Federal Reserve Bank of Chicago President Austan Goolsbee said interest rates needed to be cut “significantly” to protect the U.S. labor market and support the U.S. economy.
“As we feel confident that we are on the path back to 2%, it is appropriate to turn our focus to the other side of the Fed’s mandate – thinking about the risks to employment,” Goolsbee outlined Monday in talking points for a moderated question-and-answer event in Chicago. “That probably means many more rate cuts next year.”
Goolsbee warned that the labor market situation would deteriorate faster than central bankers could remedy it by cutting interest rates.
“It’s just not realistic to wait until problems arise,” he said. “If we want a soft landing, we can’t lag behind.”
Goolsbee said he supported the Fed decision last week to cut interest rates by half a percentage point, a message that Minneapolis Fed President Neel Kashkari and Atlanta Fed President Raphael Bostic repeated in separate comments on Monday.
Although Goolsbee is not a regular voter on the Federal Open Market Committee this year, he is participating in monetary policy discussions.
“The exact timing of the first cut is less important than the long-term assessment that conditions are good on both sides of the mandate,” Goolsbee said, referring to inflation and employment. “Interest rates will have to be cut significantly in the future if we want conditions to remain that way.”
Neutral course
Goolsbee pointed out that borrowing costs are “hundreds” of basis points above neutral – an interest rate level that neither stimulates nor slows economic activity.
“We have a long way to go over the next 12 months to get interest rates close to neutral and maintain current conditions,” Goolsbee said during the moderated discussion.
“If inflation is at target and unemployment is where you want it to be, do you want to have the tightest monetary policy in decades?” he asked. “If you stay tight for too long, you won’t be able to reach the dual mandate sweet spot for long.”
rate Projections However, figures released alongside the Fed’s decision show that Fed officials have differing views on the level of interest rates at the end of 2025.
Unlike Kashkari, who had planned smaller cuts of a quarter of a percentage point each for the two remaining central bank meetings this year, Goolsbee left it open whether he expected cuts of a quarter of a percentage point or half a percentage point in the coming months. Bostic emphasized The central bank is not committed to a rhythm of large price movements in the future.
Concerns about the labor market
The head of the Chicago Fed commented Worries on the development of the labor market in recent months and noted that it is uncertain whether the economy will return to a more normal level after the post-pandemic recovery or whether there will be a slowdown beyond that.
In the past, massive layoffs have created a negative feedback loop: job losses lead to spending cuts, which in turn force other companies to lay off employees in response to lower demand.
The unemployment rate, which hit a historic low of 3.4 percent last year, has risen to 4.2 percent, a level most would consider full employment, Goolsbee said Monday.
“Basically, we would like to freeze both sides of the Fed’s dual mandate here,” Goolsbee said.
(Updated to include additional comments from Goolsbee starting in the eighth paragraph.)