Fed's Goolsbee on Adjusted Rate-Cutting Path Amidst Policy Uncertainty

On Friday, Austan Goolsbee, the President of the Chicago Federal Reserve, outlined his updated perspective regarding interest rates. He indicated that he now expects a gentler trajectory for rate cuts in 2025 compared to his earlier forecasts. However, he maintains that the U.S. central bank's policy rate is likely to decrease by a "judicious amount" in the coming year.

During an appearance on CNBC, Goolsbee elaborated on the challenges posed by "uncertainty about policy." He noted that this uncertainty complicates efforts to estimate both the neutral interest rate and the inflation rate—a crucial factor in economic prediction. This complexity contributes to his more reserved outlook for the rate cuts in 2025. Despite these challenges, Goolsbee is optimistic that inflation trends suggest a move toward the Federal Reserve's target rate of 2%.

Goolsbee pointed out that the current policy rate is significantly above the eventual target stopping point, estimated to be around 3%. This indicates that as inflation declines, the Fed will need to implement considerable reductions in the policy rate over the next 12 to 18 months.

Previously, Goolsbee anticipated that the rates would need to decrease by as much as 100 basis points in the next year, aligning with the view held by several of his colleagues. However, the latest projections released by the Federal Reserve, following a recent quarter-point reduction in its policy rate to the range of 4.25%-4.50%, suggest that most members of the Federal Reserve anticipate only 50 basis points of cuts in the coming year.

Federal, Reserve, rates