Fed Officials Keep Door Open for Potential Interest-Rate Cuts
A few key Federal Reserve officials hinted on Monday (Sep 23) that there may be room for more significant interest-rate cuts, noting that the current rates are still burdening the U.S. economy.
Chicago Fed President Austan Goolsbee, speaking at a Q&A event, acknowledged that the central bank has a long way to go to bring rates closer to a “neutral” level, which neither stimulates nor restricts economic growth. Goolsbee, along with his colleagues, emphasized that any decision on future rate cuts would depend on incoming economic data, and they were not yet advocating for another half-point cut like the one made on Sep 18.
The Federal Open Market Committee (FOMC) is set to meet again just after the U.S. presidential election, on Nov 6-7, when further discussions about interest rates will take place.
Goolsbee pointed out that the current benchmark interest rate is “hundreds” of basis points above neutral, making it restrictive for the economy. He stressed that while employment and inflation are at favorable levels, these conditions won’t last unless the Fed lowers rates “significantly” in the coming months. His colleagues, including Atlanta Fed President Raphael Bostic and Minneapolis Fed President Neel Kashkari, also supported last week’s decision to lower the benchmark rate to a range of 4.75% to 5%.
The ongoing debate among Fed policymakers centers around the neutral rate, which remains difficult to measure but is estimated to be around 2.9%. Some officials, like Bostic, are cautious about how fast rates should be cut, while others like Kashkari favor a more gradual approach, suggesting quarter-point cuts at the next two Fed meetings this year.
Inflation and the labor market remain critical factors in shaping the Fed’s policy direction. Kashkari acknowledged the strength of the U.S. economy despite high rates, but also cautioned that any significant weakening in the labor market could lead to more aggressive policy adjustments.
Governor Christopher Waller, who backed the half-point cut, mentioned that favorable inflation data played a big role in his decision. However, he remains flexible, stating that new data on inflation or labor could change the Fed’s course. In contrast, Governor Michelle Bowman expressed concerns about above-target inflation and voted against the recent rate cut, marking the first dissent by a Fed governor since 2005.
Goolsbee highlighted that waiting too long to address deteriorating labor market conditions could make things worse. Historically, significant layoffs trigger a chain reaction, leading to reduced spending and further job losses. He emphasized the importance of acting proactively to prevent a sharp economic downturn.
As the Fed navigates its dual mandate of controlling inflation and ensuring full employment, officials like Goolsbee are keen to find the “sweet spot” where both goals are met. The current unemployment rate of 4.2%, while higher than last year’s historic low of 3.4%, is still considered a strong indicator of full employment.
With the Fed’s next move uncertain, the focus remains on how the economy evolves in the coming months.
