Fed's Goolsbee says he has a higher threshold for a December rate cut

Key Concepts

• Rate Cuts: Reductions in the central bank's benchmark interest rate.
• Front-loading Rate Cuts: Implementing rate cuts earlier and more aggressively than might be warranted by current economic conditions.
• Payroll Growth: The net increase in jobs in an economy.
• Inflation: A general increase in prices and decrease in the purchasing value of money.
• Transitory Inflation: Inflation that is expected to be temporary and self-correcting.
• Statement of Economic Projections (Dot Plot): A Federal Reserve publication showing individual policymakers' projections for future interest rates.
• Neutral Rate: The theoretical interest rate at which monetary policy is neither expansionary nor contractionary.
• Core Inflation: Inflation that excludes volatile food and energy prices.
• Core Services Inflation: Inflation in the services sector, excluding food and energy.
• Data Shutdown: A period when official government economic data is unavailable due to government closures.
• Private Sector Data: Economic information gathered from non-governmental sources (e.g., ADP employment report, Beige Book).
• Balance of Risks: The assessment of potential upside and downside risks to the economic outlook.
• Unemployment Rate: The percentage of the labor force that is unemployed and actively seeking work.
• Layoffs: The termination of employment by an employer, often due to economic reasons.
• Hiring Rate: The rate at which employers are adding new employees.
• Attrition: The gradual reduction of staff through natural departures (e.g., retirements, resignations) without replacement.
• AI (Artificial Intelligence): Technology that enables machines to perform tasks typically requiring human intelligence.
• Structural Shift: A fundamental change in the underlying structure of an economy or industry.
• Monetary Policy: Actions undertaken by a central bank to manipulate the money supply and credit conditions to stimulate or restrain economic activity.
• Cyclical: Relating to or characteristic of a business cycle, which involves periods of expansion and contraction.
• GDP (Gross Domestic Product): The total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period.
• Interest Rate Sensitive Sectors: Economic sectors whose performance is significantly influenced by changes in interest rates.
• Consumer Durables: Goods that are expected to last for a long time, such as appliances and furniture.
• Business Investment: Spending by businesses on capital goods, such as machinery and buildings.
• Tariffs: Taxes imposed on imported goods.
• Consumer Spending: The total money spent on goods and services by households.
• Consumer Confidence: A measure of the optimism of consumers about the overall state of the economy and their personal financial situation.

Monetary Policy Stance and Inflation Concerns

The speaker, Austin, expresses unease about "front-loading rate cuts" based solely on slowing payroll growth, especially when inflation has been moving in the "wrong direction." He found the idea of simply counting on inflation to be "transitory" unsettling. Despite these concerns, he voted in favor of cutting rates at the last meeting.

Key Points:

• September Projections: In September, Austin's projections (part of the "dot plot") indicated two rate cuts for the year.
• Balancing Act: He is balancing his belief that rates will ultimately settle "a fair bit below where we are today" with concerns about front-loading cuts, particularly when facing a "data shut down" that limits private sector information on inflation.
• Data Limitations: The "data shut down" meant limited private sector information on inflation was available, making it difficult to assess the inflation outlook.
• "Golden Path": He still believes a "golden path" for monetary policy is possible, implying a scenario where inflation is brought down without causing significant economic damage.
• No Significant Change: Not much has changed since the September projections, which is why he "had no problem with that" (referring to the rate cut decision).

Unease with Front-Loading and Inflation Trends

Austin reiterates his discomfort with front-loading rate cuts and emphasizes that rates should ideally come down in conjunction with inflation. He highlights specific inflation figures that are causing concern:

Key Points:

• Core Inflation: The last three months of core inflation are running at a 3.6% annualized rate.
• Core Services Inflation: Core services inflation is running close to a 4% annualized rate for the last three months.
• "Going the Wrong Way": These figures are described as "worrying" because they indicate inflation is moving in an unfavorable direction.
• Uncertainty about Next Meeting: He is "not decided" about the next meeting's policy decision.
• Threshold for Cutting: His "threshold for for cutting is is a little bit higher" than it was for the previous two meetings.
• Analogy of Fog: He agrees with Fed Chair Powell's analogy of slowing down and becoming more cautious when it's "foggy," implying uncertainty about the economic outlook.

