Chicago Fed President warns: Falling inflation and high interest rates could make the situation worse

Then analysts would no longer have to sift through FOMC members' remarks between meetings for clues, or endure the two nerve-wracking days when the committee's 12 economists debate the state of the economy. They could simply sit back and wait for the announcement.

Unfortunately, according to Austan Goolsbee, President of the Federal Reserve Bank of Chicago and member of the FOMC, this scenario would also massively increase the likelihood that the committee would make a serious mistake.

Goolsbee took office in January 2023 and immediately became a voting member when the committee was under greater scrutiny than ever before.

Sitting down at the giant table where the group gathers to look at historical data on unemployment, car prices, and housing costs can be daunting—especially when you have to argue your point of view against the differing opinions of others.

But Goolsbee tells Assets he loves his job. In fact, “it's not difficult at all to hear the different opinions at the table. It's great.”

More importantly, Goolsbee believes this range of perspectives from across the United States will keep the FOMC on track.

Courtesy of the US Federal Reserve

“I said right after I arrived – and my observation has not changed – that the FOMC is the largest advisory body in the world in the 21st century. Nothing against the US Senate or anyone else,” says Goolsbee Assets in an exclusive interview.

“It's super important to hear the different geographic perspectives and worldviews. If we were to fill the committee with people who have the same background, come from the same place and think the same way, then I think the likelihood of the FOMC making a terrible mistake increases significantly.”

Even critics of the FOMC led by Jerome Powell would have to admit that the committee has not made any catastrophic mistakes since the Covid crisis.

For months, analysts have been asking themselves the question: “Will Powell land the plane?” Will the Fed succeed in pushing rapidly rising inflation back down to the two percent target without pushing the economy into recession?

Some said that this was not possible.

Former Treasury Secretary Larry Summers believed that in order to bring inflation into the two percent range, unemployment would have to rise to six percent and the economy would have to contract.

Others had hoped for a soft landing – Jamie Dimon, CEO of JPMorgan, still believes the US could suffer a harder landing. But so far, the unemployment rate has remained relatively stable at around 4.2 percent, and inflation has also begun to ease.

And while an uncertain jobs report early in the month will fray the nerves of some FOMC members nervously looking ahead to the second half of the committee's dual mandate – lowering inflation and maintaining maximum employment – Goolsbee portrays the meeting as a well-oiled machine.

“We're doing pretty well. Chairman Powell has done a really impressive job of bringing a lot of people under control,” Goolsbee added. “He's doing an impressive job of building consensus between people who think very differently.”

Public input, not politicians

Goolsbee, who served in President Obama's Cabinet, is a proponent of making the Fed accountable to the public.

However, this accountability does not mean giving politicians power over monetary policy, he says.

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People like vice presidential candidate JD Vance have called Fed independence incompatible with American democracy. In an interview with CNN in August, he said, “Whether you like it or not, we should let America's elected officials have a say in the most important decisions facing the country.”

“Whether the country goes to war or what our interest rates are – these are important questions to which American democracy should have important answers.”

But the public and politicians are two different actors with completely different motivations.

Goolsbee said: “Central banks should be held accountable for their actions. And they will. The evidence of what happened during the COVID period is, in my opinion, [is that] Central banks are subject to a high degree of public accountability – not just in the United States, but everywhere – and that is perfectly fine.

“This is a completely different question than: 'Do elections influence monetary policy decisions?'”

While White House candidate Kamala Harris has made it clear that she has no interest in interfering with the Fed's autonomy, candidate Donald Trump wants the FOMC to work more closely with politicians.

“I think in my case, I've made a lot of money. I've been very successful,” Trump said this month at a news conference at his Mar-a-Lago club in Palm Beach. “And I think I have better instincts than a lot of other people who are at the Federal Reserve or the chairman of the Federal Reserve.”

Chairman Powell has firmly rejected all attempts to bring the FOMC into the policy discourse. If you look at history, Goolsbee says, the combination of central banking and central government has not worked well.

“Independence is important,” Goolsbee added. “The Federal Reserve Act is designed so that the Fed chairman's term is not dependent on an election cycle. He is not a normal political candidate.”

“Every two years there are federal elections in the United States: Can the Fed not do its job every two years because there are elections?

“All the Fed can do, and all it does, is follow the Federal Reserve Act, which says you're supposed to care about maximizing employment and stabilizing prices and base your decisions on that – and that's what we're doing.”

“You can read the minutes yourself. The transcript will be published. You can read word for word what everyone says. It's not about elections, it's about the economic situation.”

What remains of a September cut?

Wall Street has, of course, already placed its bets. It is expecting a long-awaited cut in the key interest rate in September, which at 5.25% remains at a level that has been high for more than 20 years.

Although FOMC members cannot comment specifically on when and by how much the key interest rate might be cut, that does not stop experts from looking for clues.

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Analysts generally expect the Fed to make its first interest rate cut of 25 basis points to 5% in September, with another likely to follow in December.

Banks like Goldman Sachs expect a third in between. The majority of experts assume that the Fed will lower the key interest rate again to just over three percent in 2025.

Goolsbee made no promises to those craving a cut, but acknowledged that the economy will have changed in 2024.

Inflation appears to be moving in the right direction. In the 12 months to July, the consumer price index rose by 2.9 percent. While this is still above the 2 percent target, it was the smallest annual increase since March 2021.

“The conditions were very different when we set the interest rate at this level. Every month that we have had inflation like we have just experienced – where inflation is lower than expected – we have tightened real interest rates,” Goolsbee said.

“If you keep the interest rate that we keep with falling inflation, we will become more and more restrictive and you have to be careful.”

So Goolsbee asks himself a question: When does the Fed really have to be so strict?

“The answer is that you should only be as strict as you absolutely have to and if you are afraid that the economy is overheating,” he explained. “That is not what an overheated economy looks like to me.”

“So I think we need to be clear that we don't stay this strict for too long, because if that happens, we'll have to think about the actual side of the mandate, and the employment situation will get worse.”