MNI: Goolsbee Sees Risk Fed Overshoots As Supply Recovers
"Golden Path" is still available if Fed avoids "traditionalist" thinking about growth and inflation tradeoffs.
The Federal Reserve can generate a rare soft landing but the risk is that policymakers overshoot by relying on misguided models suggesting a clampdown down on demand when the real economic driver is a rebound in supply, Chicago President Austan Goolsbee said Thursday.
Employment and GDP have been much stronger recently than economic models had suggested following the Fed’s recent tightening cycle, while core PCE inflation has been much slower, so much so that “the real data have not followed the historical patterns at all,” according to the text of remarks to the Peterson Institute for International Economics in Washington.
"In today’s environment, believing too strongly in the inevitability of a large trade-off between inflation and unemployment comes with the serious risk of a near-term policy error," Goolsbee said. His remarks didn't give a specific view on where the fed funds rate should move in the near term. (See MNI INTERVIEW: Fed Likely Overtightened-Ex-Boston Fed's Fuhrer)
The Fed has hiked from near zero to a policy rate ranging from 5.25% to 5.5%, the most aggressive cycle in decades, as the U.S. economy powered ahead following the end of most Covid restrictions. Officials earlier this month predicted one more quarter-point hike by year's end and scaled back projected rate cuts next year citing the need to make sure inflation sustainably moves back to 2%.
Supply chains appear set to continue loosening up, Goolsbee said, helping further ease inflation even as the focus often remains on the risk that job and output growth will keep inflation above target.
"Holding to the simple historical correlations of what growth and labor market conditions mean for inflation in the face of positive supply developments is a recipe for overshooting and causing an unnecessary downturn," Goolsbee said, again referring to a soft landing as a "golden path."
The Fed is determined to bring inflation and calls for raising the target are "a recipe for ratcheting up inflation expectations just like we saw in the old days," he said.