Fed's Goolsbee on inflation: 3 rate cuts this year 'in line with my thinking'

joining me now in an exclusive interview is Chicago fed president Austin gouby Austin thanks so much for joining me welcome back to the program it's great to see you hi Jennifer thank you for having me last week Fed chair palel said during his press conference that despite hotter inflation data in the first couple months of this year he didn't feel that the overall picture for inflation has changed all that much do you share that view I think I share that view um I think the the big CPI and and pce inflation readings of January remained higher than than we wanted them to be and higher than expected in February but they did come down we they follow on seven straight months of really quite good CPI and pce readings so we're in a little bit of a murky period the over overall it seems hard for me to view that the seven months previous to this the start of this year uh we're just random so we're in a we're in an uncertain state but it doesn't feel to me like we've changed fundamentally the story that we're getting back to to Target setting CPI aside for a second because that's been running hotter than the fed's preferred inflation gauge of core pce core pce sits at 2.8% as of January and it's been falling by a tenth of a percent every month we'll get a new reading uh on that metric this Friday but do you expect that that Trend could continue at that pace well it it better and let's let's hope we even start speeding up the the Improvement we have to I mean to 2.8 is is well above our Target as you know we're going to get to 2% we've always known it's going to take place over time we're as I say we're in this murky period where we've got to strike a balance of the Dual mandate the law gives us the the the Dual job of getting as prices stabilized and maximizing employment we've been in a restrictive environment I think if you look at the real federal funds rate that is the the rate minus the inflation rate as inflation has come down it means that we're in a historically pretty restrictive uh territory and it gets more restrictive as we hold the rates steady and inflation comes down the real restrictiveness goes up so I think in with that level of restrictiveness you will have to start paying attention to the other side of the Mandate too if it goes for too long and you saw chair poell discussed the employment side of the Mandate at at the press conference as well yeah I want to come back to that piece of the employment mandate in a in a moment but on sticking with inflation right now uh the committee has projected inflation will end this year at 2.6% on core pce that's only two10 of a percent away from where we sit right now uh yes the trend could be slower or bumpier than what we've seen over the last several months but as you said the inflation picture hasn't changed that much given that what is the prospect that we could be at that level of 2.6% by the summertime well the the the one thing to note is that the 2.6% would be averaged for this whole year so the fact that we got two big readings in January February mean that for the next 10 months they will have to be a fair bit lower to get the the 2.6 down by by the end of this year so I think the there's there's a big difference between 2.6 2.6 repeated for 18 months and what we've been seeing which is more variability so we were literally down at 2% for six or seven months at the end of last year now we've had two high readings and we need to see progress in the that inflation coming down that's that's the foremost thing on our mind on the Dual mandate the where we have missed as you know has been on the inflation side the job market has been quite strong but the inflation side of the Mandate is is where we've missed and I continue to highlight the main puzzle has been about housing that we've got to get housing inflation coming down closer to where it was before the pandemic you've already seen goods come down to very very close to where they were pre pandemic Services still elevated but not that much elevated height than they were pre pandemic a and the big outlier has been housing I do think the market rents show that there is progress to be made but we have yet to see that in the overall data so that so I'm very highlighted about that issue so still some room for improvement obviously but you did say that we're very restrictive here so I'm curious is a June rate cut on the table well yet as you know I I don't ever like like tying our hands or signaling that we've made up our minds or that I've made up my mind before the meetings when we're going to get a lot of data between now and whenever that decision has to be made you've seen the evolution of everyone's thinking and my own thinking when we had seven months of 2% inflation or even less uh the committee statement ends up being fairly pressy and to have added language that says the committee needs to have more confidence that we're on the path to 2% we then saw this uptick in inflation and we just got to make sure that that we're on Trend we never we I believe that we should never rule out or rule in anything when we've got a whole lot of of data to come and so but multiple meetings and multiple months of data so but is it still possible that we could see June on the table I mean or is it off the table look it's as I say it I'm not going to I don't want to get backed into speculating about what's not even the next meeting but two meetings from now everything's always on the table or off the table it all depends on the data and the conditions in my opinion let me ask you this three rate Cuts have been penciled in by the median for this year is that in line with your thinking that was line with my thinking this time for the as you know the summary of economic projections is not forward guidance is not debated we don't vote discuss deliberate on these