Title: Chicago Fed President Goolsbee Expresses Optimism of Avoiding Recession while Lowering Inflation
Date: August 2, 2022
Chicago Fed President, Goolsbee, stated on Tuesday that the Federal Reserve can successfully decrease inflation without triggering a severe recession. However, the decision on whether to further raise interest rates will ultimately depend on incoming data.
Last week, the Fed announced a 25 basis point rate hike, bringing the policy rate to a target range of 5.25%-5.50%. Despite this increase, Goolsbee remains hopeful that policymakers can effectively target inflation and bring it down at a reasonable rate, without causing a significant rise in unemployment.
Goolsbee stated, “Hopefully, we will continue to see improvements in inflation, which I believe was a major factor in our previous decision-making and will continue to influence our upcoming decision.”
The Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) price index, has decreased by more than half since reaching its peak last summer. Recent data reveals that the U.S. PCE rose by 3% in June compared to the previous year, marking the lowest level since April 2021.
Interestingly, the decline in inflation has thus far not had a substantial impact on the labor market. The U.S. unemployment rate currently stands at a low of 3.6%, which remains unchanged since the Fed began raising interest rates in March 2022.
Goolsbee pointed out that the data indicates the Fed is on a positive trajectory to reduce inflation without causing a recession. He highlighted, “So far so good, it’s been a difficult road.”
According to a Labor Department report, U.S. job vacancies dropped to the lowest level in two years in June. Meanwhile, layoffs and dismissals declined for the third consecutive month, suggesting a balanced cooling in the job market.
Goolsbee commented, “This aligns with what we are hearing from the business community and the other job market data, indicating that the market is still robust but gradually transitioning to a more balanced level.”
The Chicago Fed President expressed confidence that subsiding inflation and a healthy job market can be achieved simultaneously. He also noted a decline in commodity inflation, emphasizing that it is the primary driver of headline inflation.
Nevertheless, Goolsbee acknowledged that inflation remains elevated and stressed the need for the Fed to address it. He emphasized that the September interest rate decision will depend on how long the Fed intends to keep rates high and when it plans to initiate rate cuts.
Goolsbee concluded, “The answer lies in whether we can bring inflation under control without experiencing a recession.”
As the Fed carefully evaluates incoming data, economists and market participants will eagerly await the September decision to assess the central bank’s approach towards balancing inflation and economic growth.