Regulation

Chicago Fed President Signals Emergency Rate Cut, Slashes Recession Concerns

Published

4 months ago

August 5, 2024

Coin2049 Newsletter

Chicago Federal Reserve President Austan Goolsbee hinted on Monday, August 5 that the central bank might react to signs of economic weakness with an emergency rate cut. Goolsbee’s remarks came in light of recent economic data suggesting that current interest rates might be too high. Moreover, the Chicago Fed President also weighed in on the possibility of a U.S. recession.

Chicago Fed President On Emergency Rate Cut

Today, Goolsbee addressed the impact of recent trends in the labor market and manufacturing sector on Federal Reserve policy. He acknowledged that the current economic indicators, including a weaker-than-expected jobs report, might necessitate a reassessment of the Fed’s policy stance. However, he did not commit to any specific actions, leaving the door open for various policy adjustments.

“The Fed’s job is very straightforward, maximize employment, stabilize prices, and maintain financial stability,” Goolsbee stated. He added, “That’s what we’re going to do.” He emphasized that the central bank’s approach would be forward-looking, according to a CNBC interview.

Goolsbee also suggested that any deterioration in economic conditions would prompt a response. “If the conditions collectively start coming in like that on the through line, there’s deterioration on any of those parts, we’re going to fix it,” he added.

This data triggered the Sahm Rule signal, which historically has been an indicator of a potential recession. Despite these signals, Goolsbee was cautious about jumping to conclusions. “Jobs numbers came in weaker than expected, but not looking yet like recession,” he said.

The U.S. Fed has maintained its benchmark interest rate in the range of 5.25% to 5.5% since July 2023, a level not seen in over two decades. Goolsbee noted that this rate might now be considered restrictive, a stance typically justified only if the economy is overheating. He said:

“Should we reduce restrictiveness? I’m not going to bind our hands of what should happen going forward, because we’re still going to get more information. But if we are not overheating, we should not be tightening or restrictive in real terms.”

Also Read: Is A Fed Rate Cut Ahead? Experts Warn It May Escalate Market Bloodbath

Market Expects 50 Bps Cut Today

Goolsbee’s comments come amidst a backdrop of significant market movements. Futures tied to the Dow Jones Industrial Average dropped nearly 1,300 points, or close to 3%, as Treasury yields fell sharply. This decline followed the Federal Reserve’s decision last week to maintain interest rates.

It raises concerns among investors that the central bank might be lagging in its policy adjustments as inflation eases and the economy shows signs of weakness. The Labor Department’s recent report revealed an increase of just 114,000 nonfarm payrolls and a rise in the unemployment rate to 4.3%.

The real fed funds rate, which is the difference between the Fed’s benchmark rate and the inflation rate, has increased as inflation declines. Currently, this rate stands around 2.73%, compared to the Fed’s long-term estimate of 0.5%.

Investors are now anticipating that the Fed will implement an aggressive easing policy starting today with a 50 bps cut. According to 30-day fed funds futures contracts, a 0.5 percentage point rate cut is fully priced in.

Also, projections indicate that the Fed could reduce the funds rate by 1.25 to 1.5 percentage points by the end of the year. While Goolsbee did not specify whether an emergency rate cut would be considered, he indicated that all options remain on the table.

“Everything is always on the table including raises and cuts,” he stated. Furthermore, according to Polymarket, the odds of an emergency rate cut by the U.S. Fed has surged to 55%. On the contrary, market experts like Peter Schiff and Scott Melker caution an expedited downturn in case of an emergency rate cut. It could negatively affect the crypto market and other global stock markets.

Also Read: Breaking: US Fed Calls Emergency Meeting As Japan Markets Collapse