Chicago Fed President Austan Goolsbee said Thursday the Federal Reserve will do whatever it takes to get inflation down but stressed the central bank can lower inflation without causing a recession if it doesn’t risk raising interest rates more than needed.
“We will get inflation back to our target, whatever that takes. Inflation still needs to come down,” Goolsbee said in a speech in Washington at the Peterson Institute for International Economics. “But we also can’t lose sight of the fact that the Fed has the chance to achieve something quite rare in the history of central banks — to defeat inflation without tanking the economy.”
Goolsbee maintained that inflation has come down significantly — running at 2.4% on a three-month annualized basis as measured by the consumer price index — as pandemic economic forces reverse. He said that the Fed could lower inflation while avoiding a severe recession now that supply chain bottlenecks are unwinding and demand is returning to a more stable level.
“These factors also argue against putting too much weight on the idea that strong labor market and growth conditions will necessarily stall out the disinflationary process,” Goolsbee said. “Doing so risks policy overshooting and unnecessarily derailing the expansion.”
He also said the Fed shouldn’t use short-term wage growth to predict inflation, warning that tying interest rate decisions to wage growth at a moment of transition would “almost certainly mean overshooting.”
He noted, however, that there are risks to what he dubs the “golden path,” including oil price spikes, the slowdown in China, the possibility of an expanded and prolonged auto strike, and the potential for a disruptive government shutdown.
Goolsbee also cautioned changing the inflation target to something higher than 2% would undermine the power of expectations to bring actual inflation down.
“Raising the target when inflation is above the target would undermine the credibility of the Fed’s commitment to any inflation target and impairs the very mechanism of how it is supposed to help,” he said.
Goolsbee says the Fed is moving from the phase of how much more rates should rise to one of how long rates should be held at or near current levels.
Looking ahead, Goolsbee said he is watching housing inflation to get core inflation back to target, productivity, and inflation expectations. He said if housing inflation in CPI goes back up then he would be pessimistic and say the Fed would need to “apply more monetary policy restraint.”
Fed officials see raising rates one more time this year to a range of 5.5%-5.75% before holding rates at that level for an extended period. Rates currently stand in the range of 5.25%-5.5%.
The Fed has raised rates 11 times since March 2022 in the most aggressive rate-hiking campaign since the 1980s. While inflation has dropped, it remains around 4% — double the Fed’s inflation target.