Chicago Fed President Sees Interest Rate Cuts Ahead

Chicago Fed President Sees Interest Rate Cuts Ahead

Voters may still be uneasy about the economy. Still, Federal Reserve Bank of Chicago President and CEO Austan Goolsbee said the U.S. is currently on what he calls a “golden path.” Inflation has cooled from historic highs without the country going into a recession, and the unemployment rate is at what economists generally consider a sweet spot.

Now, the key is staying there.

Goolsbee said the Fed’s half percentage point interest rate reduction last week “made sense.” He predicts more rate cuts are coming.

“Take the long arc,” Goolsbee said. “If conditions continue like these, there are a lot of cuts to come over the next 12 months.”

Goolsbee made the remarks in an interview Monday with Illinois Treasurer Mike Frerichs as part of the National Association of State Treasurers conference in Chicago.

Here’s some of how Goolsbee explained his thinking.

On the Federal Reserve’s charge: Treating the central bank’s decisions with a day-trader mentality is the wrong approach, Goolsbee said. Better is to “take the longer arc: Where are we in the economy? Where are we on inflation?” all within the context of the Federal Reserve’s dual mission.

The mission is exclusively twofold:

• stabilizing prices
• and maximizing employment.

How that comes into play: Goolsbee said the Fed’s “great failure on dual mandate grounds of the last five years has been inflation totally out of control. Way higher than our stated target of 2% inflation.”

It was the opposite on the jobs front, with strong unemployment rates and even an overheated job market.

But he credits Federal Reserve Chair Jerome Powell with the major accomplishments of surviving the COVID-19 pandemic, bringing down inflation and averting a financial crisis, and avoiding a credit crunch when the Silicon Valley Bank fell.

On the “golden path”: Things have changed, and the U.S. is on what Goolsbee calls the “golden path.”

In the past two years, inflation has come “way down,” Goolsbee said. “It did so without a recession, which has never happened before in the U.S. and virtually anywhere in the world.”

Goolsbee said when he had previously suggested that as a possibility and aspiration, some experts had thought that so impossible that they mockingly termed falling inflation without a recession “immaculate disinflation.”

“But that is what happened,” Goolsbee said. “And now we’ve got to stick the landing. I’m not here to declare mission accomplished. The mission is never done. I observed that inflation came down, it’s been cut more than in half, and there wasn’t a recession. That already happened in ’23, and that was the goal.”

Inflation levels now are around the Federal Reserve’s 2% target. Meanwhile, Goolsbee said, the unemployment rate has “inched its way up, slowly, to a level — 4.2 — that many people thought ahead of time, ‘That’s basically stable, full employment. That’s where you want to stop.’”

From the dual mandate perspective, the goal is to keep things level.

“If you could just freeze it in place, right exactly where it is, you kind of would like to,” Goolsbee said.

What’s next for interest rates: If interest rates remain high, that would knock the U.S. off the desired freeze frame, Goolsbee said.

“If I told you inflation’s basically close to where you want it, and unemployment is close to where you want it,” he explained, “wouldn’t you think that it makes sense to have the interest rate be at 20-year highs, way, way above where anybody thinks — in our language — is neutral. No. You’d be nervous.” 

He said that’s why the Federal Reserve started to move on interest rates. The 50-basis-point reduction is a “demarcation that we’re shifting back to a normal dual mandate mode, where we’re thinking about employment and inflation, and out of what we have been for a year and a half, which is singularly prioritizing the fight against inflation,” Goolsbee said.

He predicted more moves are on the horizon.

“Whether the next one is 25 or 50 or zero or whatever, my view is, over the next 12 months, we have a long way to come down to get the interest rate to something like neutral, to try to hold the conditions where they are,” Goolsbee said.

Recession warning signs: The economy is in what Goolsbee described as a “cautionary” period.

Goolsbee called himself a “data dog” who watches economic indicators and some blinking lights warn that a recession could be coming. Namely, he pointed to “consumer delinquencies” like paying off auto loans, credit cards, and job numbers.

More on job numbers: “The hiring rate, the quit rate, each of these measures on the job market, they’re all saying the same thing, which is directionally we’re cooling,” Goolsbee said.

He said historically, upticks in the unemployment rate and declining vacancy rates would be flashing warning signs.

But because the unemployment rate is low, he said that’s not a cause for alarm, and at this point in time, the past doesn’t necessarily predict the future. It’s a new type of labor market.

More people are working virtually post-pandemic, which Goolsbee said he believes has contributed to a rebounded labor force participation rate.

“This business cycle, down and now up, looked nothing like any business cycle before,” he said. “We never had a business cycle down that wasn’t driven by cyclically sensitive industries like durable goods manufacturing, housing construction. These types of things normally leave the business cycle down and up.”

Goolsbee said he travels the Midwest often and talks with business owners. His Federal Reserve district has more agriculture and is heavier in manufacturing — particularly auto manufacturing — than others.

“Manufacturing is a cyclical industry, and so we tend to feel the business cycle up and down more rapidly than others,” Goolsbee said.

He said he previously heard a lot of complaints about supply chains and hiring pressures. Now, he said, that’s no longer the case. People have generally figured out supply chain bottlenecks, and the job market, while still “tight,” is nothing like at its peak.

As of a year and a half ago, talk turned to inflation. He said there’s “surprisingly little discussion about inflation.”

Positive signs: The economic dashboard has positive signs, not just warning signals, Goolsbee said, including:

• strong GDP (gross domestic product)
• robust consumer spending
• and strong wage and income growth.

Not feeling the vibes: Whatever the data shows, polls consistently show that the economy is front of mind for many Americans.

Goolsbee said the Fed had long paid attention to consumer sentiment because it was seen as an indicator of economic activity, like consumer spending. If people were woeful about the economy, they believed they would soon spend less.

That’s also changing.

“The relationship between the vibes and actual behavior has broken down,” Goolsbee said. “That has made us a little less attuned to the vibes.”

Goolsbee said research shows to keep in mind three factors about consumer sentiment:

• Gas and groceries: Goolsbee said the price of goods like groceries and gas have an “outsized” contribution to people’s thoughts on inflation beyond how much these prices factor into consumers’ budgets.
• A lag. Sentiment is slow to catch up, taking about six months between improved conditions and when consumers say they notice it, Goolsbee said. In contrast, “when conditions deteriorate, they’re still looking backward.”
• The media. “Vibes are highly influenced by what people see in the media,” Goolsbee said. He noted that that’s always been true, but it’s especially true now that viewers can choose their preferred TV channels or scan social media.

“How stupid must you be to mint money at a loss?” Goolsbee said.

But many people are partial to their pennies, he noted, including kids with piggybanks full of them and consumers who would see companies raise prices by at least 4 cents to reach a number easily divisible by five.

Goolsbee said he backs an approach favored by a Chicago Fed economist. The economist suggests a voluntary, universal declaration that would make all pennies worth 5 cents instead.

“Pennies just become nickels,” Goolsbee said.

He suggested that to make that swallowable to Illinois residents and other fans of Abraham Lincoln, the president’s profile could be moved from the penny to the nickel. Goolsbee didn’t touch on the politics of displacing President Thomas Jefferson from his spot on America’s 5-cent piece.

Ten bucks, too:  The Federal Reserve Bank of Chicago headquarters will serve as a repository during the process.

“At the beginning, you store all the old ones in case something goes wrong with the rollout,” he explained. “So we’re going to be like a Fort Knox of $10 bills here in Chicago.”