Let's head back out to Jackson Hole, where we find Michael McKee, International Economics and Policy correspondent. He's sitting down with Chicago Fed President Austin Goolsby.
Hey Mike, Hey.
Tim, Thanks for having us and thank you for joining us.
Great to see you were not surprised.
You've been calling for the Fed to cut rates soon for quite some time, so basically you got what you wanted today.
Yeah, look, you know the rules.
I'm not to comment on what anybody else from the FMC says. As you say, I think we set a rate pretty tight more than a year ago. Inflation's kept coming down, so in the real rate since we've been tightening, and when the conditions are not overheating, you got to be really careful with that kind of passive tightening. Seemed pretty definitive, the statements that Jared Powell made there in his remarks, and I think that this reflects the reality of the economy that we've got to keep our eye
on the employment side of the mandate. Now, this is what the path down to two percent inflation looks like. You know, you got some bumps, but I think that side's looking a lot better.
As you say, you've been worried about being too tight for a while now. The Chair did not discuss how big of a cut might be coming for the first one. What do you think the economy needs? Do you need to see fifty basis points?
You know?
I don't like ahead of time, as you know, picking out specific numbers. In my view, the SEPs over the last year have made pretty clear that almost everyone on the committee thinks that conditions will show inflation coming down, the unemployment rate going up gradually.
And settling in, and that there will.
Be multiple cuts over calendar twenty four in calendar twenty five and feels that feels like what the path is from conditions so far?
To me, well, we start down the golden path, or is the chair would say, the golden road to unlimited devotion? How fast do you move? Do you think you need to be gradual? Are you open to bigger moves if the data suggests.
Look, you've seen many times the size of the table. It's a big enough table in the FOMC room. You can fit everything on the table. I think we shall always put everything on the table. And what will warrant the speed at which we cut rates or how much we pause on the cutting will be determined by how the totality of the conditions show. I think there are definitely warning signs, though there are also signs of strength. So on the warning category, the unemployment rate drift up
as definitely a warning sign. If you look at the delinquencies on credit cards, if you look at small business defaults.
All of those are in the warning category.
On the stronger category, GDP grows been pretty robust. Consumer spending still pretty strong, driven by I think the robust wage growth.
So we just got to watch the whole thing. And on the job.
Market side, if you start to see and increase in direct layoffs, that would be a clear warning sign from past business cycles that unemployment rates rising from layoffs is a sign of recession.
If you cut interest rates by twenty five basis points a quarter percentage point in September, that's not going to do a lot right away. How far do you think you need to go before it will really affect the economy.
Look, I think this is the right way to think about it, that about the long arc of both the conditions and the monetary policy. Monetary policy does not work instantaneously, and if anything, this strange recovery has shown us that even the normal rules of monetary policy transmission maybe don't apply exactly right now as they have in the past, whether from excess savings or from mortgage rate lock ins or supply chain things had depressed manufactured durable goods consumption
during the pandemic, so there's some pent up demand. All of those are primary channels. Normally when we change the rates, that's the first place you look. But in each of those cases it's looked a little different.
So I don't think we should.
I don't think it makes sense to get into a big debate of is twenty five in this month or fifty at the next meeting. The little gradations like that aren't what matters the most. What matters the most is over the long art from now to one. If we come back one year from now, would we expect to see a lot of rate cuts if conditions keep evolving in this positive way?
My view, yes, Well, if we come back one year from now, and I presume we will, and we'll have you sitting there, what do.
You think the rate would be?
Where do you think neutral.
Is these days?
It's far from where we are. I think you're see an unemployment continuing to rise. And it's worth noting, as I say, the SEPs that come out every three months have been saying that people thought unemployment would settle in four point one or something like that, and we're already pushing through. So the determination of what is neutral is going to have to go off of the rough and ready guide. Does it look like things are settling in
or does it look like conditions continue to worsen. You know, I've been less of a fan of trying to use a model based estimate of our star in real time as a determinate monetary policy.
I just think it's not that easy to do that.
But that said, we're very tight so we know which way it should be going from this point if conditions keep improving.
But fair to say you're not going back to zero.
I don't know. Everything's always on the table. You don't know.
It certainly does not see if the barring crises.
If you look at the SEPs.
The long run interest rates are above that. The members of the FMC forecast to be appropriate are well above zero, And it doesn't seem right now, if conditions progress how they are that it would that it would be that far down what.
Are companies in your district telling you about how they see the economy evolving over the next six months to a year and how they see rate cuts affecting them or do they in the short run.
Well, our district is part of the Midwest.
It's more manufacturing intensive and autos especially than any other district. It can be sectors specific. There are some sectors that are feeling the pinch right now in a tough way, as spending shifts back away from goods back towards services. There are manufacturing sectors that are suffering. But for the most part, we've heard a lot of steady as she goes. It's not getting worse, but it's not getting better. So in a way, that's encouraging not expecting recession. That in
the job market it's easier to find people. The labor shortage mostly solved, the supply chain crisis mostly solved, and from the business perspective, some complaint that they don't feel like they can pass cost increases on to customers anymore, that there's pushback from the consumers.
From the central banks perspective, that's good.
That means probably inflation's coming down, and overall recognition that we're tight.
I mean for companies that are.
Out trying to borrow from banks, smaller businesses, et cetera. Credit conditions are as tight as you'd expect.
With the rates high like this.
What about average Americans? What do you sense do you pick up from them about their willingness to continue to spend?
Well, a lot of that, as I say, I think is tied to wage growth. And wage growth for the last year has been robustly higher than the rate of inflation, so real incomes rising.
But for sure, you hear.
When we go out and talk to people in the community or community leaders, hear a lot of fretting over the affordability, especially of different than like housing affordability huge issue, and the price level upset that the price level is a lot.
Higher than it was in previous years.
So I'd say there's some question mark on the strength of the consumer. That said, if you look at actual consumer spending in these latest reports have been still fairly robust.
Well, thank you very much for joining us today, Austin Golesby from the Federal Reserve Bank of Chicago. And of course now we've made a date next year, we'll have you sitting here figure out what the interesting.
The moose will come back, we can hope so