— Goolsbee Focuses More On Danger Of Waiting To Ease ‘Quite Restrictive’ Stance
By Steven K. Beckner
(MaceNews) – While not significantly diverging from the cautious approach toward monetary easing which Federal Reserve Chairman Jerome Powell has preached over the past two months, two senior Fed officials expressed varying degrees of concern Wednesday about the risks of unduly delaying short-term interest rate cuts.
While Vice Chairman for Supervision Michael Barr largely echoed Powell in saying the Fed needs to see more evidence that inflation is on a lasting path down to 2%, Chicago Federal Reserve Bank President Austan Goolsbee put much greater emphasis on not waiting “too long” to start cutting short-term interest rates.
Barr, who usually confines himself to financial supervisory issues, said Fed policymakers must be “careful” and assess both “the risk of an economic slowdown that could reduce employment” and “the risk that inflation does not stay on its path of sustainably returning to 2%.”
Barr told the National Association for Business Economics (NABE) annual Economic Policy Conference that he and his colleagues on the Fed’s policy making Federal Open Market Committee “need to see continued good data before we can begin the process of reducing the federal funds rate.”
Goolsbee was more forceful in warning that keeping rates at “quite restrictive” levels “for too long” could hurt employment. He said the Fed should not wait until inflation has actually fallen to its 2% target before starting to cut rates. He did not say when that might be.
Goolsbee urged a Council on Foreign Relations audience not to get “flipped out” by the larger than expected rise in consumer prices reported the day before and pointed to the downtrend in inflation over the last seven months. He also said surprisingly strong economic growth and labor markets should not necessarily deter the Fed from cutting rates.
The officials’ comments came a day after a Labor Department report showed inflation staying over 3%. They came two weeks after the FOMC kept the federal funds rate target unchanged in a 5.25% to 5.50% target range, but dropped a long-standing tightening bias in favor of more neutral policy guidance in apparent preparation for eventual rate cuts. FOMC participants had previously projected 75 basis points of rate cuts this year.
At the same time, the FOMC made clear it is in no hurry to ease. Powell told reporters the funds rate is “likely at its peak for this tightening cycle and that, if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year.” But he said “the Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”
Since then, a variety of reports have shown persistent strength in economic activity and labor markets along with continued mixed inflation data.
On Tuesday, the Labor Department said its Consumer Price Index rose a faster than expected 0.3% in January. The CPI’s 3.1% year-over-year increase was an improvement compared to December, but not as good as hoped. The core CPI did worse, rising 0.4% in January and 3.9% from a year earlier.
A January reading on the Fed’s preferred inflation gauge, the price index for personal consumption expenditures, won’t be released until later this month, but it too has been trending lower. In December, the PCE rose a faster 0.2%, but it was up just 2.6% from a year earlier – first time since March 2021 that it had been below 3%. The core PCE was up 2.9% year-over-year – down from 3.2% in November.
Although the Fed’s inflation target is predicated on the behavior of PCE, policymakers carefully watch the CPI and other indicators as well, including wage behavior. Although the data show a cooling of measured inflation, officials have made clear they want to see more, lasting improvement.
Barr hewed closest to the Jan. 31 FOMC statement and Powell’s comments in prepared remarks, saying, “my FOMC colleagues and I are confident we are on a path to 2 percent inflation, but we need to see continued good data before we can begin the process of reducing the federal funds rate.”
“I fully support what he called a careful approach to considering policy normalization given current conditions,” he continued. “January’s report on consumer product index inflation is a reminder that the path back to 2 percent inflation may be a bumpy one.”
Elaborating in response to questions, Barr said the path of 2% inflation is “likely to be bumpy,” as illustrated by the CPI report.
“That’s why it is important for us to be careful and cautious” before reducing the funds rate, he continued.
But Barr said the FOMC must be “careful on both sides” and “make sure we don’t cut prematurely” before it is confident inflation is on a sustainable decline down to 2%.
On the other hand, he added, “We don’t want to wait too long and end up causing cracks in the labor market.”
“Right now we’re in a very good place,” said Barr, adding that with “the healing of the economy.. we’ve been able to bring inflation down markedly while still having a strong labor market.”
But he repeated, “risks on both sides are there.”
Goolsbee put more weight on the risk of waiting too long to cut rates.
Once labeled a “dove,” Goolsbee joined most of his colleagues in calling early rate cut speculation premature over the past two months, but a day after the CPI report triggered a Wall Street sell-off, he seemed to revert to a more “dovish” frame of mind.
Instead of focusing on the CPI uptick, he noted that “over the past seven months core PCE inflation …. has been running at the Federal Reserve’s 2% target or even below.”
Echoing the FOMC statement, Goolsbee said, “Rate cuts should be tied to confidence in being on a path toward the target.”
