A senior Federal Reserve official said Monday that the U.S. central bank is prepared to step in with emergency rate cuts if the economy takes a sharp downturn, although he suggested that markets were overreacting amid Monday’s stock sell-off.
Austan Goolsbee, president of the Federal Reserve Bank of Chicago, told CNBC’s “Squawk Box” on Aug. 5 that as inflation has come down, the effective federal funds rate is as high as it has been in a long time, while hinting that monetary policy may now be too restrictive.
“We’ve been in a restrictive posture at the Fed,” Goolsbee said. “And you only want to be that restrictive if you think there’s fear of overheating. And that these data, to me, do not look like overheating.”
Data emerged last week showing deterioration in the U.S. labor market and manufacturing, including an 11-month high in initial jobless filings, a manufacturing gauge sinking deeper into recession territory, job creation numbers that came in well-below expectations, and an unemployment rate that jumped higher than anticipated.
Market reaction was swift, with stocks and other risky assets selling off, with the rout resuming after opening bell Monday, when a measure of stock market volatility, the VIX index—dubbed the Wall Street “fear gauge”—jumped to its highest level since the COVID-19 pandemic.
Asked about the incoming data, Goolsbee said the Fed is always prepared to respond if the situation deteriorates, noting that the Fed’s mandate is “straightforward”: to stabilize prices and maximize employment.
“And that’s what we’re going to do,” he said, while not committing to any particular course of action, noting that the jobs numbers have come in weaker than expected, but “not looking, yet, like recession.”
He said the Fed is forward-looking and data-driven with its decisions, while warning market watchers not to jump to conclusions from a single jobs report, especially when the job creation number was roughly equivalent to the margin of error.
The Bureau of Labor Statistics (BLS) said in its Aug. 2 nonfarm payrolls report that the U.S. economy added 114,000 new jobs in July, a marked slowdown from June’s 179,000 and well below economists’ expectations of 175,000.
Goolsbee said that the margin of error for the job creation data is around 100,000 a month, so “be a little careful over concluding about things” in the margin of error.
Asked about whether he sees any other indicators besides last week’s weak U.S. manufacturing data and signs of labor market softness that suggest a possible, Goolsbee pointed to the rise in consumer delinquencies and an uptick in small business defaults.
On the flip side, he said that gross domestic product (GDP) data has come in quite strong, indicating economic growth at a “fairly steady level.”
Goolsbee was then asked for his thoughts about market expectations for a whopping 150 basis points in rate cuts by January 2025. The CME Fed Watch tool now indicates that a majority of investors expect the Fed to slash the fed funds rate by 50 basis points at the policy-making meeting of the Federal Open Market Committee in September, followed by a second 50 basis-point cut in November and another two 25 basis-point cuts in December and January.
Asked if he believes that markets have embraced a panic about the economy that he does not share, Goolsbee remained noncommittal on rates, hinting that investors may be overreacting somewhat, given that there are other things going on in the world that may be amplifying their anxiety, including exchange rate movements and the Japanese central bank raising rates while others are on paths to cutting.
The Federal Reserve Bank of Chicago chief was asked if an inter-meeting emergency rate cut is on the table, he replied that “everything is always on the table,” including rate increases—if that’s what the incoming data warrant, such as inflation heading back up.
“The Fed’s job is very straightforward, maximize employment, stabilize prices and maintain financial stability. That’s what we’re going to do,” Goolsbee said. “We’re forward-looking about it. And so 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.”
His remarks came as Wall Street’s main indexes tumbled on Monday, as fears of the United States tipping into recession rippled through global markets.
At the opening bell, the Dow Jones Industrial Average fell 681.07 points, or 1.71 percent, at the open to 39,056.19. The benchmark S&P 500 Index opened lower by 195.42 points, or 3.66 percent, at 5,151.14, while the Nasdaq Composite dropped 1,063.63 points, or 6.34 percent, to 15,712.53.
By 10:30 a.m. EST, two of the indexes had pared back some losses. The Dow Jones was down 1,018 points, or 2.56 percent, at 38,743.19, the S&P 500 was down by 155.5 points, or 2.90 percent, at 5,191.28, while the Nasdaq Composite was down 544.17 points, or 2.88 percent, to 17,894.68 at the opening bell.
From The Epoch Times