Fed Heavyweights Advocate for Economic Safeguard
Earlier this week key figures at the Fed confirmed they advocated for the substantial interest rate cut to safeguard the US labour market and bolster economic growth, the outlook, however, appears mixed.
Austan Goolsbee, President of the Chicago Fed (a dove and voter next year), stated that interest rates need to be "significantly" lowered. He explained: “As we've gained confidence in returning to our 2% inflation target, it's appropriate to increase our focus on the other side of the Fed's mandate - to consider risks to employment." Goolsbee emphasised that this approach likely entails numerous rate cuts over the coming year.
Goolsbee also expressed concern about the labour market's trajectory, noting uncertainty about whether it's normalising after a post-pandemic surge or weakening beyond that point. The unemployment rate, which hit a historic low of 3.4% last year, has risen to 4.2% - a level generally considered commensurate with full employment. "Essentially, we'd love to freeze both aspects of the Fed's dual mandate right where they are," Goolsbee concluded, underscoring the delicate balance the Fed aims to maintain between inflation control and employment stability.
Minneapolis Fed President Neel Kashkari (a non-voter until 2026) revised his outlook on interest rates. Kashkari suggested that the current US economic resilience may indicate a more permanent shift in the neutral rate. As such, he expects 25bps cuts in November and December. Kashkari adjusted his long-term forecast for the federal funds rate to approximately 2.9%, up from his previous estimate of 2.5% in March.
Atlanta Fed President Raphael Bostic (a hawk and voter) also weighed in, suggesting that initiating the central bank's cutting cycle with a substantial move could help bring interest rates closer to neutral levels. He stressed that this approach would be beneficial as the risks between inflation and employment become more balanced. Bostic emphasised that the Fed isn't committed to continued big rate cuts.
We then heard from the central bank’s leading hawk, Bowman (a voter into 2026). Having dissented from the FOMC decision’s jumbo rate cut in favour of a 25bps reduction, Bowman, last Friday, stated that the US economy remains strong while inflation risks are a concern, adding that rates should be cut at a measured pace to “avoid unnecessarily stocking demand”. Yesterday she suggested that the Fed should maintain higher rates for an extended period to ensure inflation returns to the 2% target. Bowman also noted that estimates of the neutral interest rate may have increased since the pandemic, which could affect the pace of rate cuts.
So, a complex economic landscape will likely see the Fed officials’ nuanced debate continue. We will receive further rhetoric from the central bank members later this week, with the central bank’s PCE Price Index prints a clear focus on Friday.
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