Chicago Fed Chief: Interest Rates Expected to Decline in the Next 12-18 Months
Chicago Federal Reserve President Austan Goolsbee recently stated that the central bank may be pausing rate hikes for the time being. However, he anticipates interest rates to decrease over the "next 12-18 months."
His comments follow the release of a solid January jobs report indicating signs of economic resilience. Despite job creation falling short of estimates, the unemployment rate dropped to 4.0% and wages rose by 0.5%.
Goolsbee described the report as "solid" and suggested it indicates a transition towards full employment. When asked if this implied a prolonged period of stable rates, he responded, "We may be on hold, but I see over the next 12 to 18 months, if we can emerge from the uncertainty stemming from policy, geopolitics, and commodities, the long-run settling rate for the fed funds rate will be substantially lower than it is today."
Goolsbee believes the pace of rate declines may be gradual due to uncertainties surrounding the impact of Trump administration policies. However, he maintains his expectation that the economy will ultimately achieve the Fed's target of 2% inflation.
He emphasized that the challenge for the Fed lies in distinguishing between "transitory" inflation, which can be overlooked, and permanent inflation if Trump's tariffs persist or expand.
Goolsbee shared concerns about a potential escalation of the trade war and its impact on supply chains. Nevertheless, he expressed hope that experience and recent developments may prevent it from becoming a significant impediment to trade.
Despite uncertainties, Goolsbee noted that the job market is stabilizing at full employment, economic growth is solid, productivity growth is positive, and wage growth is consistent with 2% inflation. He concludes that the economy is in a better position than six months ago and that long-term interest rates should settle "a fair bit" lower than current levels.