Fed’s Goolsbee: policy ‘restrictive,’ more disinflation likely

By Thomson Reuters Feb 29, 2024 | 12:17 PM

By Ann Saphir

(Reuters) – Chicago Federal Reserve Bank President Austan Goolsbee on Thursday said he believes last year’s improvements in the supply of goods and labor set the stage for further declines in U.S. inflation this year, a signal he remains on board for interest-rate cuts later this year.

“Rates are pretty restrictive,” Goolsbee said in an event sponsored by Princeton University. “The question is, how long to remain this restrictive.”

Goolsbee did not give an answer to that question.

But if inflation continues to come down, he said, the Fed’s policy rate, now at 5.25%-5.5%, will become increasingly restrictive in “real” terms even if it is held steady.

“Eventually,” he added, that could hurt the labor market, which has so far stayed strong despite the Fed’s aggressive rate hikes in 2022-2023.

Goolsbee said he feels there is still scope for the U.S. economy this year to continue on what he has dubbed the “golden path” of falling inflation alongside a robust labor market and economic growth, a historically unusual pattern.

Repairs to the pandemic-damaged supply chain and a boost in immigration that lifted U.S. labor force participation helped push inflation down substantially last year, and some analysts have said they think those positive developments have run their course. Goolsbee disagreed.

Research suggests that even if the labor supply does not continue to improve as it did last year, the lagged effect of that increase in pushing down inflation is likely still ahead, he said.     “I still feel like there is supply benefit coming through the system on both the supply chain, and the impact of labor supply,” Goolsbee said, adding he would be “careful” about extrapolating from a government report showing inflation accelerated in January.

He repeated that he finds it a “puzzle” why housing inflation has not improved more than it has, given the decline in rents, and is watching that data closely.

(Reporting by Ann Saphir; Editing by Chris Reese)