Chicago FED official Austan Goolsbee, who recently gave a speech at the Peterson Institute for International Economics, shared his views on the current economic situation and the FED's approach to inflation.
Goolsbee expressed confidence in the Fed's ability to return inflation to its target without causing a recession, calling it a “rare” achievement. He warned against using short-term wage movements to predict inflation, as wages often lag prices.
He also shared some analysis showing that inflation could soon reach its target without further policy tightening and with only a modest slowdown in growth. According to the official, this is supported by the latest data showing that inflation is slowing without loss of employment, which is contrary to the US's past habits.
Goolsbee disputed the view that job losses were inevitable to slow inflation, saying it risked a near-term policy error. He emphasized that the Fed needs to be “extra careful” about tying its policy to historical relationships that may not apply in the current economy.
According to Goolsbee, the housing sector will play a key role in the continued progress in inflation over the next few quarters, and there is a risk that rising house prices will also increase market rents. Goolsbee also stated the importance of expectations and the credibility of the FED and stated that suggestions to raise the inflation target from 2% are quite risky.
Goolsbee also pointed out risks such as oil prices, economic recession in China, a prolonged auto factory strike in the US or a “devastating” government shutdown.
Goolsbee stated that the findings indicate that the inflation explosion in 2021 is largely related to supply, and ignoring improvements in supply may lead to more moves than necessary. However, the Fed official believes that long-term inflation expectations are well anchored and could help bring inflation down with less economic pain than before.
Goolsbee concluded by saying he hasn't decided what to do at the next meeting and is still trying to understand why long-term interest rates are rising.
*This is not investment advice.