By Michael S. Derby
NEW YORK (Reuters) – Interest rate cuts remain possible at some point, but uncertainty related to huge changes in U.S. trade policy make it hard to know how the economy will fare for now and how the U.S. central bank’s rate policy should be adjusted, Austan Goolsbee, president of the Federal Reserve Bank of Chicago, said on Thursday.
“There is not a generic playbook for how a central bank should respond” to the tariffs the Trump administration is pursuing, as they create a stagflationary shock, or a period of simultaneous higher inflation and depressed growth, Goolsbee said at a gathering of the Economic Club of New York.
While uncertainty is high and problematic, if that can be resolved and inflation can move down amid solid job market performance, “I still think that one to two years, 12 to 18 months from now, rates will be lower than they are today,” he said.
Goolsbee spoke a day after President Donald Trump reversed hefty tariffs on dozens of countries while ramping up pressure on China. The change in tariffs unleashed a global stock rally on Wednesday, but U.S. stocks reversed course on Thursday.
Some major banks have forecast that the economy will soon fall into recession. Financial markets have also priced in a more aggressive course of rate cuts, expecting the Fed will need to shift to supporting the job market even with inflation above the Fed’s 2% target and likely to go higher on the tariffs.
Goolsbee on Thursday noted that the current state of economic data looks pretty good, but the lag on when the data is reported could mean it does not reflect the current situation. Goolsbee said it’s important for the Fed to look at all the data it can now.
He also highlighted the importance of keeping inflation expectations in check, because it helps keep current price pressures under control. While near-term expectations have risen, he said, the critical view on longer-run price pressures has remained anchored so far.
If there were a deterioration in expectations, it would likely take primacy in Fed policymaking. If longer-run price pressure expectations start going up, “any central bank almost has to address that…regardless of what the other conditions are.”
(Reporting by Michael S. Derby; Editing by Leslie Adler)
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