Chicago Fed President Austan Goolsby doesn’t think Friday’s positive jobs report will change the path of lower interest rates over the next 12 to 18 months.
“I don’t think the calculus will change,” he said in an interview with Yahoo Finance.
He added: “If the current situation continues, I think it will drop significantly by the end of 2025.”
Last month, the Federal Reserve cut interest rates for the first time in more than four years, starting with a massive 50 basis point (bp) rate cut in preparation for a weak labor market.
But new data released Friday from the Bureau of Labor Statistics instead showed new strength. Labor market employment rose by 254,000 people in September, exceeding economists’ expectations of 150,000. The unemployment rate also fell to 4.1% from 4.2% in August.
But Goolsby declined to say whether he thought the central bank’s estimate of small interest rate cuts in November and December was still valid, saying the long-term outlook for rate cuts remained unchanged in his mind. He liked to make a point.
Fed policymakers last month collectively estimated that the central bank would trigger two more 25 basis point rate cuts in 2024, followed by four more smaller rate cuts in 2025.
Goolsby noted that most of the Fed’s rate-setting committee believes rates will eventually settle in the 2.5% to 3.5% range, down from the current range of 4.75% to 5.00%.
That analysis still “sounds right to me,” he says.
However, he said the pace at which the Fed will reach that level will depend on economic conditions and whether there are any surprises that could shake up the economy or inflation, such as how much oil prices will rise in response to the growing turmoil in the Middle East. He pointed out that it depends on the situation.
“External shocks like this have derailed many soft landings in the past. We need to adapt to all of this before we can answer that,” he said.
Chicago Fed President Austan Goolsby, 2022. Reuters/Brendan McDiarmid/File photo (Reuters/Reuters)
But if the unemployment rate settles in the low 4% range and inflation at the same time falls to the Fed’s 2% target, Mr. Goolsby will be even more confident that the risk of recession has diminished.
“I would feel more confident that we are accomplishing exactly what we set out to do,” he said.
Other Fed watchers argued Friday that the new jobs report could change the Fed’s calculations in the short term. The probability of another 50 basis point (bp) rate cut in November fell sharply on Friday.
“I think this will displace the Fed quite a bit,” said Peter Chill, head of macro strategy at Academy Securities, but noted that it could increase the central bank’s concerns about inflation.
“I still don’t know if I’ll be able to score 50 points this year,” he added. “It might be the 25th in November, but this might give them pause.”
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Robert Sockin, senior global economist at Citi, said the Fed is likely to keep its movements modest by 25 basis points for now.
“It is hard to see that there is much need to proceed as quickly as the September meeting,” he added.
Federal Reserve Chairman Jerome Powell said earlier this week that he expects the central bank’s rate-setting committee to continue lowering interest rates at a steady pace.
“This is not a committee that feels like it’s in a hurry to cut rates quickly,” Powell said Monday at the National Association for Business Economics’ annual meeting in Nashville.
He also reiterated that the consensus among Fed officials, outlined at their September meeting, was for two more 25 basis point rate cuts this year.
“That doesn’t mean another 50 years,” Powell said.
FILE – Federal Reserve Chairman Jerome Powell speaks during a press conference at the Federal Reserve System in Washington, Sept. 18, 2024. (AP Photo/Ben Curtis, File) (ASSOCIATED PRESS)
But he added that the commission could make faster cuts if the economy slows more than expected.
“We’re going to do everything we need to do in terms of moving with speed,” he said.
The Fed has one more jobs report to digest just before its Nov. 6-7 central bank meeting.
Employment growth could slow, if only temporarily, depending on the impact of Hurricane Helen and the machinists’ strike that halted production of Boeing Co. (BA) aircraft in the Pacific Northwest. The longshoremen’s strike that has affected ports from Maine to Texas is at risk of further repercussions before they return to work Friday.
Economists at JPMorgan say the closure of the Eastern and Gulf ports could have an economic impact of $3.8 billion to $4.5 billion per day, some of which could be recouped over time as normal operations return. We estimate that.
Thursday’s agreement to suspend union strikes reduces that risk.
JPMorgan Chief Economist Michael Feroli said in a note that a soft landing for the economy is once again in sight.
“The September report generally reversed many of the cooling trends evident in various indicators of labor market activity,” he said. “There were concerns that the cooling would turn into something even more alarming, but today’s report appears to put the soft landing on track.”
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