Fed Officials Signal Openness to Substantial Rate Cuts

Several Federal Reserve officials on Monday left the door open for further substantial interest rate cuts, noting that current interest rate levels still pose a serious strain on the US economy. However, none of these Federal Reserve officials indicated a preference for repeating the Fed's move last week to cut rates by 50 basis points, and said that upcoming data would guide their decisions.

Chicago Fed President Austan Goolsbee said at an event: "In the next 12 months, we still have a long way to go to lower interest rates to a neutral level in an attempt to maintain the current economic situation." Goolsbee said he expects the current Federal Reserve benchmark interest rate to be "several hundred basis points" higher than the neutral rate.

Goolsbee's voice is more forceful than other Federal Reserve officials in calling for interest rate cuts. He emphasized that the US employment situation and inflation are at favorable levels, but unless the Federal Reserve "substantially" cuts interest rates in the coming months, this situation will not last. He said: "If the restrictions last too long, you won't stay in the best position for the dual mandate for too long."

Goolsbee emphasized his point. He warned that when the job market deteriorates, it happens faster than the central bank can alleviate by cutting interest rates. Historically, large-scale layoffs create a negative feedback loop, in which unemployment leads to reduced spending, and further leads to other businesses laying off workers to cope with declining demand.

Goolsbee said: "It is unrealistic to sit and wait for problems to arise. If we want to achieve a soft landing, we cannot fall behind the situation." Regarding the unemployment rate rising from a historical low of 3.4% last year to 4.2%, Goolsbee said that this is a level that most people believe matches full employment.

Goolsbee, Atlanta Fed President Raphael Bostic, and Minneapolis Fed President Neel Kashkari all said on Monday that they support the Fed's decision last week to cut rates by 50 basis points.

On the issue of how quickly the Federal Reserve should cut interest rates, Bostic is clearly more cautious than Goolsbee. But he also acknowledged that there may be room for the Federal Reserve to cut interest rates before reaching the neutral rate.

Bostic said at an event organized by the European Economic and Financial Center: "I don't know who would reasonably refute our claim that we are quite a distance above it (the neutral rate)." He also said that uncertainties about inflation and employment should rule out the possibility of a single interest rate cut of more than 50 basis points.

Bostic did not directly say whether he would support another 50 basis point interest rate cut. He warned against assuming that last week's rate cut would be repeated. But he also said: "If there is further evidence of substantial weakness in the job market in the next month or so, it will definitely change my view on the strength of policy adjustments."

For months, Federal Reserve policymakers have been debating where the neutral interest rate might be, and whether it has risen since the pandemic severely disrupted the US and global economies. Most economists believe that the neutral interest rate has risen, although it is uncertain whether this is a temporary or permanent change.Kashkari pointed out that despite high policy interest rates, the US economy remains robust. He stated: "The longer this economic resilience lasts, the more I believe that temporarily raising the neutral interest rate level could actually be more structural."

However, Kashkari added that the overall policy stance is "still tight," and he is inclined to support a 25 basis point rate cut at each of the remaining two policy meetings this year.

It is worth mentioning that Federal Reserve Governor Christopher Waller said last Friday that the unexpectedly favorable inflation data in recent weeks prompted him to support a 50 basis point rate cut at last week's policy meeting, and he may support a 25 basis point rate cut at the next two policy meetings. Waller added: "If the labor market data deteriorates, or if inflation data continues to be weaker than everyone's expectations, then you might see the pace of rate cuts accelerate." But he also pointed out that a resurgence in inflation could also lead the Federal Reserve to pause rate cuts.

Waller's views contrast with those of Federal Reserve Governor Michelle Bowman. Bowman said last Friday that she voted against the Federal Reserve's decision to cut rates by 50 basis points at last week's policy meeting – the first time since September 2005 that a Fed official dissented from the interest rate decision – because she remains concerned about inflation being higher than the target.