While the Consumer Price Index ticked up in January and February, Chicago Fed President Austan Goolsbee called it a bump on the “golden path” to reducing inflation to its 2% target without triggering recession. But if the Fed is going to shift its monetary policy toward interest rate cuts this year, one lagging indicator needs to improve.
Housing inflation has proved more stubborn than other components of the Consumer Price Index, and may determine whether and when the Fed does cut interest rates, Goolsbee told the Tribune Thursday.
“We want to have confidence that we’re on path to 2% before we start cutting,” Goolsbee said. “We haven’t seen near enough progress on housing.”
Inflation peaked at an annual rate of 9.1% in June 2022 but has since cooled significantly. The Consumer Price Index was up 3.2% over the previous 12 months in February, which is still above the Fed’s annualized target of 2%, but potentially on track for predicted interest rate cuts this year.
But housing inflation was up 5.7% annually in February.
“It has to come down. I still think it will,” Goolsbee said during a multi-chamber economic outlook luncheon Thursday in west suburban Oak Brook. “If it does, it gives us a little momentum to get down to 2%. But if it doesn’t, that’s a threat to our target.”
The Fed held the benchmark rate steady at a range of 5.25% to 5.5% last month, where it has been since July 2023. Before that, the Fed increased rates 11 times over 16 months as it attempted to tame inflation, boosting the benchmark rate from near zero at the onset of the pandemic.
Federal Reserve Chair Jerome Powell has signaled the central bank is expected to lower interest rates this year. Consensus projections were for three rate cuts, starting in June.
The Consumer Price Index for March will be released next week, data that could well determine the likelihood for rate cuts this year.
“I think it’s important,” Goolsbee told the Tribune after Thursday’s luncheon. “We now have had two months where inflation was higher than the trend that had been established for six or seven months previous to that. That kind of raises the importance of the next couple of readings.”
Another key economic indicator will be available Friday when the Labor Department releases its monthly jobs report. In February, U.S. employers added 275,000 jobs — more than consensus projections — while the unemployment rate increased to 3.9%, mixed signals that still pointed to three Fed rate cuts this year, according to many economists.
Fed monetary policy usually navigates a trade-off between inflation and unemployment. But as inflation has declined, the unemployment rate, which peaked at 14.8% in April 2020, has also dropped to pre-pandemic levels, hovering under 4% for more than two years.
Goolsbee warned that if the Fed monetary policy stays restrictive for too long, it runs the risk of increasing the jobless ranks, undermining the central bank’s dual mandate to stabilize prices and maximize employment.
“If we hold restrictiveness at this level, of historically pretty tight, for too long, we’re going to have to be thinking about the other side of the dual mandate,” Goolsbee said. “Employment will likely begin to deteriorate.”
A longtime economics professor at the University of Chicago Booth School of Business and a former adviser to President Barack Obama, Goolsbee became the 10th president of the Chicago Fed in January 2023, succeeding Charles Evans, who retired after 15 years. One of 12 regional Reserve Banks, the Chicago Fed district covers Iowa, Illinois, Indiana, Michigan and Wisconsin.
Goolsbee has warned against raising interest rates too aggressively since taking on his new role more than a year ago, hoping to reduce inflation without crashing the economy. While the work is not done, the Fed’s monetary policy seems to have fulfilled Goolsbee’s vision for a soft landing that has defied many economists, who warned of an inevitable recession in 2023.
“Nobody can take that away from us — 2023 was exactly the golden path that I was hoping would be possible,” Goolsbee said. “Inflation came way down, one of the biggest drops in inflation on record. And we didn’t have a recession.”
The next Federal Open Market Committee meeting is scheduled for April 30 – May 1.
rchannick@chicagotribune.com
