New Chicago Fed president Austan Goolsbee warns against raising interest rates too aggressively

Economist Austan Goolsbee, recently named president of the Federal Reserve Bank of Chicago, urged caution Tuesday against raising interest rates too aggressively amid financial uncertainty and two high-profile bank failures.

Addressing the “new big hairy elephant in the room” at an Economic Club of Chicago luncheon, Goolsbee said tightening credit conditions in the wake of last month’s collapses of Silicon Valley Bank and Signature Bank can work in tandem with monetary policy to cool inflation.

“History has taught us that at moments of financial stress, even if they don’t escalate into a crisis, they often mean tighter credit conditions and have a material impact on the real economy in a way that the Fed absolutely needs to take into account when setting the monetary policy,” Goolsbee said.

Despite the banking turmoil, the Fed raised interest rates for the ninth time in a row last month, a 0.25% hike that boosted the benchmark rate to a range of 4.75% to 5%, up from near zero a year ago. The Fed relies on higher interest rates as its main tool for fighting inflation, which has risen over the last year to an annual rate of 6% in February — far above the target inflation rate of 2%.

A longtime economics professor at the University of Chicago Booth School of Business and a former adviser to President Barack Obama, Goolsbee, 53, became the 10th president of the Chicago Fed in January, succeeding Charles Evans, who retired after 15 years. Goolsbee has already voted twice to increase rates, something it took his predecessor eight years to achieve.

Goolsbee said that although inflation remains a problem, the collapse of Silicon Valley Bank and Signature Bank means the Fed may need to adjust monetary policy — slow down the rate hikes — if banks pull back on lending to protect their balance sheets. Projected tighter credit at banks may be the equivalent of raising the Fed funds rate by 25 to 75 basis points, he said.

“We should be extra careful about raising rates too aggressively until we see how much work the headwinds are doing for us in getting inflation down,” Goolsbee said.

One of 12 regional Reserve Banks, the Chicago Fed district covers Iowa, Illinois, Indiana, Michigan and Wisconsin.

Goolsbee, who was named Washington, D.C.’s funniest celebrity during his tenure in the Obama administration, touched on more than interest rates in his hourlong discussion, citing the unusual circumstances of the economy’s recovery from “bizarro” COVID-19 times. Half-empty office buildings, shifting consumer demand, rising inflation and a strong job market have created a “weird puzzle” for the Fed to solve, he said.

Playing to the business leaders in attendance, Goolsbee said Chicago may not have the best winter weather — or baseball teams — but its diverse economy is a reason to remain bullish on the city, however the future unfolds.

rchannick@chicagotribune.com