future meetings that's the the things in the statement are are what we discuss and debate the summary of economic projections are individual projections which which we don't have any debate on I was at the median um for for this one and we'll have to see how how the conditions develop on that doubling back on on what you said in terms of the rate being restricted right now I have here in my notes the Atlanta fed R run some numbers um using the tailor Rule and three versions of that rule show that the fed's target rate should be in the range of 3.9 to 4.7% right now do you subscribe to the tailor rle what are your thoughts on that and yes I know we have room to improve on inflation what about cutting now okay you got there's a lot of important issues in that question okay so the the Taylor rule uh is a Formula that looks at past history of the fed and says you you plug in the inflation rate you plug in the unemployment rate you you uh make some estimates of of what the the neutral rate of of each of those would be and it kind of spits out here in the past is how the feds has behaved I'm a loose subscriber to the Taylor rule but especially at moments where you've got Oddities happening like Supply shocks or things that make the current con situation quite different from previous times that the economy's been in that circuit irance you just got to be a little careful with being too mechanically tied to let's just do whatever the formula says um there are many tailor rules tailor style rules let's call them um and some of them are for lower rates but there are also some tailor rules that are arguing the rate should be higher so all of those are inputs that let's pay attention to but I I don't think that a formula should convince US ah if the if the machine say says you know the chat GPT tells us we should go cut the rates right now or we should wait until next year to do it I don't think we should be overly enthusiastic to embrace those rules because we know that 2023 for example was extremely unusual really quite substantial drop in inflation with no recession at all virtually without precedent given that we just got through the year in which that happened let's be a little circumspective using the old rules to determine what the rate should be right now and to your point let me ask you about the pulse of the consumer right now because we did see retail sales come in uh a little bit uh more tepid uh what's your sense of the strength of the consumer now and consumer spending as we go through this year do you expect any weakening yeah I think I think you're right I Like You Ed tepid you've seen two to three months where consumer spending was weaker than than it was expected to be I mean it's still the consumer has been a strong part of the economy and you've seen a lot of of growth I would highlight it's mixed our picture a little of how much consumer spending and what uh payroll jobs numbers we can sustain uh at for a given rate of inflation has been mixed a little by the recalculation about immigration so you've now seen the CBO and others saying there was a lot more immigration last year than they had initially calculated and if true larger population there's no question about it is going to lead to more aggregate GDP is going to lead to more aggregate consumption so I think we still got to get a handle on when we're trying to make calculations that are not per capita that are about the aggregate I think we got to we're going to have to pay a little closer attention to what was in the denominator uh as it were not just a numerator let me ask you about the balance sheet because last week chair pal said that he thought it would be appropriate to begin slowing the pace of shrinking the balance sheet run off quote fairly soon do you share that view and how soon is fairly soon yeah I I don't know the exact date um I do share that view and I thought chair Powell's the second part of chair Powell's comment is also quite important which is to say slowing the rate of the balance sheet runoff is not the same question as what will be the ultimate size of the balance sheet and the the issue that we want to pre announce an approach in a regular uh in a regularized way a slowing down so we can tell what is the point or where do we think the the range of banks having ample reserves is because that's quite important for our for our rate control so I I thought the chair was was spot on from from my view on what should happen with the balance sheet and I know that uh rate cuts on a separate TR back from the balance sheet but would you begin slowing that runoff before cutting rates or no I would keep them to totally separate um I think if you remember back in the in the bad old days where at every meeting it felt like the market is demanding to know what are you going to do on balance sheet and what are you going to do on rate cuts that was confusing it add a lot of volatility I felt like and I think it was an accomplishment to get on the balance sheet side get it separate and get it on a regularized path and I felt with the Chairman's statement it was an indication in my view of of correct policy I think we want to get on a regularized path doing it a little slower as we get closer to the point at which the reserves uh the point at which reserves are ample um we should keep that separate from rates yeah real quick I gotta go but do you think one would come before the other or it just depends I think it just depends like I say I I I want them on separate tracks our decisions about the balance sheet are not decisions about rate and monetary policy I think it's important we keep those separate all right well Austin thank you so much for your Insight it's great to speak with hope to speak with you again soon great to see you Jennifer

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Length: 14min 33sec (873 seconds)

Published: Mon Mar 25 2024