Chicago Fed President Goolsbee said that as long as inflation continues to fall toward the Fed's 2% target, interest rates will be significantly lower in the next 12-18 months.
Still, Goolsbee agreed with Fed Chairman Jerome Powell that policymakers are in no rush to cut interest rates.
“As long as we continue to move toward our 2% inflation goal, interest rates will be much lower over the next 12 to 18 months than they are today,” Goolsbee said.
The Chicago Fed chief said it makes sense to slow down rate cuts at a time when uncertainty is about the neutral rate, the level of interest rates that neither stimulates nor depresses the economy.
“If there is disagreement about the neutral rate, then it makes sense to at some point start to slow the pace at which you get to that level,” he said.
Goolsbee added that interest rates remain at restrictive levels, so there is room to reduce borrowing costs to a more neutral level.
Policymakers cut interest rates by a quarter point last week, following a larger cut in September, and several Fed officials, including Powell, have advocated a cautious and slow approach to further rate cuts amid a strong economy.
Data earlier on Friday showed U.S. retail sales rose in October, driven mainly by auto sales, and a significant upward revision to the prior month suggested consumers entered the final months of the year with strength.
Traders slashed their odds of a December rate cut by the Federal Reserve to about 50 percent after the data.
Powell said Thursday that the economy is not sending “any signals” that the Fed needs to rush to cut interest rates, allowing officials to pursue further adjustments “prudently.”
The pace of progress toward the Fed’s 2% inflation target has also slowed. CPI data released earlier this week showed that the consumer price index (excluding food and energy) rose 0.3% month-on-month for the third consecutive month.
In addition, Trump's tariff policy may cause US inflation to rise again, and the Federal Reserve may have to readjust its interest rate path.
“We expect Trump’s tariffs to be implemented,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank.
Luzzetti believes that data from Trump's first term is useful in predicting what may happen this time around.
“The tariffs have really weighed on the economy,” he said. “It created a trade war, and financial markets were very negative about it. We have clear evidence that the tariffs are indeed playing out as we expected, which is creating a negative supply shock to the economy in the short term.”
Markets have been ignoring tariff risks since the election results were announced last Tuesday, with the risk of tariffs rising to an all-time high following news of Trump's victory.
Article forwarded from: Jinshi Data