However, he said, “I don’t support waiting until inflation on a 12-month basis has already achieved 2% to begin to cut rates.”
“More data like we have seen in the past six months would indicate that path, but that’s probably too stringent,” he continued. “Even if inflation comes in a bit higher for a few months (as many forecasts suggest), it would still be consistent with our path back to target.”
Goolsbee pointed out that, in their December Summary of Economic Projections, FOMC participants projected three 25 basis point rate cuts by the end of 2024, even though they also forecast 2.4% inflation. “The median SEP says there’s going to be multiple rate cuts with inflation at 2.4%,” he noted.
The Chicago Fed chief, who is not a voter this year, described the current monetary policy stance as “quite restrictive.” He put the real funds rate at “plus three percent” and contrasted that to the 0.5% real rate built into the FOMC’s median estimate of the longer run funds rate.
“(I)f we stay this restrictive for too long, we will start having to worry about the employment side of the Fed’s mandate,” he said in prepared remarks.
Goolsbee reiterated that opinion in response to questions.
“In my view you … must get inflation down to target,” he said, but, “You want to do that in as efficient a way as possible and not more. You don’t want to be overly restrictive.”
Since succeeding Charles Evans as Chicago Fed president just over a year ago, Goolsbee said he has been “cautioning people against over interpreting data, like wage growth.”
“There’s an argument that if wage growth is at some level that’s not consistent with 2% inflation, and so we must see wage growth come down before we can get inflation down,” he continued. “I think there’s a mistake in that logic, which is wages are stickier than prices, so when things happen, prices tend to move first and then wages. So wages are not a leading indicator of price inflation…
“In the long run, steady state, yes, wages have got to be consistent with inflation,” he went on, “but you want to be super careful making predictions like, ‘ah, three months from now inflation cannot come down because wage growth this quarter was whatever it was.”
Goolsbee again asserted, “You don’t want to remain this historically restrictive for too long. If you do you’re going to have to start thinking about the employment side of the mandate.”
“So far we’ve mostly just been thinking about the inflation side of the mandate because the employment side is looking great,” he went on, but “if you’re too restrictive for too long, you’re definitely going to need to think about that.”
Goolsbee also pointed to supply and productivity improvements as helping the Fed control inflation, and he cited low inflation expectations. “It’s important to remember that in the presence of favorable supply movements and stronger productivity growth, strong output or employment growth numbers are not reliable indicators of an overheating economy.”
The Commerce Department reported that real gross domestic product grew at a 3.3% rate in the fourth quarter and 3.1% for all of 2023, but Goolsbee said this above-trend growth pace need not push up inflation or delay rate cuts.
“(I)n moments when supply is moving, be extremely careful concluding from quantity data something about the overheating of the economy, because you kind of can’t do that,” he said.
When GDP “comes in surprisingly strong, there’s one world view that says that means there’s a danger that inflation is about to reignite,” he continued, but “be super careful about that at a moment like this.”
With supply chains “healing” and labor force participation increasing, “you can’t look at GDP growth rates and say that’s a sign of overheating,” Goolsbee said.
“Supply is a major driver, and I think we want to be careful with the Phillips Curve type argument that we must have pain in the quantity side to see inflation come down; you definitely did not in 2023 need to have that.,” he added.
Goolsbee suggested stock and bond markets overreacted to the CPI report.
“If you see (inflation) goes up that doesn’t mean we’re not on target to get to 2%,” he said. “We can still be on the path even if we have some increases and some ups and downs … . There’s nothing wrong with that. So let’s not get too flipped out if you see (CPI) inflation was higher than what we thought.”
In other comments, Barr said he has been “focused on how we can improve bank readiness to tap the Fed’s discount window.”
But he said “bank liquidity needs also relate directly to the evolution of the Federal Reserve’s balance sheet ….
“Right now, the Federal Reserve is implementing monetary policy with plentiful reserves in the system, even as we continue to run down the balance sheet with sizable securities redemptions every month,” he said. “This process has been operating smoothly. So far, balance sheet asset reduction has largely been accompanied on the liability side of our balance sheet by large declines in overnight reverse repurchase agreement (ON RRP) usage, rather than reductions in reserves.”
“Since the ON RRP remains sizable, we still have a buffer before reserves begin to decline in a meaningful way,” he went on.
Going forward, Barr said “it may be difficult to determine what level of reserves is consistent with ‘ample.’” He recalled that in September 2019, repo rates spiked and these pressures spilled over into the federal funds market, forcing the Fed to rapidly ramp up operations to add reserves to the banking system.
Barr said that episode led to establishment of the standing repo facility, “which, along with the discount window, will help dampen pressures that could emerge in short-term money markets.”
“I am pleased to see that there has been a steady growth in the number of firms signed up for the facility, and that current bank counter-parties to the facility engage in regular testing as a part of maintaining access,” he said.
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