Austan Goolsbee, speaking in Jackson Hole, August 8, 2023.
David A. Grogan | CNBC
Chicago Federal Reserve President Austan Goolsbee vowed Monday that the central bank would respond to signs of weakness in the economy and indicated interest rates could now be too restrictive.
Asked whether the weakening of the labor market and manufacturing sector could prompt a Fed response, Goolsbee did not promise a specific course of action but said there is no point in pursuing “restrictive” policies if the economy is weakening. He also declined comment on whether the Fed would make an emergency cut in inter-meetings.
“The Fed’s job is very simple: maximize employment, stabilize prices and maintain financial stability. That’s what we’re going to do,” the central bank official said during an interview on the “Squawk Box” program CNBC. “We’re looking ahead at it. So if conditions on the throughline collectively start to get like that, there’s deterioration on any of those parts, then we’re going to fix it.”
The interview took place while the markets were in turmoil.
Futures tied to the Dow Jones Industrial Average fell nearly 1,300 points, or nearly 3%, as Treasury yields plunged. These moves continue a downward trajectory that began Thursday, a day after the Fed opted not to cut rates. This led to concerns that policymakers were falling behind as inflation falls and the economy weakens.
Those fears were heightened Friday when the Department of Labor said nonfarm payrolls rose by just 114,000 and the unemployment rate rose to 4.3%, triggering a signal known as the Sahm Rule that the economy is recovering could be in a recession.
However, Goolsbee said he doesn’t believe that’s the case.
“Jobs numbers were weaker than expected, but… [are] “It doesn’t look like a recession yet,” he said. “I do think you want to look ahead to where the economy is going when making the decisions.”
However, he also said that Fed policy is now restrictive, a position it should only adopt if the economy appears to be overheating. The central bank has kept its benchmark interest rate in a range of 5.25%-5.5% since July 2023, the highest level in about 23 years.
“Should we reduce restrictiveness? I’m not going to tie our hands on what should happen in the future because we will continue to get more information. But if we don’t overheat, we shouldn’t tighten or be restrictive in real terms. ,” he said.
Policymakers have focused on the “real” Fed Funds rate, the Fed’s benchmark minus inflation. As inflation decreases, real interest rates rise – unless the Fed decides to cut. The real interest rate is now about 2.73%; Fed officials believe the real long-term interest rate is closer to 0.5%.
Markets expect the Fed to implement aggressive easing, starting in September with a 0.5 percentage point rate cut, which is now fully priced in, as reflected in 30-day Fed Funds futures contracts. Traders expect the Fed to cut 1.25 to 1.5 percentage points from the fund rate by the end of the year. FedWatch from CME Group Tool.