Chicago Fed President Austan Goolsbee affirmed on Thursday the Federal Reserve’s unwavering dedication to combat inflation, emphasizing the central bank’s capacity to curtail rising prices without jeopardizing economic stability through excessive interest rate hikes. Speaking at the Peterson Institute for International Economics in Washington, Goolsbee asserted, “We will get inflation back to our target, whatever that takes. Inflation still needs to come down.”
Goolsbee pointed out that inflation has witnessed a notable decline, registering at 2.4% on a three-month annualized basis according to the consumer price index, as the pandemic-induced economic pressures abate. He asserted that, given the resolution of supply chain bottlenecks and a return of demand to more stable levels, the Fed possesses the means to lower inflation without triggering a severe recession.
“These factors also argue against putting too much weight on the idea that strong labor market and growth conditions will necessarily stall out the disinflationary process,” Goolsbee explained. “Doing so risks policy overshooting and unnecessarily derailing the expansion.”
Moreover, Goolsbee cautioned against using short-term wage growth as a barometer for predicting inflation, warning that anchoring interest rate decisions to wage growth during a transitional period would likely result in overshooting. However, he acknowledged potential hazards to what he termed the “golden path,” including the specter of oil price spikes, a deceleration in China’s economic activity, the potential for an extended auto strike, and the looming threat of a disruptive government shutdown.
The Chicago Fed President also urged against revising the inflation target to a figure higher than the established 2%, arguing that such a move would weaken the influence of expectations in driving down actual inflation. “Raising the target when inflation is above the target would undermine the credibility of the Fed’s commitment to any inflation target and impairs the very mechanism of how it is supposed to help,” he emphasized.
Goolsbee revealed that the Fed is transitioning from deliberating on the magnitude of future rate hikes to contemplating the duration of maintaining rates at or near their present levels. He emphasized vigilance in monitoring housing inflation as a pivotal factor in aligning core inflation with the target, alongside considerations of productivity and inflation expectations. He cautioned that a resurgence of housing inflation in the Consumer Price Index would necessitate a more assertive application of monetary policy restraint.
Federal Reserve officials foresee one more rate increase this year, projecting a range of 5.5% to 5.75%, followed by a prolonged period of maintaining rates at this level. Presently, rates hover within the bracket of 5.25% to 5.5%. The central bank has executed 11 rate hikes since March 2022, marking the most assertive rate-hiking campaign since the 1980s. While inflation has moderated, it persists at around 4%, doubling the Fed’s designated inflation target.
In summary, Chicago Fed President Austan Goolsbee conveyed his confidence in the Fed’s ability to combat inflation without inducing a recession. He urged caution in decision-making, underlining the potential ramifications of policy shifts on the economy.
Source: Yahoo Finance