Chicago Fed President Austan Goolsbee vowed on Monday that the central bank would respond to any signs of economic weakness and suggested current interest rates may be too stringent.
Asked whether weakness in the labor market and manufacturing sector could prompt the Fed to act, Goolsby did not outline a specific course of action but said it made no sense to maintain a “tight” policy stance when the economy was weakening. He also declined to comment on whether the Fed would make an emergency rate cut between meetings.
“The Fed’s job is pretty simple: maximize employment, stabilize prices and maintain financial stability. That’s what we’re going to do,” a central bank official said in an interview on CNBC’s “Squawk Box.” “We’re looking to the future, so if things start to trend this way across the board and we see a deterioration in any one piece, we’re going to correct that.”
The interview took place amid market turmoil.
Futures tracking the Dow Jones Industrial Average fell nearly 1,300 points, or nearly 3%, as Treasury yields tumbled. The move continued a downward trend that began on Thursday, a day after the Fed decided not to cut interest rates, raising concerns that policymakers are slowing to act as inflation falls and the economy weakens.
Those concerns were heightened after the Labor Department said Friday that nonfarm payrolls rose by just 114,000 jobs and the unemployment rate rose to 4.3 percent, sending what was known as a “thumb rule” signal that the economy could be heading toward a recession.
But Goolsby said he doesn’t think that’s the case.
“The employment report was weaker than expected, [are] “We’re not in a recession yet,” he said. “I think decisions should be based on looking into the future at where the economy is going.”
But he also said Fed policy is tight for now and should do so only if the economy appears to be overheating.The Fed has kept interest rates on hold at a range of 5.25% to 5.5% since July 2023, the highest level in nearly 23 years.
“Should we ease regulations? We’ll have more information as we go along so I don’t want to hold us to what to do, but if we’re not overheating then we shouldn’t be effectively tightening monetary policy or tightening regulations,” he said.
Policymakers have focused on the “real” federal funds rate, which is the Fed’s benchmark rate minus inflation. When inflation falls, real interest rates rise unless the Fed chooses to cut rates. The real rate is currently around 2.73%. Fed officials believe that the long-term real rate is closer to 0.5%.
Markets expect the Fed to move into aggressive easing mode starting in September with a half-percentage-point cut, and as measured by the 30-day federal funds rate futures contract, that’s already fully priced in. Traders expect the Fed to cut rates by 1.25 to 1.5 percentage points by the end of the year, according to CME Group’s FedWatch tool.
