Chicago Fed President Austen Goolsbee vowed on Monday that the central bank would respond to signs of economic weakness and said interest rates may now be too stringent.
Asked whether weakness in the labor market and manufacturing would prompt a reaction from the Fed, Goolsby did not commit to a specific course of action but said there was no point in maintaining a “restrictive” policy stance if the economy is weak. He also declined to comment on whether the Fed would make an emergency interest rate cut during the meeting.
“The Fed’s job is very simple: Maximize employment, stabilize prices and maintain financial stability. That’s what we do,” the central bank official said in an interview on CNBC’s “Squawk Box.” “We’re proactive about it. So if things start to look like this across the entire line, and any one part deteriorates, we’re going to fix it.”
The interview comes amid market turmoil.
Futures tied to the Dow Jones Industrial Average fell nearly 1,300 points, or nearly 3%, as U.S. Treasury yields plummeted. The moves continue a downward trajectory that began on Thursday, a day after the Fed chose not to cut interest rates, raising concerns that policymakers are behind the curve as inflation falls and the economy weakens.
Those concerns were heightened on Friday when the Labor Department said nonfarm payrolls rose by just 114,000 and the unemployment rate climbed to 4.3%, triggering a signal known as the “Sam Rule” that the economy may be heading into recession.
However, Goolsby said he does not believe that is the case.
“The employment data was weaker than expected, but it doesn’t look like a recession yet,” he said. “I do think you want to make forward-looking decisions about where the economy is going.”
However, he also said that the Fed’s current policy is restrictive and that this stance should only be taken if the economy looks overheated. Since July 2023, the central bank has maintained its benchmark interest rate in a range of 5.25% to 5.5%, which is the highest level in about 23 years.
“Should we reduce restrictions? I wouldn’t hang my hat on what happens in the future because we’re still going to get more information. But if we’re not overheating, we shouldn’t really tighten or restrict,” he said.
Policymakers have been focusing on the “real” federal funds rate, which is the Fed’s benchmark minus the rate of inflation. As inflation falls, real interest rates will rise—unless the Fed chooses to cut rates. The current actual interest rate is about 2.73%. Fed officials estimate that long-term real interest rates are close to 0.5%.
The market expects the Federal Reserve to enter a radical easing mode and cut interest rates by 0.5 percentage points starting in September, which has now been fully reflected in the 30-day federal funds futures contract. Traders expect the Fed to cut the funds rate by 1.25 to 1.5 percentage points before the end of the year. CME Group’s Fed Watch tool.
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