Chicago Federal Reserve President Austan Goolsbee expressed that recent cooling in U.S. inflation is encouraging, but he still wants to see similar improvement trends in the coming months before he is confident that prices are steadily returning to the Fed's 2% target. Meanwhile, he believes U.S. economic growth and the labor market are currently "broadly stable," with inflation remaining his primary concern at this time.
In an interview on Friday, Goolsbee noted that the Consumer Price Index (CPI) data released this summer indicates that price shocks from factors like tariffs and rising oil prices over the past year may be gradually being absorbed by the economy. He pointed out that U.S. inflation had moved in an unfavorable direction for five or six consecutive months earlier, with the overall level still too high, but the recent three months' performance has been encouraging. He said if he could see three or four consecutive months of inflation data similar to June, he would be more confident that inflation is back on track toward the 2% target.
Goolsbee stated that he supports the Fed's decision to hold interest rates steady at the July meeting. Currently, he is more focused on inflation risks compared to economic growth and employment, and he believes the U.S. economy and labor market are generally in a "broadly stable" state. The experience of high inflation in the past has also made Goolsbee more cautious in policy judgment. U.S. inflation exceeded 7% in 2022 and has been above the Fed's 2% target for over five years. He said that both historical periods of high inflation and the post-COVID-19 price surge show that once inflation forms a sustained trend, controlling it can be difficult and painful, so current monetary policy needs to pay more attention to changes in inflation.
The Fed has held interest rates steady for the fifth consecutive meeting in July, but internal divisions over whether further rate hikes are needed are widening. Three policymakers voted against the decision at that time, advocating for a 25-basis-point rate hike. A growing number of officials are concerned that without further tightening of monetary policy, inflation may struggle to fall back to the 2% target. However, recent data has also released some positive signals. As the energy price shock from the war gradually fades, U.S. consumer price increases have slowed for two consecutive months. Data released on Friday showed that U.S. retail sales in July posted their largest decline in over a year. Goolsbee said that given the importance of consumer spending in U.S. economic growth, several consecutive months of declining retail sales would worry him, meaning that if consumption continues to weaken, the Fed will need to pay more attention to downside risks to the economy while controlling inflation.
The recent improvement in inflation, coupled with sluggish hiring performance in the labor market, has prompted investors to significantly lower their expectations for Fed rate hikes. A month ago, federal funds rate futures were still pricing in at least two rate hikes by the Fed this year, with the first likely occurring in September; currently, the probability of a September rate hike has fallen to about 30%, and the market expects only one rate hike before the end of the year. Additionally, Goolsbee expressed concern about the recent slowdown in U.S. productivity growth. Productivity data was strong last year but has cooled in recent quarters. He hopes this change is just a temporary phenomenon in volatile productivity data. Some officials and economists, including Fed Chair Jerome Powell, believe that new technologies like artificial intelligence could improve corporate efficiency, allowing the economy to grow faster without significantly pushing up inflation. But Goolsbee noted that if the trend of accelerating productivity growth cannot be sustained, it would significantly impact the current market judgment about "AI-driven productivity gains" and further affect monetary policy and the economic outlook. Goolsbee has also previously warned that higher productivity does not necessarily mean the Fed should lower interest rates. Productivity gains could stimulate larger corporate investments, similar to the current massive inflow of funds into AI infrastructure, potentially increasing the risk of an overheating economy.
Regarding Powell's recent ideas for reforming the Fed's operating mechanism, including considering reducing the number of policy meetings per year, Goolsbee said he currently has no strong stance on how many meetings should be held annually. He will wait for recommendations from the five working groups established by Powell. Currently, the Federal Open Market Committee (FOMC), which sets interest rate policy, holds eight meetings per year.
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