Federal Reserve "big doves": hope to see more progress by September

Mr. Goolsbee, the "big dove" at the Fed and the president of the Chicago Fed, said that while recent data had convinced him that inflation could be cooled without causing too much pain to the economyHe wants to see more progress before the Federal Reserve stops raising interest rates。

Goolsby said in an interview on Tuesday:

"We've seen short-term progress before, like last summer, but that turned out to be false, and it's too early to say what the Fed should do at its next policy meeting in September."

Currently,Officials have slowed the pace of interest rate hikesThey took aggressive action to curb annual inflation, which hit a 40-year high last year, but announced a 25 basis point hike at their July meeting.Policy makers are looking for signs of a steady decline in price growth before they stop raising interest rates. 

Two reports released last month showed that price growth has slowed, especially the inflation component, which has risen modestly over the past few months. butOne or two good reports may not be enough to reassure officialsInflation slowed in the early months of last summer, but officials were spooked when it picked up again in August and September. The Chicago Fed president said:

"I don't like to promise up front what we will do in September, and when you are at a turning point, you try to figure out the general trend and not just focus on data that reflects only one month." 

As this year's vote committee, Goolsbee supports the Federal Reserve to raise interest rates by 25 basis points in July, after the Fed suspended interest rate hikes in June. Since March 2022, the Fed has raised interest rates by 5.25 percentage points, including four major hikes of 75 basis points last year.

Goolsby also slammed the market's expectations for a rate cut, saidAny interest rate cut will be in the distant futureAtlanta Federal Reserve President Bostic also believes that September action depends on data, and there is a risk that the Federal Reserve will tighten too muchInterest rates will not be cut until the second half of next year.

Goolsby said that the key to his views on the market outlook lies inHow core commodity inflation has evolvedThis category includes everything from used cars to clothing and furniture, which used to be a big driver of inflationBefore the COVID-19 pandemic, it was a drag on headline inflation, but the buying frenzy during the epidemic and subsequent supply chain problems made it a big driver of inflationGoolsby said:

"A return to deflation in core commodities is critical in the short term."

In addition, he has also been keeping an eye on housing inflation over the past few monthsHousing inflation has slowed somewhat and is expected to slow sharply later this year and in 2024. 

Some Federal Reserve officials, including Federal Reserve Chairperson Jerome Powell, have said they are closely monitoring prices in services other than food, energy, and housing as a proxy for wages.

Are wages a lagging indicator of inflation?

But Goolsby said,He doesn't think wages are a predictor of inflationInstead, it is a lagging indicator: Prices rise first, wages respond later, and growth tends to be stickier. If Fed officials tie policy too much to wages, they risk raising interest rates too high.

FXTWatching how inflation evolves in core commodities and housing will be key to helping the Fed navigate what Mr. Goolsby calls the "golden path" - a soft landing.

When it comes to core inflation, Fed officials "always knew it was more sticky," Mr. Goolsby said.Commodity inflation has not slowed as quickly as the Federal Reserve had expected.

 "These are the two components of inflation over the next three to six months," he said.If we are to succeed in staying on the'golden path ', we must see inflation progress on both fronts。We don't have to see progress in service sector inflation” 。

Goolsby also warned,Don't make too many comparisons between the present and past periods of high inflationSome economists had previously argued that the Federal Reserve could not reduce inflation without causing massive unemploymentThe situation today is radically different from what it used to be.He said:

"I am optimistic that we can have a soft landing. Because this business cycle is very different from previous business cycles. We can learn from past business cycles, but they are limited because they are not very'related '.