In a speech at the Economic Club of Minnesota on Monday, Chicago Federal Reserve President Austan Goolsbee hinted at a series of interest rate cuts over the next 12 months. Goolsbee stated that the Fed needs to lower rates significantly to reach a neutral level, suggesting a shift in focus from battling inflation to supporting the labor market.
This shift in focus is significant. While acknowledging that inflation remains a concern, Goolsbee expressed concern about the potential for rising unemployment. He noted that a 0.7% increase in unemployment within a year is typically a precursor to a recession, emphasizing the delicate balance the Fed faces between managing inflation risks and ensuring a healthy labor market.
Despite acknowledging the recent upward trajectory of unemployment, Goolsbee emphasized that the overall rate remains relatively low, suggesting that the labor market is not in a state of freefall. The Fed is actively monitoring the situation, ensuring that its actions do not inadvertently trigger a significant downturn in the economy.
Goolsbee also emphasized that the Fed is committed to managing inflation risks without undermining the labor market. “At this time, there’s little evidence that inflation is stalling out at 3%,” he added, reinforcing the Fed’s dual mandate to control inflation while promoting maximum employment.
While acknowledging potential warning signs, Goolsbee remained optimistic about the underlying strength of the economy. He highlighted that recent increases in unemployment primarily reflect an increase in labor force participation, with payrolls continuing to grow and consumer spending holding steady.
This cautious approach is reflected in interest rate futures, which currently price in nearly equal odds of a 25 or 50 basis point cut at the Fed’s November meeting, according to the CME FedWatch tool. This expectation of easing monetary policy is reflected in the recent decline of U.S. Treasury bonds.
Fitch Ratings predicts the federal funds rate will fall to 4.5% by the end of 2024, and further to 3.5% by the close of 2025, ultimately stabilizing at a neutral level of 3.0% by mid-2026. This anticipated easing cycle is expected to be “modest” compared to historical rate-cutting episodes, despite the surprising 50-basis-point reduction at last week’s FOMC meeting.
Fitch projects the Fed will implement a 25-basis-point rate cut in both November and December 2024, followed by four additional 25-basis-point cuts through 2025. The agency anticipates that the Fed will lower rates at alternating FOMC meetings next year, signaling a gradual approach to easing monetary policy.
Despite the anticipated cuts, Fitch does not foresee a sharp decline in the U.S. job market. Instead, the agency believes the labor market’s current softness is part of a natural recovery in the workforce after the volatility of the past 12-18 months. With payroll growth continuing and consumer demand holding up, the Fed’s cautious approach appears to be aimed at managing economic risks without triggering a sharp downturn.
Goolsbee’s comments suggest a potential shift in the Fed’s focus from inflation to labor market conditions. While the Fed remains committed to managing inflation, the potential for rising unemployment and the need to support a strong labor market are increasingly prominent in the Fed’s policy considerations. The coming months will be crucial as the Fed navigates this delicate balance and makes decisions that will shape the direction of the U.S. economy.
