole,” wrote Barron’s Nicholas Jasinksi.
Former New York Fed President William Dudley said investors will “probably be disappointed” by Powell’s commentary, even though “there are plenty of crucial questions about the future of monetary policy that Fed officials can and should address.”