The Fed May Need to Turn Focus to Labor Market, Says Chicago Fed’s Goolsbee

After a jobs report that showed hiring slowed in July, Chicago Fed President Austan Goolsbee said that the Federal Reserve may need to focus more closely on jobs reports as it sets interest rates. 

In an interview with Bloomberg Television, Goolsbee stopped short of forecasting an interest rate cut when the Federal Reserve concludes its next meeting on Sept. 18, arguing that officials shouldn’t react to single pieces of economic data. However, he said that the “real fed funds rate,” which factors inflation into current interest rate levels, was as high as it’s been in “decades,” and could create further economic tightening that could make job losses worse.

“If we stay restrictive for too long, we’re going to have to think about the employment side of the mandate,” said Goolsbee, referring to the Fed’s legal responsibility to balance price stability with a strong labor market.

Goolsbee’s comments come after the Federal Reserve this week said it would keep interest rates at their decades-high levels of between 5.25% and 5.5%, despite some analysts warning that the Fed should have moved to cut rates. As inflation has fallen over the past year, Fed officials have been examining data to determine if price pressures have eased enough to safely lower interest rates without sending prices back upwards. 

Unemployment Higher Than Projections

Goolsbee cited the Fed’s Summary of Economic Projections, which showed that the unemployment rate should be at around 4.1%. The July jobs report showed unemployment at 4.3%.

“That is exactly the kind of pinching on the other side of the mandate that the law said that the Fed has to think about and respond to,” Goolsbee said.

Goolsbee said that Fed officials have been seeing the improvements on inflation that they had been looking for, including in areas like housing and the services sector. But other elements of the economy are beginning to show signs of struggling. 

“It is still an economy with cross currents, where you have some things that have remained quite strong by historical terms, and you have other things that have deteriorated,” Goolsbee said. “Credit card delinquencies and small business defaults, those have been rising, and they have moved into what I call warning-sign stage.”

No Signal on Rate Cut Timing or Magnitude

Goolsbee, currently a nonvoting member of the Federal Open Market Committee (FOMC), acknowledged he voted at the latest meeting to keep interest rates at current levels, saying he was casting the vote as a fill-in for the Cleveland Federal Reserve. Loretta Mester, former head of that regional central bank, retired in June, and incoming Cleveland Fed President Beth Hammack won’t take the position until Aug. 21, allowing Goolsbee to represent the Cleveland Fed at the meeting. 

Goolsbee side-stepped speculation from some analysts and investors that the Federal Reserve could lower rates by more than 0.25% at its September meeting, or even that it could schedule an emergency meeting before then to cut rates.