Fed’s Goolsbee says neutral rate is ‘well below’ where it is today

Chicago Federal Reserve Bank President Austan Goolsbee said on Monday that the Fed’s interest rate-cutting campaign has a ways to go before reaching a “neutral” rate and that the central bank should continue to cut to reach that rate so long as the economy does not show signs of overheating.

Goolsbee, who in January will become a voting member of the Federal Open Market Committee (FOMC) that makes monetary policy decisions, said in an appearance on FOX Business Network’s “The Claman Countdown” that policymakers are likely to continue with rate cuts until the neutral rate is reached, but the path may slow if the economy accelerates.

“Barring some sign of actual overheating of the economy, I still feel comfortable saying that if you look at the broad dot plot, rates have a fair way to go down before they get to something like neutral,” Goolsbee told host Liz Claman during Monday’s interview. 

“If you’ve got inflation coming toward the 2% target, and you’ve got unemployment rising, but getting to something like sustainable full employment, you better be careful adding cold water to the bathtub if you’ve got the temperature about where you want,” Goolsbee said.

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His remarks come after Fed Chair Jerome Powell said earlier this month that the central bank is not rushing to cut to reach the neutral rate, which he explained is “a level of interest rates that’s neither pushing the economy up and supporting it or dragging it down, which could be tighter, restrictive policy.” 

Powell added that while there is not a “theoretical or empirical way” to confidently estimate the neutral rate, it “argues for moving carefully.” Goolsbee echoed the chair’s sentiment, saying that the neutral rate is known “by its works in the economy.”

Goolsbee noted that FOMC policymakers’ forecasts for future ranges of interest rates in the “dot plot” all suggest that interest rates are likely to decline over the next year until rates reach a settling point around what may be the neutral rate.

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Chicago Federal Reserve President Austan Goolsbee said that the Fed can continue to cut interest rates unless there is convincing evidence the economy is overheating and inflation reaccelerating. (Photo by Chip Somodevilla/Getty Images / Getty Images)

“Whether you’re on the higher side or the lower side of where it’s going to settle down, almost everybody agrees that it’s well below where we are today. So as we get closer to where the disagreement is about what’s the settling point, I can see that it makes perfect sense to start slowing the pace of the rate cuts,” Goolsbee said. 

“Barring some convincing evidence of overheating, I don’t see the case for not continuing to decline, to have the Fed funds rate decline, because everybody agrees it’s well below where we are today,” he added. “So until we start getting into the range of where people think is the settling, I still feel like this trajectory, that’s the way it’s leaning.” 

Goolsbee also cautioned Fed watchers against overinterpreting any individual inflation report, because it can be a “noisy” data series with month-to-month moves not necessarily being indicative of a longer-term trend for the pace of price growth. 

Federal Reserve Chair Jerome Powell attends a press conference in Washington, D.C., on May 1, 2024. (Photo by Liu Jie/Xinhua via Getty Images / Getty Images)

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The Commerce Department is expected to release October data for the Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) index, on Wednesday. 

September’s PCE reading was 2.1% year over year and 0.2% on a monthly basis.