Chicago Fed President Goolsbee: Several more rate cuts possible if inflation proves to be transitory

Key Concepts

• Inflation: The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. Specifically discussed are Headline Inflation, Core Inflation (excluding food and energy), and Services Inflation.
• PCE (Personal Consumption Expenditures) Inflation: A measure of price changes for goods and services purchased by persons. Considered a key inflation gauge by the Federal Reserve.
• R-star (Neutral Rate): The real interest rate (nominal interest rate minus inflation) that is consistent with full employment and stable prices over the long run.
• Tariffs: Taxes imposed on imported goods, potentially contributing to inflationary pressures.
• Quantitative Tightening (QT): Reducing the Federal Reserve’s balance sheet, often by allowing previously purchased securities to mature without replacement.
• Dot Plots: Graphical representations of Federal Open Market Committee (FOMC) participants’ projections for future interest rates.
• Transitory Inflation: Inflation that is expected to be temporary and self-correcting.

Inflation Report Analysis & Concerns

The discussion centers around the recent inflation report showing Headline Inflation at 2.4% and Core Inflation at 2.5%. While seemingly positive, Austan Goolsbee, President of the Chicago Fed, expresses caution. He highlights that these figures are 12-month moving averages, and a particularly bad inflation report from a year ago is influencing the current numbers. He emphasizes that the recent data doesn’t necessarily indicate sustained improvement. Specifically, he points to “statistical pollution” affecting shelter data, but the primary concern is that services inflation remains “not tamed”, with Core Inflation running at an annual rate of around 3.6%. Goolsbee states the need for more data before drawing firm conclusions, noting “some progress, but some warning.”

Impact of Tariffs on Inflation

The conversation shifts to the impact of tariffs on inflation, focusing on commodities excluding food and energy. While the topline figure showed a “big goose egg,” removing the decline in used car prices reveals upward pressure from tariffs. Goolsbee explains that a 6-8 month trend shows goods with higher tariff content have experienced higher inflation. He expresses hope this effect is “one time” and “transitory,” allowing the Fed to “look through” it, provided it doesn’t spread to services and eventually dissipates. He believes that if this proves temporary and the path back to 2% inflation is established, “several more rate cuts” could occur in 2026. Currently, however, the situation is “stalled out around 3%” with mixed signals.

Neutral Rate & Inflation Persistence

The discussion delves into the concept of the neutral interest rate (R-star). Goolsbee suggests a “loose target” of around 3% – 2% inflation plus a 1% real rate – aligning with the long-run rate projections from the FOMC’s Dot Plots. However, he argues that if inflation persists around 3%, current interest rates may not be as restrictive as they appear. He explains that R-star is a real concept – the interest rate minus inflation – and that persistently high inflation effectively loosens monetary policy. Therefore, he reiterates the need for evidence of a return to 2% inflation before considering further rate cuts. He states, “I want some evidence that we’re back headed back to 2%. And then I think rates can keep coming down.”

Fed Dynamics & Chairman Powell

The conversation touches on potential internal dynamics within the Federal Reserve, specifically regarding Chairman Jerome Powell. It references concerns that some Fed members may not support Powell’s policies, potentially hindering his ability to achieve consensus. Goolsbee, having worked with Powell during the 2009-2010 financial crisis, expresses strong support for him, stating he is a “reputable guy” and looks forward to working with him. He denies observing any negative reactions from colleagues upon Powell’s appointment. He notes the historical tendency for Fed Chairs to ultimately “get their way.”

Balance Sheet Reduction & Rate Cuts

The discussion briefly explores the feasibility of simultaneously reducing the Fed’s balance sheet (Quantitative Tightening) by a trillion dollars and cutting interest rates by one percentage point. Goolsbee acknowledges the complexity of this scenario, stating they will need to “look through them as, as they come through.”

Logical Connections

The conversation flows logically from an initial assessment of the inflation report to a deeper analysis of contributing factors like tariffs. It then transitions to a discussion of the neutral interest rate and the conditions necessary for future rate cuts. The segment on Fed dynamics provides context for the potential challenges in implementing these policies. The final question regarding balance sheet reduction and rate cuts ties together the themes of monetary policy and economic management.

Data & Statistics

• Headline Inflation: 2.4%
• Core Inflation: 2.5%
• Core Inflation (Annual Rate): Approximately 3.6%
• Target Inflation (Goolsbee’s Loose Target): 3% (2% inflation + 1% real rate)
• Goods Prices (with Tariff Content): Showed an increase in inflation over a 6-8 month trend.

Conclusion

Austan Goolsbee’s assessment of the recent inflation report is cautiously optimistic. While acknowledging some positive signs, he emphasizes the persistence of services inflation and the potential inflationary impact of tariffs. He stresses the importance of data dependency and the need for evidence of a sustained return to 2% inflation before considering further rate cuts. The discussion highlights the complexities of monetary policy and the internal dynamics within the Federal Reserve, emphasizing the need for a nuanced approach to economic management. The key takeaway is that while progress has been made, the fight against inflation is not yet won, and vigilance is required.