Balance of Risks: Inflation vs. Employment

Austin indicates he has been "a little more worried about inflation than the job market."

Key Points:

• Job Market Stability: Aside from payroll growth, other indicators like the unemployment rate have been "pretty stable." There hasn't been a significant uptick in layoffs, which would be expected at the beginning of a recession.
• Inflation Concerns: The recent upward trend in inflation, particularly in services not driven by tariffs, is a significant concern. He cautions against relying too heavily on 12-month backward-looking inflation numbers, emphasizing the importance of the most recent monthly data.
• "Mountain Lion" Analogy: He uses an analogy of seeing a "mountain lion sitting in your front yard" to illustrate the need for caution and an additional look before letting "Fluffy out to go run around," implying a need for more data before making significant policy moves.

Job Market Data and Uncertainty

Despite official data limitations due to a government shutdown, private sector indicators and layoff announcements are raising questions about the job market's trajectory.

Key Points:

• Layoff Announcements: Major layoff announcements from companies like Amazon and UPS are noted.
• ADP Measure: ADP's employment measure turned negative for September.
• Beige Book: The Beige Book revealed employers are considering headcount reductions due to policy uncertainty, weaker demand, and AI.
• Potential Further Deceleration: Austin acknowledges that payroll growth "might have" decelerated further since the last official data.
• Hiring Rate: The hiring rate is identified as one of the "weakest things in the economy at the moment," making it difficult for new graduates and young people.
• Unusual Economy: A "low hiring, low firing economy" is considered unusual and indicative of "a lot of uncertainty."
• AI's Impact: If job market shifts are driven by AI and concentrated in the tech sector, it suggests a "structural shift" rather than a cyclical downturn, which has different implications for monetary policy.

Economic Outlook and Timing of Policy Decisions

Austin emphasizes the difficulty central banks face in timing policy decisions during economic transitions, especially with limited data.

Key Points:

• Difficulty of Timing: "One of the hardest things the central bank ever has to do is get the timing right on on moments of transition."
• "Squished Bugs" Analogy: The "data shut down" is likened to having "squished bugs covering the windshield," hindering clear visibility of the economic road ahead.
• Undecided for December: He remains "not decided" for the December meeting.
• Inflation as a Priority: He is "nervous about the inflation side of the ledger" and believes it would be "most judicious to have the rates come down with inflation."
• Deteriorating Job Market: A significant deterioration in the job market would alter the balance of risks.

Sector-Specific Economic Performance

Austin discusses the performance of interest-rate-sensitive sectors, disagreeing with the notion that parts of the economy, like housing, are already in a recession.

Key Points:

• Housing Sector Weakness: He agrees that the housing construction sector has been weak for some time.
• Resilient Sectors: Consumer durables have been "pretty resilient," and consumer spending and business investment have been "pretty solid."
• AI-Driven Investment: Much of the business investment is driven by the "AI boom," which may not be cyclical.
• Overall Economy Strength: He believes the economy has been "pretty strong" and "pretty solid" overall, despite weakness in specific sectors affected by tariffs.
• Consumer Spending as Driver: Consumer spending remains the "main driver of solidity" in the economy, largely based on consumer confidence.

Conclusion

Austin's remarks highlight a cautious approach to monetary policy, driven by persistent inflation concerns and uncertainty surrounding the economic outlook, exacerbated by data limitations. While acknowledging potential job market softening and structural shifts like AI, his primary focus remains on ensuring inflation returns to target before significant rate reductions. He is not yet convinced that the economy is in a broad-based slowdown or recession, pointing to the resilience of consumer spending and certain investment areas. The timing of future rate cuts is contingent on clearer evidence of disinflationary trends and a stable, or at least not rapidly deteriorating, labor market.