Chicago Fed President Goolsbee: Over-reliance on monthly data will not change the long-term trend of interest rate cuts

The U.S. September non-farm payroll data far exceeded expectations, leading the market to expect that the Fed's rate cut in November will be reduced to 25 basis points. However, Austan Goolsbee, a voting member of the FOMC and President of the Chicago Fed, stated after the release of the September non-farm report that while the employment data is very strong, one should not overly rely on single-month data, as this will not change the trend of rate cuts in the next 12 to 18 months. He also added that inflation may fall below the Fed's 2% target, indicating the existence of this risk.

Goolsbee stated in interviews with multiple media outlets on Friday:

"Today's employment data and the entire report are very impressive. If we get similar reports again, I will be more confident that we are indeed achieving full employment.

As a central bank, you do not want to overreact to monthly reports."

Data released earlier on Friday by the U.S. Bureau of Labor Statistics showed that September non-farm employment data far exceeded all economists' expectations, and revised up the data for the past two months, which previously showed a slowdown in wage growth. The unemployment rate unexpectedly dropped to 4.1%.

The improvement in the employment situation alleviated concerns about the labor market, with investors starting to bet that the Fed will implement a smaller rate cut of 25 basis points at the next meeting in November. Before the November meeting, the Fed will have the opportunity to assess the October employment report and the September inflation report, both of which could influence their decision.

However, Goolsbee also mentioned that from a broad range of indicators, the labor market is cooling down, and there are even signs that inflation may fall below the Fed's 2% target. He did not suggest that the Fed should stop further rate cuts, but rather indicated that one month of data will not change the trend of rate cuts in the next 12 to 18 months.

Goolsbee declined to reveal whether he believes the Fed's expected slight rate cut plans in November and December are still valid. He is more inclined to believe that, in the long run, the prospect of rate cuts has not changed in his view.

"Some data is very strong, while some data shows some weakness.

If you look at expectations, there are signs that inflation may fall below the 2% target, and we need to remain vigilant about this.

If the situation continues as it is now, by the end of 2025, I believe there will be a significant rate cut."

Fed officials initiated a rate cut at the September meeting, lowering the federal funds rate by 50 basis points. Analysts believe that this larger-than-usual cut was aimed at boosting the labor market in the face of signs of slowing hiring and other economic cooling.

Previously, the median estimate of the 19 Fed policymakers was that rates would fall to 3.4% by the end of next year and to 2.9% by the end of 2026. Goolsbee stated that this level seems "quite appropriate."

However, he pointed out that the speed at which the Fed reaches this level of rates will depend on economic conditions and whether unexpected factors that could disrupt the economy or inflation, such as the extent to which Middle East turmoil leads to an increase in oil prices, will occur. "External shocks like this have disrupted soft landings in the past, and we must remain vigilant about these conditions in order to provide answers," he said He pointed out that the neutral interest rate, which neither stimulates nor suppresses economic growth, may have risen, but the Federal Reserve has time to determine this level.

"It's hard to say exactly what the neutral interest rate is. In my view, it is definitely higher than our pre-COVID-19 zero level."

Federal Reserve officials have been raising their estimates for the long-term neutral interest rate. The median estimate, excluding inflation, is now 2.9%, higher than the pre-COVID-19 outbreak prediction of 2.5%. This rate can only be estimated and cannot be directly measured