Chicago Federal Reserve President Austan Goolsbee indicated that given the current and potential future economic conditions, the Federal Reserve has a strong reason to implement substantial interest rate cuts. Goolsbee mentioned that this rate-cutting process might last for over a year as the Fed aims to lower rates to a normal level.
He emphasized that the Fed needs to significantly reduce the benchmark rate within the next 12 months, with multiple cuts larger than 25 basis points each. The Fed's steady rate-cutting approach is expected due to decreasing inflation pressures and rising risks in the job market. Goolsbee noted that the economy has largely returned to a normal state, with macroeconomic indicators like economic activity, employment, and inflation reaching relatively stable and predictable levels.
Recent data revealed that the Fed's preferred PCE inflation measure indicated easing price pressures last month. In August, the PCE index rose 2.2% year-over-year, which was below expectations. The core PCE index, closely watched by the Fed, also increased 2.7% year-over-year, meeting expectations. These figures suggest that the inflation rate is progressing towards the Fed's 2% target.
In September, the Fed cut the interest rate by 50 basis points, bringing the benchmark rate down to a range of 4.75% to 5%, citing improved inflation conditions and a cooling labor market. Goolsbee noted some warning signs in the job market but also mentioned that the current unemployment rate of 4.2% seems sustainable.
Additionally, Goolsbee expressed concerns about the potential disruption caused by port workers' strikes. Workers on the East Coast and the Gulf of Mexico are set to strike, possibly causing severe supply chain disruptions. The strike, anticipated to start soon, could be one of the most destructive to the U.S. economy in decades.
Any negative supply shocks, he stated, would increase operating costs and lead to shortages, complicating the situation. Negotiations between shipping companies and port terminal operators have stalled, with a strike imminent. This strike could severely disrupt the flow of goods, affect prices, and broadly impact the economy, akin to the supply chain disturbances seen during the pandemic.
White House spokesperson Patterson mentioned that the Biden administration is working urgently to avoid the strike and has been in contact with both sides over the weekend, urging them to reach an agreement.
