The Federal Reserve is the slow and steady hand guiding the U.S. economy. It shepherded the country out of a pandemic-induced recession, and so far has helped tame inflation without tipping the economy into a downturn.
Now, all eyes are on the central bank as a long-awaited interest rate cut seems to be in sight. The Fed’s decision-making arm, the Federal Open Market Committee (FOMC), is widely expected to lower rates at its next meeting on Sept. 17 and 18, after holding the federal funds rate steady at a 23-year-high of 5.25%-5.5% since July 2023.
Its preferred inflation metric, the Personal Consumption Expenditures (PCE) price index, rose 0.2% on a monthly basis in July, in line with expectations. Consumer price growth came in at 2.9%, a strong sign that inflation has slowed considerably towards the Fed’s 2% target. Combined with a higher-than-anticipated 4.3% unemployment rate and job openings falling more than expected, the Fed has signaled that it’s finally time to cut rates.
But the central bank is still keeping its eyes peeled for any potential red flags, which will likely affect how big the cut is (it’s largely expected to be either 25 basis points, or 50). Plus, the August Consumer Price Index (CPI) is scheduled for Sept. 11, and weekly unemployment figures will continue to stream in.
Chicago Federal Reserve President Austan Goolsbee, who serves as an alternate member of the FOMC and was chairman of the Council of Economic Advisers under President Barack Obama, spoke to Quartz last week about where the economy is at — and where it might be headed.
Quartz: The FOMC is meeting in a couple of weeks. We’ve had some pretty good data so far. Are you seeing strong evidence for a rate cut?
Austan Goolsbee: Well, I’ll preface by saying that I’m always hesitant to tie our hands before a meeting when we’re still going to get a lot of good information. I think we set this rate a long time ago, more than a year ago, and conditions were extremely different than they are today. Inflation was much higher, unemployment was significantly lower, and I can speak only for myself on the FOMC, not for any others, but I was there in Jackson Hole and saw Chair Powell say that he believed that the time had come to start the process of cutting rates. And I think that as inflation’s come down, and we’ve had this rate this high, that’s tightening. You only want to be tightening if you’re trying to prevent overheating, and the economy is not overheating.
What would be some of the consequences if there isn’t a rate cut soon?
If we stay restrictive for too long, I would anticipate that the employment side of the mandate would start to deteriorate, pretty notably. And we’ve seen a cooling of the job market, mostly to levels that are, we hope, sustainable. But when, in the past, that starts to turn sour, it does so quickly. And that’s the fear, that unemployment has drifted up now a fair amount, and it’s supposed to settle at a steady state, full employment level.
If you look at the SEPs [Summary of Economic Projections], people make estimates of where they think unemployment and inflation will settle. The vast majority of folks in the SEP dots said unemployment would not go above 4.1%. Yes, it’s only one month, and it could easily go down, and you don’t want to hinge too much on one month, but we already got above where people said the highest it would go.
It’s not just the unemployment rate, but the job market in total, that I will highlight. If we’re too restrictive for too long, we’re going to start seeing it there. And that’s the job of the Fed. That’s the law, stabilize prices and maximize employment. So we have to take that seriously.
Debates over a soft landing, or as you’ve called it, a “Golden Path,” where the Fed brings down inflation without tipping the economy into a recession, have been ongoing for years now. Where do you see the U.S. economy in terms of a recession?
There’s still a chance of recession. In a way, there’s always a chance of recession.
This has been such an unusual business cycle, going through COVID. We had a steep downturn that was not driven by cyclical sectors, the way it usually is. We’ve had a recovery that’s been quite strange, by historical precedent. And then, in 2023, we got the inflation rate down close to as much as it’s ever come down in a single year without a recession. That was the “Golden Path.”
So now, this is a second chapter, a second part of this journey. But we should not forget that was a major event in the monetary history of the U.S., that we actually got inflation down without a deep recession. Now can we, on the last tail leg of it, not have the economy worsen? I hope so. That’s certainly the goal.
But if you take historical indicators of the business cycle, there are multiple warnings. There are some parts of the economy that look strong. GDP growth is still strong and came in better than expected. But each thing you’ve seen in the labor market — like the unemployment rate or the hiring rate, the quit rate, or the ratio of vacancies to unemployment — they’re cooling. And some of them have cooled more than just where they were before COVID.
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If you’re looking at consumer credit card delinquencies or small business defaults, those have been rising. Each of them is now to a level that’s kind of cooled to worse than it was before COVID. So those would be the warning signs, and recession is still possible. It requires vigilance from the central bank and a bit of good fortune in economic conditions to keep the magic going. But I’m hopeful, like I said, that it’s possible. Let’s just not be too restrictive for too long.
A lot of people I’ve talked to have predicted a shallow recession, not something that would be super severe, if that recessionary case were to happen. It sort of seems like an overwhelmingly positive view of what’s still to come.
