Federal Reserve officials: Measures will be taken to repair the economy if it deteriorates

Chicago Fed President Guersby said on Monday that the Fed will respond to signs of economic weakness and suggested that current interest rates may be too tight.

When asked whether the softness in the job market and manufacturing sector would prompt the Fed to respond, Guersby did not commit to specific actions but stated that maintaining a "restrictive" policy stance would be meaningless if the economy is weakening.

In an interview with CNBC's "Squawk Box," he said, "The Fed's job is very clear, which is to maximize employment, stabilize prices, and maintain financial stability. That's what we need to do."

This interview comes at a time of global market turmoil. On Monday, the US experienced a sell-off in stocks, bonds, and the dollar. The three major US stock indexes opened sharply lower, with the Dow falling 1070 points, the S&P 500 down 4.2%, and the Nasdaq down 6%.

Wall Street's fears were ignited by weak non-farm payroll data last Friday. The data showed an increase of only 114,000 jobs in non-farm payrolls, with the unemployment rate rising to 4.3%, triggering a signal known as the Sam rule, indicating that the economy may be heading into a recession.

However, Guersby stated that he does not believe the situation is as dire as it seems.

He said, "The performance of employment data is weaker than expected, but it doesn't seem like a recession yet," and added, "I do think that we should take a forward-looking view of the direction of the economy when making decisions."

Guersby emphasized that the margin of error for monthly employment data is 100,000, so conclusions should not be drawn prematurely.

When asked about the market's call for an emergency rate cut, Guersby said that options including rate hikes and cuts have always been on the table, and if the economy deteriorates, the Fed will take measures to repair it.

Guersby also acknowledged that the Fed's current policy is restrictive, a stance that should only be taken when the economy appears to be overheating. Since July 2023, the Fed has kept the benchmark interest rate between 5.25% and 5.5%, the highest level in about 23 years.

"Should we reduce the restrictiveness of policy rates? I'm not going to constrain our choices because we will still get more information. But if the economy is not overheating, we should not take substantive tightening or restrictive measures," he said.

Policymakers have been focused on the "real" federal funds rate, which is the federal benchmark rate minus the inflation rate. Unless the Fed chooses to cut rates, when inflation falls, the real rate rises, limiting economic growth.

The market expects the Fed to enter a proactive easing cycle, with a 100% likelihood of a 50 basis point rate cut in September, another 50 basis point cut in November, and a significant possibility of another 50 basis point cut in December