MNI: Goolsbee Sees Rates Within Neutral Zone Over Next Year

MNI (CHICAGO) - Federal Reserve Bank of Chicago President Austan Goolsbee said Friday the pace of interest rate reductions over the next year should slow as rates approach the 2.5% to 3.5% zone that Fed officials estimate to be neutral policy. 

Current market pricing for 125 bps of cuts by the end of 2025, including a quarter point cut later this month, "wouldn't be crazy," he told reporters on the sidelines of a regional economic conference at the Fed bank. "We would be in range of where there’s disagreement about neutral," he said. "I hope this will be a 2025 story."  (See: MNI INTERVIEW: Three Fed Cuts Before Mid-2025 Pause - Giannoni)

"It’s rational from a statistical management perspective that as you get closer to this region where there’s disagreement you will slow the pace, because you have to feel your way to -- is this stable or restrictive or loosening," he said. 

The past few months of data have given him comfort that the labor market is stabilizing near a sustainable full employment level, "but we need to settle there, not crash through that and get worse," he said. "If conditions begin to deteriorate, we monitor that quite closely." 

At the same time, data suggest inflation is on a path to 2%, despite slightly more elevated readings over the past two months. Goods prices should return to mild deflation, services prices are continuing in the right direction, and cooler market measures of housing inflation should presage a slowdown in the official statistics on shelter prices, Goolsbee said.   

"The long arc suggests inflation is coming down, and the last mile theory has not been proven true. That said, if we got six more months of inflation at 3% or above, then the last mile theory is right and I would consider that a change to economic conditions that would warrant a reevaluation of the strategy."

When the incoming Trump administration begins passing new policies on trade, immigration, tax cuts and deregulation, the Fed will take all the policies on board in judging the impact to prices and jobs, Goolsbee said. 

An increase in tariffs could have a one-time impact on prices unless trading partners retaliate or it wreaks havoc on supply chains, he said.  

"We don’t have any actual proposals, much less what’s going to go along with the proposals," he said. "If they are going to have a USD5 trillion tax cut and large tariffs and some other thing that changes the rate of immigration -- we would want to think through the scenarios. Right now it’s pure political speculation so I’m not comfortable using that to determine our short term monetary policy."