(Bloomberg) - Federal Reserve Bank of Chicago President Austan Goolsbee suggested the central bank may need to lower borrowing costs soon in order to avoid a sharper deterioration in the labor market, which has cooled in recent months.
While the Fed’s inflation fight is ongoing, multiple months of improving data have reassured him that officials are back on track to bring inflation down to their 2% goal, Goolsbee said. But he said the labor market is “definitely an area of concern,” noting that keeping interest rates elevated while price pressures ease means monetary policy has “tightened substantially.”
Asked whether officials risk the “golden path,” as Goolsbee calls it — the prospect of winning their inflation battle without a significant rise in unemployment — the Chicago Fed chief answered immediately, “Yes.”
“Just look at the real fed funds rate — the interest rate minus inflation. That’s as high as it’s been in decades,” Goolsbee, who will vote at the Fed’s meeting later this month as an alternate member of the Federal Open Market Committee, said in a Yahoo Finance broadcast interview.
“And when do you want to be that restrictive? As I say, you want to be restrictive if you’re afraid of an overheating economy,” he said. “The economy’s not overheating.”
He stopped short of saying when officials ought to begin lowering rates.
Fed officials led by Chair Jerome Powell have said in recent weeks that the central bank is making some progress toward lowering inflation to its 2% goal, though they have been vague about the timing of interest-rate cuts.
Policymakers are widely expected to hold their benchmark rate steady in July for an eighth straight meeting, marking a year since it first reached the current 5.25%-to-5.5% target range. Investors are betting on at least two cuts before the end of 2024, starting in September, according to futures.
Inflation has resumed downward progress toward the Fed’s target after stalling in early 2024. A measure of consumer inflation cooled broadly in June, with prices overall falling from the prior month for the first time since 2020.
While the unemployment rate remains relatively low at 4.1%, it has now edged higher in each of the last three months. It’s up from a low of 3.4% in early 2023, raising concerns about a recession risk.
By Steve Matthews