My only hesitation is that word, “positive,” but I see what you’re saying is it’s benign, it doesn’t look sinister. But I just remind everybody, it’s central bankers’ job to be paranoid about everything. Easier soft landings to land than this one have been derailed by external shocks many times in the past. And there’s geopolitics, there are many reasons that people could go in the freakout channel. If you look at asset prices, a lot of them look high. We’ve had recessions that began with popping bubbles. We’ve had recessions that began with wars in the Middle East and commodity prices going up. We’ve had recessions that began when worldwide slowdowns took place. So, yes, it could be worse. But it definitely requires vigilance at this point.
What do you see as the biggest economic challenge confronting the U.S. going into 2025?
I think the biggest challenge is making sure the economy settles. It cools, and it cools to sustainable full employment, and doesn’t just keep getting worse and not stop where it’s supposed to stop. That’s going to be our challenge.
And the thing that raises the degree of difficulty to central banks, including the Fed, is that we learned from this episode that the lags of monetary policy’s impact are probably a little bigger than what they were in previous rate cycles, and there have been a series of things that also made the transmission mechanism less impactful. So as the economy is cooling, it is a delicate balance that we’re trying to strike. And it’s not that easy.
What do you think are going to be some of the tools that the Fed is going to employ next year to prevent that?
The Fed only has one tool: It’s a screwdriver. We can tighten, we can loosen. That’s all we have, so that’s the tool we’re going to use. What will be required is good judgment to not just be backward looking, but to be forward looking and trying to figure out where the economy’s going to be, and what would be the appropriate policy to do now, knowing that it’s going to take a little bit for that policy to work its way through. That’s the art of central banking, and why it doesn’t feel like ChatGPT is going to replace the central bank anytime soon.
There was a lot of criticism from people this year about the Fed acting too slow, maybe being too cautious about cutting rates. Would this slow-and-steady pace continue?
My feeling, and maybe it’s wrong, but my feeling is that most of the critics of the speed of Fed decision-making are on a market traders’ timetable. For me personally, I think good monetary policy goes on an economic timetable which is definitely not market traders’ daily, down to the minute timetable. And I used to work closely with [former Fed Chair] Paul Volcker, and he would tell me, “Our job is to act and their job is to react, and let’s not get the order mixed up.”
So, I don’t think that we should be setting monetary policy based on how the stock market is reacting or demanding. I think that’s a bad idea.
For the past year or so, we’ve seen a pretty big disconnect between consumer sentiment and how the economy actually seems to be doing. That’s beginning to turn around a bit, but there’s still a gap. Why do you think that is?
There is a sense in which the Fed is one step removed from the vibes. The law requires us to look at the actual numbers. That said, we have always paid attention to the vibes and the sentiment, and because, as your question started, those consumer and business sentiment indices were good indicators of spending, and that began to break down. Interestingly, it didn’t just start breaking down post COVID. That post-COVID was a continuation. It’s been breaking down for a bit. That’s made us put a little less weight on vibes, because the law says we have to care about the actual numbers. So if the vibes aren’t going to tell us about the actual numbers, we’re not going to throw it away — we pay attention to everything — but we’re going to put a little less weight on it.
Consumer sentiment is tied to several very public prices, like the price of gasoline, the price of milk and groceries and some things like that, has an outsized impact on consumer sentiment than it does in the consumer budget. And the price level of a bunch of those things went way up.
What do you see as the future of the housing market in the next year? What are you hoping happens?
Over the coming year, I want and expect to see progress on housing inflation. Housing is one of the most interest rate sensitive sectors of the economy, so when the Fed tightens rates, it’s always housing that bears a lot of the brunt. As rates loosen, housing will be a beneficiary.
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The only thing is, a dramatically higher share of mortgages in the United States are 30-year fixed-rate mortgages than they were in past business cycles, for sure, than they were around the time of the Great Recession. So the impact of rates on the market are going to be muted, delayed, extended in a way like what you’ve seen now, and you’ve had this weird component that it also affected the supply of existing housing, whether people were willing to move, because you’ve got these long fixed rates that are much lower than the current rate.
How do you think that the outcome of the upcoming elections could shape the economy?
When you become a sworn member of the Federal Reserve, you’re out of the elections business. As I always say, our motto here in Chicago is, “There’s no bad weather, there’s only bad clothing.” So give us the conditions, and we’ll handle it. Whatever they want to do, whoever’s elected president, whatever their policy is, we’ll adjust.
Other than policy, rates, and the economy, what is your current obsession?
What is my obsession? It’s not the White Sox, which are about to set the record to be the worst baseball team in the history of baseball. I would say, I love the outdoors, and lately, my obsession has been getting out on Lake Michigan in a kayak or a paddleboard.