On the eve of his first Jackson Hole Economic Policy Symposium as president of the Chicago Fed, Austan Goolsbee sees a “golden path” ahead to getting inflation down and avoiding a recession: continue to watch the data and hold steady on rates for as long as it takes.
Goolsbee, 54, who has warned against raising interest rates too aggressively since taking on his new role in January, said Wednesday a soft landing is looking more promising as inflation continues to decline, while the real economy remains resilient.
“I still think we have the possibility to do an unprecedented thing, which is get the inflation down without a recession,” Goolsbee said.
In July, the Federal Reserve raised interest rates for the 11th time in 16 months, a 0.25% hike that boosted the benchmark rate to a range of 5.25% to 5.5%, up from near zero. The Fed relies on higher interest rates as its main tool for fighting inflation, which last peaked at an annual rate of 9.1% in June 2022.
The inflation rate has steadily declined since then, dropping to 3.2% in July, but still remains above the Fed’s annualized target of 2%, prompting ongoing speculation of when the next rate increase will come, and how long rates will stay at or near a 22-year high.
While the Federal Open Market Committee does not meet again until September, economists are watching the Fed’s annual Jackson Hole Economic Policy Symposium, which begins Thursday, to get a sense of which way monetary policy is headed. Goolsbee said rates may not have to go much higher, but it may be a while before they begin to come down.
“The question is not going to be how much more does the rate need to go up, the question is going to be how long do we need to keep rates at this level,” Goolsbee said.
Goolsbee said pandemic-related supply chain issues were a big component of the spike in inflation. Most of the supply chain bottlenecks have worked through the system, helping bring down inflation, he said. In addition, Goolsbee cited the muted impact of the Silicon Valley Bank and Signature Bank collapses in March, which did not create a credit crunch or weigh on the economy to the extent that some feared.
Fed monetary policy, meanwhile, which usually navigates a trade-off between inflation and unemployment, has somehow seen both numbers improve, defying conventional economic theory. Goolsbee said. As inflation declines, the unemployment rate, which peaked at 14.7% in April 2020, has since dropped to pre-pandemic levels, coming in at 3.5% in July.
“The conventional view already has a problem explaining how we got the inflation rate down as much as we have so far this year, without the unemployment rate going up,” Goolsbee said. “I think this time is different.”
One potential downside of the surprisingly strong post-COVID job market may be a disincentive for younger adults, particularly those from disadvantaged communities, to pursue higher education or skills certification. On Tuesday, Goolsbee participated in a Fed Listens event in Chicago where panelists debated the longer-term impact of leaving school earlier for ready employment.
Goolsbee said youth employment is a more complicated issue, especially as the economy evolves, when those who discontinue their education may lack the degrees and certificates needed to compete for future jobs.
For much of the past year, Fed members have projected that interest rates would be higher for longer than the market was betting. More recently, the market has aligned with the Fed. Goolsbee said it may be until late next year before rates begin to come down.
Some economists have suggested that in its quest to bring down inflation, the Fed will raise interest rates until something breaks. Goolsbee rejects the notion that the Fed should consider adjusting its 2% target inflation higher to minimize the potential for a recession.
“We stated what our goal is, and we’re going to get to that goal,” he said. “I am hopeful that we can do that without generating a major recession.”
A longtime economics professor at the University of Chicago Booth School of Business and a former adviser to President Barack Obama, Goolsbee became the 10th president of the Chicago Fed in January, succeeding Charles Evans, who retired after 15 years. One of 12 regional Reserve Banks, the Chicago Fed district covers Iowa, Illinois, Indiana, Michigan and Wisconsin.
Goolsbee last attended the Jackson summit more than a decade ago as part of the Obama administration. Returning to Wyoming in his new role, he anticipates robust discussion and a clearer view on future monetary policy.
While some economists are skeptical that any central bank has the power to tame inflation without causing a recession, Goolsbee said the monthly progress remains promising, and the goal is in sight.
“Betting against the Fed is a risky bet,” he said.
