Chicago Fed President: The future Fed will have more room to cut interest rates

According to the Zhitong Finance and Economics APP, on Friday, Chicago Fed President Guersby stated that the U.S. economy has recovered to a state similar to normal, therefore requiring a more normal level of interest rates. He believes that in the future, the Fed will have more room for rate cuts and is not too concerned about specific timing.

At the 18th Community Bankers Symposium of the Chicago Fed, Guersby delivered a speech where he first compared the economic conditions during the COVID-19 pandemic and the post-pandemic recovery to the Northern Lights seen on Thursday night. Due to a strong solar storm that night, the Northern Lights were visible across the entire continental United States. Guersby said, "This economic cycle is different from any other, much like the Northern Lights appearing in the Chicago night sky on a random night in October."

He mentioned that the current economic conditions have returned to a near-normal state, pointing out that the unemployment rate has dropped to around 4% and the inflation rate is gradually approaching the Fed's annual target of 2%. However, Guersby believes that the federal funds rate is still at an abnormal level.

"In the long run, inflation has dropped significantly," he said. "And in terms of the labor market, it has cooled down from an overheated state to a state of full employment similar to stability. If this picture can be frozen, it would be an ideal scenario that meets the dual mandate of controlling inflation and maintaining employment. So, if this is the normal state, then I believe the current interest rates are still far above the level that stability should have."

Over the past three years, the Fed has been focused on curbing inflation. The Fed raised rates to a tightening range and maintained this level for over a year. On September 18th this year, the Federal Open Market Committee (FOMC) lowered the federal funds rate target range by 0.5 percentage points to 4.75% to 5.0%.

Guersby stated that this move reflects progress in slowing inflation and aims to prevent further deterioration of the labor market. He pointed out, "Historically, the labor market has had this characteristic - once it starts to decline, it's too late, the recession has arrived."

Guersby is not too concerned about the detailed measures that the FOMC will take at the November meeting or other specific meetings. He is more focused on the long-term trend of interest rates.

He said, "In the next 12 to 18 months, rates will eventually fall to the range of 2.5% to 3.5%, and we are far above that level now. For me, the most important thing in formulating monetary policy is to acknowledge that rates are falling, and the specific timing is not that important."

On Friday, interest rate futures pricing indicated that the market expects an 88% chance of a 25 basis point rate cut in the federal funds rate on November 7th