MNI:Fed's Goolsbee-Disinflation On Track Even If Prices Bounce

U.S. inflation is likely to keep falling in a way that allows the Federal Reserve to cut interest rates even if the road to the Federal Reserve's 2% target proves a bit bumpy, Chicago Fed President Austan Goolsbee said Wednesday.

"Over the past seven months core PCE inflation has been running at the Federal Reserve’s 2% target or even below. Rate cuts should be tied to confidence in being on a path toward the target. I don’t support waiting until inflation on a 12-month basis has already achieved 2% to begin to cut rates," Goolsbee said in prepared remarks to the Council on Foreign Relations.

"Even if inflation comes in a bit higher for a few months (as many forecasts suggest), it would still be consistent with our path back to target."

He cited a range of reasons for expecting U.S. disinflation to continue despite a stronger-than-expected CPI report for January, including the prospect of a reversal of robust shelter costs, which jumped 0.6% in January and contributed to over two-thirds of the headline gain in consumer prices.

"Over the past few months the deceleration in housing services inflation has not been as fast as expected. That is at odds with market data on rents for new leases, so I expect improvements to resume. Still, that puzzle got bigger with the Consumer Price Index data yesterday, and it is something I am watching," he said. (MNI: U.S. Shelter Inflation Cooldown Seen Limited In 2024)

Goolsbee emphasized that the Fed targets the PCE inflation measure, not CPI. "They can differ somewhat significantly in some important aspects, especially in regard to some of the components that have behaved strangely as of late, like housing and other services. So, we will need to see what those PCE data show."

He said Fed policy is "quite restrictive," noting the real federal funds rate is "as high as it has been in decades."

"It’s worth acknowledging that if we stay this restrictive for too long, we will start having to worry about the employment side of the Fed’s mandate," he said. The unemployment rate has been at 3.7% for the past three months.

Goolsbee also argued improved supply chains and rising productivity mean the economy can accommodate stronger growth without generating as much price pressure.