Chicago Fed President: Interest rates need to continue to decline to achieve an "economic soft landing"

Intelligence Finance App learned that Chicago Fed President Guerspé stated at a meeting on Monday that in order to achieve an "soft landing" for the economy, interest rates need to continue to decline.

Despite a significant drop in inflation and a softening labor market, even after the Fed cut its target rate by 50 basis points last week, rates are still near their highest level in 20 years. Guerspé has been serving as the Chicago Fed President since January 2023 and will have voting rights on the Federal Open Market Committee (FOMC) next year.

Speaking at the annual meeting of the State Treasurers Association in Chicago, Guerspé said, "What I have seen in the past two years is that inflation has dropped significantly without causing an economic recession, which is unprecedented in the United States and even globally."

He added, "Now the unemployment rate has slowly risen to 4.2%, and many believe this is a fundamentally stable level of full employment, which is the state we hope the unemployment rate will maintain."

Guerspé pointed out that if monthly inflation data continues at its current pace, the inflation rate will meet the Fed's 2% annual target in a year. He also stated that real-time economic activity indicators show robust GDP growth in the third quarter.

"The overall economy has some warning signs, but also shows clear strength," he said. "It would be ideal if we could freeze the current economic situation in its current position."

Guerspé also mentioned the FOMC's decision last Wednesday. The FOMC voted to lower the federal funds rate target by 50 basis points to a range of 4.75% to 5.0%, the first rate cut since July 2023.

"Rates are still at a high level for the past 20 years, much higher than any neutral level that anyone thinks is reasonable," Guerspé said. The so-called neutral level refers to the level of interest rates that neither stimulate nor suppress economic growth. He further explained, "If rates remain this high, it may be difficult to maintain the current economic stability."

For Guerspé, the discussion about whether the Fed will cut rates by 25 basis points or 50 basis points at a meeting is not as important as the ultimate rate target. This means that rates will continue to decline over the next year or so, gradually approaching a neutral level.

According to the median of the FOMC's economic forecasts in September, a total of 100 basis points rate cuts are expected this year, with another 100 basis points cut next year, bringing the target rate to a range of 3.25% to 3.5%. Fed officials have raised the median forecast for long-term rates for the third consecutive quarter, currently slightly below 3%. This is seen as the committee's collective forecast for the neutral rate