WASHINGTON — Following three interest rate reductions in the previous year, Federal Reserve officials, including Chair Jerome Powell, have indicated a shift towards a more cautious approach marked by observation and assessment. They are focused on watching for a further decline in inflation and assessing the economic implications of recent policies introduced by President Donald Trump, especially regarding tariffs, before making any additional cuts to borrowing costs.
During a recent interview on February 7, Austan Goolsbee, the president of the Federal Reserve’s Chicago branch, expressed his expectations for declining inflation and emphasized the stability of the job market. He mentioned that if tariffs do not escalate inflationary pressures, then the Fed might consider resuming rate cuts.
Q. What is your perspective on the current state of the economy?
A. The economy is demonstrating robust growth, and employment levels are stable and close to full employment. While there have been some fluctuations, overall, we have made significant strides towards achieving our inflation goals. We need to remain vigilant to avoid any overheating risks, but at this moment, I do not observe signs of overheating. By clearing away the current uncertainties, we can reveal the strong foundation beneath them.
Q. The Federal Reserve reduced its key rate by a full percentage point last year. What are your thoughts on future moves?
A. We are now entering a phase of uncertainty where it is unclear what our ultimate endpoint will be. It seems prudent to decelerate the pace of our rate adjustments, allowing us to carefully gauge where we might land. Given the new uncertainties we face, it is essential to wait for some clarity before we can more easily identify our path forward.
Q. How could the possibility of new tariffs influence your views on inflation and interest rate adjustments?
A. Should we experience further inflation increases, we would need to analyze which aspects are indicative of persistent overheating and which are merely isolated cost spikes, such as those caused by tariffs. This analysis will not be straightforward and will require time to accurately assess. From the experience with tariffs in 2018, we observed that they quickly translated to higher prices for affected goods, yet did not significantly alter overall inflation rates.
If inflation does not rise significantly, my underlying belief is that the economy is stabilizing at full employment, and we anticipate inflation and inflation expectations returning to around 2%. Consequently, if inflation decreases, I believe interest rates could also decrease. Ultimately, this hinges on the prevailing economic conditions, and I do not have a specific timeline for when these changes might occur—whether in two meetings, five, or even sooner.
