Chicago Federal Reserve Chairman Goulsby: The recent cooling in inflation is encouraging, but more data is still needed to confirm a return to the 2% target

The Zhitong Finance App learned that Chicago Federal Reserve Chairman Goulsby said that he is encouraged by the recent cooling in US inflation, but until he is convinced that prices are continuing to return to the Fed's 2% target, he still hopes to see a similar improvement trend in the next few months. At the same time, he believes that America's economic growth and labor market are currently “basically stable,” and that inflation is still its main concern.

Goulsby said in an interview on Friday that the consumer price index (CPI) released this summer shows that price shocks caused by factors such as rising tariffs and rising oil prices over the past year may be gradually being digested by the economy.

He pointed out that previously, US inflation had been developing in an unfavorable direction for five or six months, and the overall level was still too high, but the performance in the last three months was encouraging. He said that if he can see inflation data similar to June for three to four consecutive months in the future, he will be more confident that inflation has returned to the 2% target.

Goulsby said he supports the Federal Reserve's decision to keep interest rates unchanged at the July meeting. Currently, compared with economic growth and employment, he is more concerned about the risk of inflation, and believes that the US economic growth and labor market as a whole are still “basically stable.”

The high inflation experience in the past also made Goulsby more cautious in his policy judgments. US inflation once surpassed 7% in 2022, and has not returned to the Fed's 2% target for more than five years. He said that whether it is a period of high inflation in history or this round of price increases after the COVID-19 pandemic, it shows that once inflation forms a continuous trend, it may be difficult and painful to control, so current monetary policy needs to pay more attention to changes in inflation.

The Federal Reserve kept interest rates unchanged for the fifth consecutive meeting in July, but internal differences over whether further interest rate hikes are needed are widening. At the time, three policy makers voted against it, advocating a 25 basis point increase in interest rates. More and more officials worry that without further tightening monetary policy, it may be difficult for inflation to fall back to the 2% target.

However, the most recent month's data also sent some positive signals. As the impact on energy prices caused by the war gradually waned, the rise in US consumer prices has been slowing for two consecutive months. According to data released on Friday, retail sales in the US recorded the biggest drop in more than a year in July.

Goulsby said that considering the importance of consumer spending in the US economy, it would worry him if retail sales declined for several months in a row. This means that if consumption continues to weaken, the Fed will need to pay more attention to downside risks while controlling inflation.

Recent improvements in inflation, combined with weak labor market recruitment performance, have prompted investors to significantly lower their expectations of the Federal Reserve's interest rate hike. A month ago, federal funds rate futures also expected the Federal Reserve to raise interest rates at least twice this year. The first rate hike is likely to occur in September; currently, the probability of an interest rate hike in September has dropped to about 30%, and the market expects to raise interest rates only once before the end of the year.

Furthermore, Goulsby also expressed concern about the recent slowdown in productivity growth in the US. Productivity data was strong last year, but it has cooled down in recent quarters. He hoped this change was only a temporary phenomenon of fluctuating productivity data.

Some officials and economists, including Federal Reserve Chairman Walsh, believe that new technologies such as artificial intelligence may improve corporate efficiency and enable the economy to grow faster without significantly boosting inflation. However, Goulsby pointed out that if the trend of accelerated productivity growth does not continue, it will clearly affect the market's current judgment on “AI drives productivity growth,” and further affect monetary policy and economic prospects.

Goulsby also warned earlier that increasing productivity does not necessarily mean that the Federal Reserve should lower interest rates. Increased productivity may stimulate enterprises to invest on a larger scale, similar to the current situation where large amounts of capital are pouring into AI infrastructure construction, thereby increasing the possibility that the economy will overheat.

Regarding Walsh's recent idea of reforming the Federal Reserve's operating mechanism, including considering reducing the number of annual policy meetings, Goulsby said that there is currently no strong position on how many meetings are held in a year. He will await relevant recommendations from the five working groups set up by Walsh. Currently, the Federal Open Market Committee (FOMC), which is responsible for formulating interest rate policy of the Federal Reserve, holds eight meetings a year.