Economic Outlook: Fed May Pause Rate Hikes, But Lower Rates Expected

The Federal Reserve may currently be pausing rate hikes, as stated by Chicago Federal Reserve president Austan Goolsbee in an interview with Yahoo Finance. Nevertheless, Goolsbee anticipates a gradual decline in interest rates over the "next 12-18 months."

This assessment follows the release of a January jobs report exhibiting positive indicators, including 143,000 new jobs created (albeit below estimates), a decline in unemployment rate to 4.0%, and a 0.5% increase in wages.

Goolsbee characterized the jobs report as "solid" and indicative of "full employment." When questioned about the potential for the Fed to maintain steady benchmark rates, he responded, "We may be on hold, but over the next 12 to 18 months, I see the long-run settling rate for the fed funds rate to be a fair bit below where it is today."

However, Goolsbee emphasized the potential impact of uncertainty surrounding the Trump administration's policies, including tariffs, immigration, and tax cuts, on the pace of rate reductions. Nonetheless, he believes the economy remains on track to achieve the Fed's target inflation rate of 2%.

Recent inflation readings, according to Goolsbee, have been elevated due to base effects, and they are projected to improve later in the first quarter of this year upon comparison with the first quarter of 2024.

The Fed's challenge, Goolsbee added, will be to differentiate between "transitory" and "permanent" inflation components. This becomes particularly relevant if Trump's tariffs remain in place or expand.

"My hope is that we don't see a rebound of inflation," Goolsbee said. "But if we add policy uncertainty and inflation does rebound, that will make things more complex."

Goolsbee also highlighted the potential impact of a trade war and supply chain disruptions on the economy. While expressing optimism, he acknowledged the possibility of impediments to trade.

Despite uncertainties, Goolsbee sees the job market approaching full employment, economic growth remaining solid, and wage growth consistent with 2% inflation. He predicts interest rates will settle "a fair bit" below current levels in the long run and that the Fed will not reach a neutral rate (neither stimulating nor slowing growth) by the end of this year but likely within the next couple of years.