Goolsbee says Fed 'may be on hold' for now but sees rates going lower in next 12-18 months
Chicago Federal Reserve president Austan Goolsbee told Yahoo Finance Friday that the central bank "may be on hold" for now, but he still sees interest rates moving lower over the "next 12-18 months."
The comments about Fed monetary policy came after the release of a new jobs report for January that showed several signs of resilience. There were 143,000 jobs created, which was below estimates, but the unemployment rate ticked down to 4.0% from 4.1% and wages grew by 0.5%.
Goolsbee in an exclusive interview Friday called the jobs report "solid" and said it showed "we're settling into something like full employment."
Read more: Fed rate decision: How it affects your bank accounts, loans, credit cards, and investments
When asked if that meant the Fed would keep its benchmark rates steady for some time, he said, "We may be on hold, but I see over the next 12 to 18 months if we can get out of the uncertainty coming from policy or from geopolitics and commodities, I view the long-run settling rate for the fed funds rate to be a fair bit below where it is today."
Goolsbee emphasized he thinks the speed at which rates come down is going to be a little slower given uncertainty about the impact of the Trump administration’s policies — from tariffs to immigration to tax cuts.
But overall he still thinks the economy is on course to get back to 2% inflation, which is the Fed's target.
Recent inflation readings, he noted, have been pushed up because of base effects and they should start to look better later in this year's first quarter when compared with the uptick in the first quarter of 2024.
The challenge for the Fed going forward, he added, will be to figure out which part of inflation is "transitory" that the Fed could look through and what part is permanent — if in fact Trump's tariffs persist or widen.
Trump has already levied a 10% tariff on Chinese imports while putting 25% tariffs on pause for Canada and Mexico. He has also threatened tariffs could be coming for the European Union.
"My hope is that we don't see a rebound of inflation," Goolsbee said. "But if we're going to add this policy uncertainty and we do start seeing a rebound of inflation, that's going to be a much more difficult situation — a foggier, dustier" environment.
Goolsbee said he was in Detroit this week speaking with major auto suppliers and some of the major auto companies. He said the potential for an escalating trade war and "a wrench thrown into the supply chain is very real."
"I'm hopeful that we have more experience, like what we saw this past week or so, that for all of the argument, it ends up not being a big impediment to actual trade," he said.
Looking underneath the surface of trade uncertainty, Goolsbee said the job market looks like it's stabilizing at full employment, economic growth is solid, productivity growth is good, and wage growth is about consistent with 2% inflation.
"That's a better spot to be than the one we were six months ago where unemployment was just creeping up and we were trying to figure out, are we about to continue and move into something worse," he added.
Goolsbee said he views rates in the long run settling a "fair bit" below where they are today and that the Fed likely won’t get to neutral — the rate that neither boosts nor slows economic growth — by the end of this year, but probably over the next couple of years.
“As inflation comes down, we can commensurately be cutting the interest rate, but there's uncertainty about what the truly neutral rate is," he said.