Federal Reserve officials also seem to have begun to build momentum for a rate cut in September, but former Kansas City Fed President Honig reminded them not to let the situation of the 1970s repeat itself...
The Federal Reserve seems ready to start a rate cut cycle in the near future. The latest data from CME's Fedwatch tool shows that the probability of the Federal Reserve cutting interest rates in September is almost 100%.
Chicago Fed President Goolsbee, in an interview late Thursday, highlighted the fact that the Fed is on track to reach its 2% inflation target.
He said that while the Fed's battle with inflation continues, months of improving data have convinced him that inflation is back on track to continue to fall toward its 2% target.
But he said the labor market was "definitely an area of concern," noting that keeping interest rates high while price pressures eased meant monetary policy was already "substantially tighter."
Asked if what Goolsbee calls the “golden path” — the prospect of winning the battle against inflation without a big rise in unemployment — is at risk, the Chicago Fed president immediately responded, “Yes.”
He noted that "the real federal funds rate (the interest rate minus inflation) is at its highest level in decades...If you're afraid of an overheated economy, you want to restrict it, but the economy is not overheating right now."
Goolsbee, who will vote as an alternate member of the Federal Open Market Committee at the Fed's meeting later this month, did not specify when the central bank should start lowering interest rates.
In recent weeks, Fed officials, led by Chairman Jerome Powell, have said inflation is making some progress toward their 2% target, but they have been coy about the timing of any rate cuts.
Thomas Hoenig, former president of the Federal Reserve Bank of Kansas City, recently expressed his views on the Fed's current monetary policy, how officials are responding to economic concerns and why they should proceed with caution.
Honig, now a distinguished senior fellow at George Mason University's Mercatus Center, said the Fed's "eagerness to cut rates" is understandable.
“I look at the labor market, but the unemployment rate is still at 4.1%, which in some ways is still historically low, and I think that part is very positive,” Honig said.
But he added: “The fact is that inflation is still 3% year-on-year, and 2.6% on what they call their preferred indicator, and it’s still not 2%. And yet they’re talking about cutting rates in September. I think that’s getting a little ahead of themselves.”
Overall, Honig sees the labor market as solid: "I think wages are growing. That's a good thing, and retail sales are very strong. Those are very positive things. They don't suggest that interest rate cuts are needed."
“The other thing I keep reminding them is that I saw this happen in the 1970s — you let inflation come down for a while, then you cut rates very quickly, and then inflation would come back up again,” he said.
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