Top Fed voice predicts ‘many more rate cuts’ in next year

“As we’ve gained confidence that we are on the path back to 2%, it’s appropriate to increase our focus on the other side of the Fed’s mandate — to think about risks to employment,” Goolsbee outlined in talking points for a moderated Q&A event in Chicago Monday. “That likely means many more rate cuts over the next year.”

Goolsbee cautioned that when labor markets deteriorate, they do so more quickly than central bankers can deliver relief through rate cuts. 

“It’s just not realistic to wait until problems show up,” he said. “If we want a soft landing, we can’t be behind the curve.”

Goolsbee said he supported the Fed’s decision last week to lower rates by a half percentage point, a message Minneapolis Fed President Neel Kashkari and Atlanta’s Raphael Bostic echoed in separate comments Monday.

While Goolsbee isn’t a regular voter on the Federal Open Market Committee this year, he participates in monetary policy deliberations. 

“The specific timing of the initial cut is less important than the longer-arc view that conditions are good on both sides of the mandate,” Goolsbee said, referring to inflation and employment. “Rates need to come down significantly going forward if we want the conditions to stay that way.”

Neutral Rate

Goolsbee noted borrowing costs are “hundreds” of basis points above neutral — a level of rates that neither stimulates nor restrains economic activity.

“Over the next 12 months, we have a long way to come down to get the interest rate to something like neutral to try to hold the conditions where they are,” Goolsbee said during the moderated discussion.

“When inflation is coming in at the target and unemployment is where you want it, do you want to be the tightest in decades?” he said. “If you’re restrictive for too long, you’re not going to be at that sweet spot on the dual mandate for much longer.”

Rate projections released alongside the Fed’s decision, however, show a wide range of views among officials on where rates should be at the end of 2025. 

Unlike Kashkari, who said he penciled in smaller, quarter-point cuts for the central bank’s two remaining meetings this year, Goolsbee didn’t specify whether he expects quarter-point or half-point moves in the coming months. Bostic emphasized the central bank is not locked into a cadence of large moves going forward.

Labor Market Worries

The Chicago Fed chief has voiced concern over the labor market’s trajectory over the past few months, noting that it’s uncertain whether it’s heading to a more normal level — after running hot in the post-pandemic recovery — or weakening beyond that. 

Significant layoffs have historically created a negative feedback loop in which job losses cause a pullback in spending that then drives other businesses to lay off workers in response to lower demand. 

The unemployment rate, which hit a historic low of 3.4% last year, has risen to 4.2%. Goolsbee said Monday that’s a level that most would regard as commensurate with full employment. 

“Basically, we would love to freeze both sides of the Fed’s dual mandate right here,” Goolsbee said.

(Updates to include additional Goolsbee comments beginning in eighth paragraph.)