Chicago Fed Chair Goolsbee: The recent cooling of inflation is encouraging, but more data is needed to confirm a return to the 2% target.

Chicago Federal Reserve President Goolsbee expressed that he is encouraged by the recent cooling of inflation in the United States; however, he hopes to see similar improvement trends over the next few months before being convinced that prices are consistently returning to the Fed's 2% target. Meanwhile, he believes the labor market is currently "basically stable," and inflation remains his primary concern. In an interview on Friday, Goolsbee stated that the consumer price index (CPI) released this summer suggests that the price shocks from rising tariffs and oil prices over the past year may be gradually absorbed by the economy. He noted that U.S. inflation had been moving in an unfavorable direction for five to six months in a row, with overall levels still too high, but the performance over the past three months has been encouraging. He mentioned that if similar inflation data to that of June could be observed for three to four consecutive months in the future, he would be more confident in believing that inflation is back on track to fall to the 2% target. Goolsbee indicated his support for the Federal Reserve's decision to keep interest rates unchanged at the July meeting. Currently, he is more focused on inflation risks compared to economic growth and employment, believing that the labor market remains in a "basically stable" state. His past experiences with high inflation have made Goolsbee more cautious in his policy judgments. U.S. inflation once exceeded 7% in 2022 and has failed to return to the Fed's 2% target for over five years. He remarked that both the periods of high inflation in history and the recent price increases post-COVID-19 indicate that once inflation establishes a lasting trend, controlling it can be both difficult and painful. Therefore, current monetary policy needs to place greater emphasis on changes in inflation. The Fed has maintained interest rates unchanged in July for the fifth consecutive meeting, but divisions are widening internally regarding the need for further rate hikes. At that time, three policymakers cast dissenting votes, advocating for a 25-basis-point increase. An increasing number of officials are worried that without additional tightening of monetary policy, it may be difficult for inflation to drop back to the 2% target. However, the latest data has also released some positive signals. As the energy price shocks caused by the war gradually weaken, the consumer price increase in the U.S. has slowed for two consecutive months. Data released on Friday showed that U.S. retail sales in July recorded the largest decline in over a year. Goolsbee stated that considering the important role of consumer spending in U.S. economic growth, he would be concerned if retail sales continue to decline for several months. This means that if consumption continues to weaken, the Fed needs to pay more attention not only to controlling inflation but also to the risks of economic downturn. The recent improvement in inflation, combined with weak hiring performance in the labor market, has prompted investors to significantly lower expectations for Fed rate hikes. A month ago, federal funds rate futures had predicted that the Fed would raise rates at least twice this year, with the first hike likely occurring in September; currently, the probability of a rate increase in September has dropped to about 30%, and the market expects that there will be only one rate increase before the end of the year. In addition, Goolsbee expressed concern over the recent slowdown in U.S. productivity growth. Last year, productivity data was once strong, but it has cooled in recent quarters. He hopes that this change is merely a temporary phenomenon resulting from fluctuations in productivity data. Some officials and economists, including Fed Chairman Waller, believe that new technologies such as artificial intelligence may enhance corporate efficiency, allowing the economy to achieve faster growth without significantly raising inflation. However, Goolsbee pointed out that if the trend of accelerated productivity growth cannot be sustained, it will significantly affect the market's current judgment about "AI driving productivity improvement," and further impact monetary policy and economic prospects. Goolsbee had previously warned that an increase in productivity does not necessarily mean the Fed should lower interest rates. Rising productivity could stimulate companies to make larger-scale investments, similar to the significant flow of funds currently entering AI infrastructure construction, thus increasing the possibility of the economy overheating. Regarding Waller's recent proposal to reform the Fed's operational mechanisms, including considering reducing the number of policy meetings held each year, Goolsbee stated that he does not have a strong position on how many meetings should be held annually at present. He will wait for related suggestions from the five working groups established by Waller. Currently, the Federal Open Market Committee (FOMC), responsible for setting interest rate policy, holds eight meetings a year.