Current Rate Policy is Too Tight for the Economy, Says Reuters

By Michael S. Derby

Federal Reserve Bank of Chicago President Austan Goolsbee stated on Friday that the current monetary policy is quite tight and does not align with prevailing economic conditions. However, he refrained from offering specific guidance on future adjustments.

"I usually don’t like to restrict our options before a meeting, but I’ve been emphasizing for some time that if you consider the current level of tightness in the Fed’s interest rate targets, you would typically maintain that level only intentionally to cool an overheating economy, and we are not in that situation," Goolsbee remarked in an interview.

His comments followed a speech earlier that day from Fed Chairman Jerome Powell, who indicated that the timing for potential rate cuts is approaching, given the decline in inflation pressures and emerging risks to the job market.

Market expectations generally lean towards a quarter percentage point reduction in the federal funds rate, which currently stands between 5.25% and 5.5%, next month. Some analysts predict a possible half percentage point cut if the August job data, set to be released in early September, reveals unexpected weaknesses.

While Goolsbee hinted at the likelihood of rate cuts, he also pointed out that "by almost all measures, the job market is cooling” alongside inflation moving back towards the targeted level of 2%, which he believes is achievable. He noted that there are also "warning lights" in certain sectors of the job market.

In another interview, Goolsbee referred to the central bank’s forecasts released in June, which clearly indicated a preference for lower rates. He stated that the events since then have not contradicted that perspective.

"The pace at which we cut rates, or how long we pause in cutting, will depend on how the economy performs," he added.

Goolsbee also advised against focusing too much on the specifics of the rate cuts, suggesting, "It’s not productive to engage in extensive debate over 25 basis points versus 50 basis points. What’s most important is the overall trajectory of policy.” He concluded that Powell’s comments regarding the rate outlook were quite definitive.