by Howard Schneider
WASHINGTON (Reuters) – The U.S. Federal Reserve (Fed) may be on the verge of achieving something “rare” by reducing inflation without significantly affecting employment and economic growth, one of its officials said on Thursday , pleading for “great caution” on future decisions by the central bank, even if it means not relying on the history of past battles.
“Blindly believing in the inevitability of a significant trade-off between inflation and unemployment carries the serious risk of a short-term policy error,” said Austan Goolsbee, president of the Chicago Fed. He criticized the “traditional view” that falling inflation implies a sharp economic slowdown, even recession, and rising unemployment.
Austan Goolsbee’s statements, prepared for a speech at the Peterson Institute for International Economics in Washington, do not explicitly state that he opposes any further interest rate increases, but are peppered with warnings on the risks of an erroneous interpretation of the current situation.
Inflation, although decelerating, still remains almost twice as high as the Fed’s 2% target.
Austan Goolsbee nevertheless believes that the recommendations recommended by certain experts to put an end to the fight against inflation are perhaps obsolete. Citing a recent study by Chicago Fed officials, he argues that inflation could “soon” reach the US central bank’s 2% target without further interest rate increases.
“Sticking to simple historical correlations of what growth and labor market conditions mean for inflation in the face of positive supply developments is a recipe for overreaction and unnecessary (economic) slowdown “, did he declare.
Austan Goolsbee is a voting member of the FOMC, the Fed’s monetary policy committee.
Inflation, which exploded in 2021, was largely due to a supply shock and labor shortages that gradually eased, he argued, making it less essential a reduction in demand with high interest rates which could penalize employment and growth at the same time.
Austan Goolsbee also believes that consumers’ inflation expectations, “well anchored”, can allow a slowdown in price increases “with less economic pain than in the past”.
The Fed this month kept federal funds rates in a range of 5.25%-5.50%, but a majority of bank officials, in their projections released after that meeting, left hear that a further increase in rates would be necessary.
(Report by Howard Schneider, by Claude Chendjou, edited by Blandine Hénault)
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