Chicago Fed President: The Federal Reserve will respond to signs of economic weakness

According to the Zhitong Finance and Economics APP, Chicago Fed President Guerspé stated in an interview on Monday that the Fed will respond to signs of economic weakness and hinted that the current interest rate level may be too tight. When asked whether the weakness in the job market and manufacturing sector would prompt the Fed to respond, Guerspé did not commit to specific actions but stated that maintaining a "restrictive" policy stance would be meaningless if the economy is weakening. He also declined to comment on whether the Fed would urgently cut interest rates.

Guerspé said, "The Fed's job is very simple, which is to maximize employment, stabilize prices, and maintain financial stability. That's what we need to do." "We have a forward-looking attitude. Therefore, if any part of the overall situation deteriorates, we will make adjustments."

At the time of the interview with Guerspé, the market was in turmoil. U.S. Treasury yields plummeted, with the two-year Treasury yield falling below the ten-year Treasury yield for the first time since July 2022, partly due to the market's rapidly rising expectations of a Fed rate cut—including expectations of a 50 basis point cut in September and even expectations of an emergency rate cut this week. In addition, the U.S. non-farm payroll data released last Friday showed an increase of only 114,000 jobs in July, with the unemployment rate rising to 4.3% and hitting the "Sam Rule," sparking concerns about the Fed waiting too long to cut rates and the possibility of a recession in the U.S. economy.

In response, Guerspé stated that he does not believe the situation is as dire. He said, "The employment data is weaker than expected, but it doesn't look like a recession yet." "I do think that you should be forward-looking in making decisions about the direction of the economy."

However, Guerspé also noted that the Fed's current policy is restrictive, and the Fed should only adopt such a policy when the economy appears to be overheating. He said, "Should we reduce the restrictiveness of policy? I'm not going to tie our hands to things that should happen in the future because we're going to get more information. But if we're not overheating, we shouldn't take actual tightening or restrictive measures."

Policymakers have been focusing on real interest rates, which are the Fed's benchmark rate minus the inflation rate. With inflation cooling down, real interest rates have started to rise. The current real interest rate is around 2.73%, while Fed officials believe the long-term real interest rate should be close to 0.5%, indicating a significant room for rate cuts