5% interest rates don't make sense today, says FOMC member

After last month’s better-than-expected inflation report, Chicago Fed President Austan Goolsbee believes it's about time to move interest rates lower.

Goolsbee's concern is that keeping rates higher for longer would make monetary policy too restrictive. As evidence, he pointed to rising inflation-adjusted short-term interest rates.

“We set this rate when inflation was over 4%, and inflation is now, let’s call it, 2.5%. That implies we have tightened a lot since we’ve been holding at this rate,” Goolsbee said in an interview.

Last month, the Consumer Price Index (CPI) dropped to the lowest level in three years, adding to a growing body of evidence that inflation is giving out.

The Fed’s preferred inflation gauge—the core Personal Consumption Expenditures index—also fell to three-year lows in May.

“You only want to stay this restrictive for as long as you have to, and this doesn’t look like an overheating economy to me,” Goolsbee explained.

Goolsbee’s comments carry extra weight because he’s an alternate member of the Federal Open Market Committee (FOMC), a government body tasked with setting interest rates.

As The Wall Street Journal reported, Goolsbee will be one of 11 FOMC members to vote on interest rates later this month.

While the July FOMC meeting is expected to be a nothingburger, investors expect big changes when central bankers come back to the drawing board in the fall.

All eyes on September

Although the FOMC meets eight times per year, the September meeting is arguably the most important, as it comes after the annual Jackson Hole Symposium.

The September rate announcement also includes the Fed’s quarterly summary of economic and interest rate projections, which guide market expectations for the rest of the year.

According to CME’s FedWatch Tool, futures markets imply a more than 98% chance that the Fed will cut interest rates in September.

In his recent Congress testimony, Fed Chair Jerome Powell hinted at growing confidence within the FOMC that the worst of inflation is behind us and that it's about time to take action.

More specifically, Powell told lawmakers that the Fed won’t “wait until inflation gets all the way down to 2%” before cutting interest rates.

“If you waited that long, you probably waited too long because inflation will be moving downward and would go well below 2%, which we don’t want,” he said.

At 2.6%, the Fed’s preferred core PCE index is inching closer to the 2% target, opening the door to rate cuts sooner rather than later.

The latest inflation figures suggest “there is very little chance of inflation re-accelerating and that it’s time for some rate cuts from the Fed,” Luke Tilley, chief economist at wealth management firm Wilmington Trust, told AP.

More from Creditnews

• Mission accomplished? Fed chair makes bombshell remark that signals September cut
• Two more experts warn of a 'dangerous game' under a second Trump term
• 'We’re at the critical time'—Fed chair confesses what is keeping him up at night (it's not inflation)
• Fed chair gives strongest hint yet about when rate cuts will begin
• ECB official says more rate cuts are still on the table despite inflation concerns
• High inflation ‘is not the only risk we face,’ Fed chair says
• Fed quietly shoring up support for independence as Trump's 2024 run looms