Austan Goolsbee may not have made up his mind just yet about his vote for or against a rate cut at the Federal Reserve’s final meeting of the year. He is crystal clear, however, that even if Fed officials vote to skip doing another 25bps rate cut on December 18, a continued decline in inflation and the need to get the the key policy rate back to neutral ensure that the Fed will get back on its rate cutting path next year.
There are many voices arguing now (1) that the Fed should pause as it waits to see exactly what the impact of the new Trump administration’s policies will be on the economic growth and inflation, (2) questioning why the Fed should keep cutting rates when inflation is still above target, (3) arguing that the labor market and the consumer are holding up well, and more stimulus is the last thing the economy needs right now.
So, I started by asking him about the 800 pound gorilla in the U.S. political economy room: Donald Trump’s re-election. What do sweeping fiscal policy changes mean for monetary policy makers who have no input into them and could find their own monetary policy strategy affected?
Fed Not in Fiscal Policy Business: timeline 00:01:28:02 - 00:01:54:03
We're not in the fiscal policy business. Congress passed whatever fiscal policy they want, the administration passed whatever they want to do. And I always say our Midwest motto is, there's no bad weather, there's only bad clothing. So you tell us the conditions and we'll tell you what's the right jacket to wear if these policies contemplated or were enacted affect our dual mandate.
Only Fed Tool Is Interest rates, All the Rest Is Fiscal Policy 00:05:09:06 - 00:05:35:10 Part of what made (the) Covid times harder to understand and made the job of being a central banker more difficult is we had the first recession ever that was driven not by cyclical industries, it was driven by <a policy of government shutdowns that meant> nobody <could> spend money on services. So we're still trying to kind of come to terms around that. Every other thing in the tool box is fiscal policy.
We can adjust the interest rate and try to loosen or heat up the demand side of the economy. But all tariffs, immigration, tax policy, all of these things, that's really fiscal. And we just have to take that as ‘changes to conditions’ that we try our best to figure out what are they going to do to our mandate and how how much should we tighten or loosen the screws <using our only tool>.
Evidence Shows Long Arc Inflation Is Still 2% Timeline 00:07:28:10 - 00:08:19:08
We hit a bump in the first quarter of this year where inflation got up higher than 2%. Then we have a multi month period where it's continued coming down now with stalled a bit. But I still think that the evidence on the long arc is <that> this is a path to 2%. I still think we're going to 2%. And as inflation approaches where we want it and the job market is approaching something that looks like stable, full employment, steady state kind of levels, it will make sense to have the interest rate come down to something like normal, steady state levels.
Dot Plot Shows Almost Everyone Sees Lower Rates in a Year 00:08:19:08 - 00:08:42:15
If you look at the dot plot to almost everyone on the committee, though, there is disagreement of where that settling point is. Virtually everyone thinks it's well below where we are right now. So as I look out from right now as vantage point to a year from now, if we're talking on Central Bank Central next year, I think the rates would be a fair bit lower than where they are now.
Fed Policy Decisions Hardest in Transitions Like This One 00:22:44:20 - 00:23:19:15
We're at a moment of transition and we're trying to get the timing right and we're meet every six weeks and that's going to mean a higher frequency of close call type meetings where there's there to pauses when they thought there would be cuts, there are cuts when they thought there be pauses, there are 50, not 20 fives, then followed by 25, not 50, that kind of thing is going to happen a lot because we're trying to figure it out by feel and with legs to the monetary policy.
Dive in and hear, see what else President Goolsbee has to say. We covered a lot more ground including messages from the bond market, why he doesn’t see signs the economy is overheating, and why he does think there are signs the labor market may be showing some cracks.
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