Will the Fed Cut Rates to Prevent a Recession?
In a recent interview with Yahoo Finance, Chicago Fed President Austan Goolsbee indicated that the Federal Reserve is edging closer to cutting interest rates, warning of potential recession risks if the central bank delays easing its monetary policy.
While Goolsbee refrained from specifying a timeline for the rate cuts, he acknowledged that conditions are aligning for such a move. When questioned about the current suitability for a rate cut, he affirmed, “Are the conditions in place here? Yes, this is what the path to 2% looks like,” alluding to the Fed’s goal of reducing inflation to 2%.
Addressing the risk to what he terms the “golden path”—achieving low inflation without triggering a recession—Goolsbee expressed concerns. “You risk the golden path if you are going to be as restrictive as we are now,” he stated.
Goolsbee’s optimism is bolstered by a series of positive inflation readings in the second quarter, viewing the hotter readings from the first quarter as merely a “bump in the road.” He commented, “It’s not done, but it makes me feel a lot better when you both see it for multiple months in a row.”
Goolsbee joins other central bank officials, including Fed Chair Jerome Powell, New York Fed President John Williams, and Fed Governor Chris Waller, in suggesting that rate cuts may soon be warranted. Waller remarked in a speech titled “Getting Closer,” “While I don’t believe we have reached our final destination, I do believe we are getting closer to the time when a cut in the policy rate is warranted.”
Market participants widely anticipate that the Fed will maintain current rates at its upcoming meeting on July 30-31. However, traders are increasingly betting on a rate cut in September, with probabilities nearing 100%.
When pressed about the possibility of a rate cut in September, Goolsbee remained non-committal but noted, “The more months of [inflation] data you get like the last seven months of last year for sure that’s what the path to 2% looks like.”
The latest Consumer Price Index (CPI) data showed core inflation—excluding volatile food and energy prices—rose 3.3% year-over-year in June, down from 3.4% in May and 3.6% in April. The Fed’s preferred inflation measure, the core Personal Consumption Expenditures (PCE) index, will release its June reading on July 26, with some economists predicting it could drop to 2.5% from 2.6% in May.
Fed officials have consistently stated that rate cuts will not occur until there is substantial confidence that inflation is sustainably declining towards their 2% target. While recent inflation data has bolstered this confidence, it has not yet sealed it.
With signs of cooling inflation, the Fed’s focus has shifted back to the job market, which has shown signs of softening. The unemployment rate has risen for two consecutive months, reaching 4.1%. This shift suggests that the job market could once again become a critical factor in the Fed’s decision to cut rates. The Fed operates under a dual mandate to maintain stable prices and maximize employment.
Goolsbee highlighted the job market as an “area of concern” but noted it is cooling to a “position of better balance.” He remarked, “There are some other warning lights I’d say, but so far this doesn’t look like a recession. It’s just a cooling back to better balance, but it needs to stabilize at that and not keep getting worse.”
Should unemployment continue to rise sharply, resembling early recession trends, Goolsbee acknowledged that concerns over the employment side of the mandate would be justified. However, he concluded, “Thus far, it doesn’t look like that.”
Key Takeaways:
- The Fed is closer to cutting interest rates, with officials wary of waiting too long and risking a recession.
- Positive inflation data in the second quarter has improved the outlook for reaching the 2% target.
- The job market’s cooling trend may influence the Fed’s decision on rate cuts, aligning with its dual mandate of stable prices and maximum employment.
Conclusion:
As the Federal Reserve edges closer to potential rate cuts, the balance between managing inflation and sustaining employment becomes increasingly critical. Traders and investors should monitor upcoming inflation data and job market trends, as these will play pivotal roles in shaping the Fed’s monetary policy decisions in the near term.
