“At moments like this, of financial stress, the right monetary approach calls for prudence and patience – for assessing the potential impact of financial stress on the real economy,” Goolsbee said Tuesday, in his first extensive comments on the policy outlook since taking the top job at the Chicago Fed in January. “The foremost thing on my mind before our next meeting in May is trying to get a handle on this question about credit: is it actually credit tightening?”
Inflation, which by the Fed’s preferred measure is running at more than twice its 2% target, has not come down enough even after the U.S. central bank’s stiff interest rate hikes last year, Goolsbee told the Economic Club of Chicago.
The job market has been “unbelievably strong,” he said.
Based on that data alone, Goolsbee said, more aggressive policy tightening might be seen to be warranted.
But the failure of two regional U.S. banks in mid-March triggered financial stress that could have a “material impact” on the real economy that the Fed needs to take into account, he said.
Before the banking crisis, he said, he would have been asking his contacts about why the Fed’s nearly five percentage points of rate hikes hadn’t slowed the economy much – was an “anvil” of tight money about to drop on the economy, or were the rate hikes simply not enough?
But now, he said, his focus has shifted to “credit conditions and is it going to be a limiting factor on expansion.”
Goolsbee joined his fellow U.S. central bankers last month in voting to raise the benchmark overnight interest rate by a quarter of a percentage point to a range of 4.75%-5.00%.
Projections from Fed policymakers published at the time showed that most expected to need one more rate hike to wring high inflation out of the economy.
Goolsbee’s remarks on Tuesday suggest he may have a different view, though he did not speak directly to his preferred rate hike path.
“Given how uncertainty abounds about where these financial headwinds are going, I think we need to be cautious,” Goolsbee said. “We should gather further data and be careful about raising rates too aggressively until we see how much work the headwinds are doing for us in getting down inflation.”
Goolsbee did make it clear he is not advocating for the kind of rate cuts that the central bank has undertaken in the face of past events of financial stress, and that markets are currently pricing in for the second half of this year.
Given the trouble the Fed has had with bringing down inflation so far, and the danger of seeming to give in “any time the market throws a tantrum,” the central bank should lean first on supervisory and regulatory tools to deal with banking system stress, he said. (Reporting by Ann Saphir; Editing by Paul Simao and Rosalba O’Brien)
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