Fed's Goolsbee: Rates Need to Drop "Significantly"
Chicago Federal Reserve President Austan Goolsbee expressed optimism that the Federal Reserve could approach a neutral effect on the economy with its monetary policy by the end of next year. In a recent discussion with reporters at the Chicago Fed, Goolsbee explained that the speed at which the Federal Reserve would lower interest rates would depend on changing economic conditions.
While Goolsbee refrained from providing a specific figure for the neutral rate, he noted that a level around 3% seemed reasonable. This rate is significantly lower than the current range of 4.5% to 4.75% and aligns with the median projected by Federal Reserve officials during their meetings in September.
A quarter-point reduction in interest rates is expected at the upcoming Federal Reserve meeting on December 17-18. During this meeting, officials are also anticipated to share economic and interest policy projections for the coming year.
Goolsbee, who will be a voting member on interest rate policy in 2025, characterized the current economic situation as being at or near full employment and on track to reach the Fed's 2% inflation target. He suggested that the Fed could continue to gradually lower rates to determine an appropriate pause while monitoring economic progress.
He noted that unexpected changes, such as deviations from the 2% inflation trajectory or signs of overheating in the labor market, would be necessary for a significant shift in the Fed's approach next year.
Recent employment data supports the view that the economy has largely normalized post-pandemic. One report highlighted that U.S. firms added 227,000 jobs in November, the unemployment rate reflected full employment, and monthly job gains were similar to pre-pandemic levels.
Goolsbee anticipates that the Federal Reserve will enter a series of critical discussions in the coming months regarding the extent and pace of further reductions in the benchmark policy rate.
He also expressed increasing confidence that recent improvements in labor productivity could be sustained. This may potentially affect inflation forecasts, growth potential, and the impact of labor shortages due to demographic changes or immigration policy shifts.
Citing anecdotal evidence that businesses have been investing in labor-saving technologies in response to hiring challenges, he suggested that this trend could have broader implications for various sectors and monetary policy.