Chicago Fed President Sees Interest Rates Moving Lower in the Next 18 Months

Austan Goolsbee, President of the Chicago Federal Reserve, believes that although the central bank may remain on hold for the time being, interest rates are likely to decline over the next 12-18 months. His comments follow the release of the January jobs report, which showed signs of resilience with 143,000 jobs created, a decline in the unemployment rate from 4.1% to 4.0%, and a 0.5% increase in wages.

Goolsbee characterized the jobs report as "solid," indicating that the U.S. economy is approaching full employment. He further stated that the Federal Reserve may continue to hold interest rates steady for the time being, but he anticipates a decline in the long-run settling rate for the fed funds rate, falling below its current level over the next year and a half.

Goolsbee emphasized that the pace of interest rate reduction will be gradual due to uncertainties surrounding the impact of the Trump administration's policies, such as tariffs, immigration, and tax cuts. Despite these uncertainties, he remains optimistic that the economy will return to the Fed's 2% inflation target. He noted that recent inflation readings have been influenced by base effects and should improve later in the year.

The challenge for the Fed, according to Goolsbee, is to distinguish between transitory and permanent inflationary pressures, particularly in the context of potential tariff increases or expansion. He expressed concern that persistent or escalating tariffs could lead to a more challenging inflationary environment characterized by increased uncertainty and instability.

Goolsbee recently met with auto suppliers and automakers in Detroit, discussing the potential impact of an escalating trade war on the supply chain. While acknowledging the risk, he expressed hope that ongoing negotiations would prevent significant trade disruptions.

Overall, Goolsbee believes that the labor market is stabilizing, economic growth is solid, productivity growth is positive, and wage growth is consistent with the Fed's inflation target. He views the long-run settling point for interest rates as significantly lower than current levels and anticipates a gradual path towards neutrality over the next few years.