Chicago Federal Reserve President Austan Goolsbee put a damper on expectations of further Fed interest rate cuts, citing lack of key inflation data due to the government shutdown.
The CME FedWatch Tool has the chances of a 25 basis point cut at the Federal Open Market Committee’s December meeting at 69.9%, up slightly from the 67% of a couple of days ago.
Goolsbee, who will vote at the December meeting, has generally called for gradually lowering rates. However, in a CNBC interview, he said he has concerns over the lack of important price reports, particularly with general inflation recently trending higher.
“If there are problems developing on the inflation side, it’s going to be a fair amount bit of time before we see that, where if it starts to deteriorate on the job market side, we’re going to see that pretty much right away,” Goolsbee said. “So that makes me even more uneasy … with front-loading rate cuts and counting on the inflation that we have seen in the last three months to just be transitory and assume that they’re going to go away.”
U.S. unemployment data, as well as repots on construction spending, retail sales, and producer prices have been on hold since the shutdown started at the end of September.
Additionally, the Bureau of Labor Statistics won’t release its Consumer Price Index report which had been scheduled for next week, until an unknown time in the future.
The BLS did put out a report for September despite the shutdown, because that figure is used for Social Security cost-of-living adjustments. That report showed inflation running at a 3% annual rate, compared with the Fed’s goal of 2%.
“Medium-run, I’m not hawkish on rates,” Goolsbee said. “I believe that the settling point for rates is going to be a fair bit below where it is today. When it’s foggy, let’s just be a little careful and slow down.”
The Chicago Fed has its own dashboard of labor market indicators, which show a stable unemployment rate in October and a steady pace of hirings and layoffs. The Chicago Fed’s unemployment rate indicator was at 4.36% for the month, up just one one-hundredth of a percentage point from September.
“From my perspective as a lender, Goolsbee’s comments underscore two important truths that homebuyers and borrowers need to understand: First, the Fed is signaling that although the benchmark Fed funds rate is down somewhat, the bar to further cuts has been raised,” said Steven Parangi, Manager at Alpine Mortgage Services. “With inflation still above target, employment still relatively solid and economic data more ambiguous, the Fed appears to be shifting toward a wait-and-see mode rather than a let’s cut now posture. Second, this means that mortgage rates and homeownership affordability are entering a phase of heightened uncertainty. Many consumers have grown used to the narrative of rates will keep falling, but Goolsbee’s message suggests that’s no longer a safe assumption.”
The Fed has indicated all along that they are going to be data driven when it comes to decisions around rates, added Robert Varghese, Head of Investments at Groundfloor Finance. “In that context, his expression of caution makes perfect sense as there is no official government data to analyze while the government shutdown continues.”
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