Federal Reserve Governor Austan Goolsbee recently issued a warning regarding the potential consequences of implementing a series of interest rate cuts. During an appearance at a financial conference in Chicago, he expressed alarm. He cautioned that cuts taken too soon might upend the economy and endanger the gains we’ve made in the fight against inflation.
During the meeting, Goolsbee underscored the need for a careful moderation of monetary policy. He then argued that some economic indicators could suggest a need for lower rates. We need to get better at thinking through the consequences of those decisions. The Governor acknowledged that inflation is still a big worry, and cutting rates too soon might jeopardize the fight against resurgent price pressures.
During his speech, Goolsbee pointed out that many economists expect inflation to remain above the Federal Reserve’s target range for the foreseeable future. He warned against overreach. A reckless change in policy would have serious unintended consequences and would likely increase, not decrease, inflationary pressures. “We must remain vigilant,” he stated, “and ensure that our actions reflect a commitment to long-term economic stability.”
Goolsbee’s comments come on the heels of an upswing in chatter from the policymaking classes. What they’re arguing about is when and how much to cut rates at all. Now that inflation appears to be easing, a small army of economists are calling for the Fed to be even more aggressive with its monetary easing. Goolsbee’s view is a more conservative one, that values long-term economic viability more than the quick hit.
The Federal Reserve has been steering through a highly uncertain economic environment defined by volatile inflation and unpredictable consumer spending. Over the past few months, inflation has started to noticeably cool down. This has caused many economists and market watchers to guess that the central bank may soon pivot to starting to cut interest rates. Goolsbee’s caution is an important and timely reminder. As interest rates rise, the Feds need to find the right balance between encouraging economic growth and controlling inflation.
Not only did Goolsbee open with a warning against cutting rates too quickly, he touched on other important economic gauges throughout his speech. While employment figures are very strong, that’s not doing much with wage growth, which has fallen behind inflationary effects on households, he reminded. That disparity may drain consumer spending power, making the recovery process even more difficult.
Goolsbee’s insights are especially timely as the Federal Reserve deliberates ahead of its next policy meetings. Policymakers are rightly feeling more pressure than ever to respond to fast-changing economic conditions. Goolsbee stresses the importance of data-driven decision-making as opposed to playing whack-a-mole with the latest fad.
As the Federal Reserve goes about its complicated and controversial business, Goolsbee’s view—a classic lament of hawks everywhere—will almost certainly find favor among many inside the institution. He emphatically defends the need for a careful and balanced approach to monetary policy. Only such an approach directly supports the Federal Reserve’s avowed dual goals of maximizing employment, while ensuring price stability.