Fed Making Progress on Inflation, Goolsbee Reports

The Federal Reserve has made notable progress in its efforts to reduce inflation to its 2% target, and the focus is shifting to how long interest rates should remain at their current levels if this trend continues, according to Chicago Fed President Austan Goolsbee.

In a recent interview, Goolsbee noted, “Over the next couple of months, we might equal the fastest drop in inflation in the last century. So we’re making progress on the inflation rate.” He highlighted that as inflation declines, the conversation will transition from determining how high the policy rate should go to how long rates should be maintained at their current level.

Last week, the U.S. central bank decided to keep its benchmark overnight interest rate stable in the 5.25%-5.50% range but indicated the possibility of further increases to combat inflation, given the robust state of the economy.

Goolsbee also emphasized his belief in a “golden path” for policymakers, aiming to reduce inflation without triggering a recession. He mentioned that the recent high yields on long-term Treasury notes could influence the central bank’s economic outlook and need to be considered, especially if they are driven by term premium—an extra return that investors expect for holding longer-term debt.

He pointed out that sustained high long-term rates would likely be a tightening factor, dependent on the reasons behind their increase. Goolsbee stated, “If that’s coming from term premium and it’s tightening, then we have to take that into account. We should expect to see that with a lag working its way through the economy. So we’re all paying attention and trying to figure out what the driver is.”