Right move: Goolsbee (left) speaks at a Council on Foreign Relations forum in New York. The Chicago Fed president says policymakers should cut interest rates if US inflation continues to fall back towards its target of 2%. — Reuters
CHICAGO: Federal Reserve (Fed) Bank of Chicago President Austan Goolsbee says policymakers should cut interest rates if US inflation continues to fall back to the 2% target.
The Chicago Fed chief, speaking in Sintra, Portugal, said he feels “we are on a path to 2%” inflation and “if you just hold the rates where they are while inflation comes down, you are tightening – so you should do that by decision, not by default”.
Goolsbee’s comments follow data out last week that showed the Fed’s preferred gauge of underlying inflation increased 0.1% in May, the slowest pace in six months.
Fed officials have held rates steady at a more than two-decade high since last July, and have indicated a need to see more evidence inflation is on track towards their 2% goal before lowering borrowing costs.
“We got to this rate when inflation was over 4%, and inflation is now down close to 2.5%, so if you sit with the rate somewhere while inflation goes down you’re tightening.
“The reason that you would want to tighten is if you think that you’re not on a path to 2%,” said Goolsbee, who will vote on the Fed’s July policy decision as an alternate member of the Federal Open Market Committee.
Inflation appeared to be returning to target, he added.
“We hit a bump in the road in January but now we’ve gotten a string of improved inflation readings.
“If employment starts falling apart or if the economy begins to weaken, which you’ve seen some warning signs, you’ve got to balance that off with the progress you’re making on the price front,” he said.
“The unemployment rate is still quite low, but it has been rising.”
Fed chairman Jerome Powell, speaking during a panel discussion in Sintra, said the Fed has made “quite a bit of progress” on inflation, but officials want to see more evidence of the downward trend before lowering borrowing costs.
“Because the US economy is strong and the labour market is strong, we have the ability to take our time and get this right,” he said at the European Central Bank event. — Bloomberg
