Goolsbee emphasized his belief that the pace at which interest rates decrease will likely be slower, attributing this to the uncertainties surrounding the potential impact of the Trump administration’s policies, ranging from tariffs to immigration to tax cuts. Nevertheless, he remains optimistic about the economy’s trajectory towards achieving the Fed’s target of 2% inflation.
He pointed out that recent inflation figures have been skewed due to base effects and anticipates a more favorable outlook as the year progresses, particularly in comparison to the first quarter of 2024. Going forward, Goolsbee highlighted the challenge facing the Fed in discerning between “transitory” inflationary factors that can be overlooked and those that are more enduring, especially if Trump’s tariffs continue or expand.
With Trump having already imposed a 10% tariff on Chinese imports and considering similar actions for other regions, Goolsbee expressed concerns about a potential resurgence of inflation, particularly in light of the prevailing policy uncertainties. Reflecting on discussions with automotive industry stakeholders in Detroit, he underscored the real threat of an escalating trade conflict disrupting supply chains.
Despite the uncertainties surrounding trade dynamics, Goolsbee noted positive signs in the job market, suggesting stabilization at full employment, solid economic growth, satisfactory productivity gains, and wage growth aligning with the 2% inflation target. This represents a significant improvement from the previous scenario six months ago when unemployment was trending upwards, prompting concerns about a possible downturn.
Looking ahead, Goolsbee envisions interest rates settling considerably lower than current levels in the long term, with the Fed unlikely to reach the neutral rate — the equilibrium point that neither stimulates nor hampers economic growth — by the year’s end, but possibly within the next few years. He emphasized the importance of aligning interest rate cuts with declining inflation, albeit acknowledging uncertainties surrounding the true neutral rate.
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