On Friday, Chicago Fed President Goolsbee stated that the U.S. economy has recovered to a state akin to normalcy, necessitating a more normalized level of interest rates. He believes that the Federal Reserve will have more room for rate cuts in the future and is less concerned about specific timing.
At the 18th Community Bankers Symposium of the Chicago Fed, Goolsbee delivered a speech in which he first compared the economic conditions under the pandemic and the recovery post-pandemic to the aurora borealis on Thursday night. Due to a strong solar storm, the aurora was visible across the continental United States that night. Goolsbee said, "This economic cycle is unlike any other, as unusual as the aurora appearing in the Chicago sky on a random night in October."
He indicated that today's economic conditions have returned to near-normal, noting that the unemployment rate has dropped to around 4%, and inflation is gradually approaching the Fed's 2% annual target. However, Goolsbee believes that the federal funds rate remains at an abnormal level.
"In the long term, inflation has come down significantly," he said. "In terms of the labor market, it has cooled from an overheated state to a stable, full-employment state. If we could freeze this picture, it would be the ideal image for the dual mandate (controlling inflation and maintaining employment). So, if this is the normal state, then I think the current interest rates are still far higher than what should be in a stable state."
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Over the past three years, the Fed's focus has been on curbing inflation. The Fed raised rates into a restrictive range and maintained this level for over a year. On September 18th of this year, the Federal Open Market Committee (FOMC) lowered the target range for the federal funds rate by 0.5 percentage points, to 4.75% to 5.0%.
Goolsbee stated that this move reflected progress made in slowing inflation and aimed to prevent further deterioration in the labor market. He pointed out, "Historically, the labor market has the characteristic that once it starts to decline, it's too late, and the recession has already arrived."
Goolsbee is not too concerned about the specific measures the FOMC will take at the November meeting or other specific meetings. He is more focused on the long-term trend of interest rates.
He said, "Over the next 12 to 18 months, interest rates will eventually fall to a level of 2.5% to 3.5%, and we are far above this level now. For me, the most important thing in formulating monetary policy is to acknowledge that interest rates are declining, and the specific timing is less important."
On Friday, interest rate futures pricing indicated that the market expects a roughly 88% chance that the federal funds rate will be cut by 25 basis points on November 7th.