Federal Reserve policymakers are increasingly optimistic that inflation is easing enough to justify future interest rate cuts, with their decisions on the timing and size of these cuts guided by economic indicators rather than stock market volatility.
This was the consensus among three U.S. central bankers who spoke on Thursday, although they expressed slightly differing views on the current state of the economy. Their comments come just over a week after the Fed chose to maintain its policy rate but hinted at potential reductions as early as next month.
Last Friday’s report of a rise in the U.S. unemployment rate for July triggered a global stock market decline that extended into Monday, sparking concerns among investors and analysts about a possible recession and the Fed’s response. However, Richmond Federal Reserve Bank President Thomas Barkin downplayed the significance of the stock market’s reaction, noting that major U.S. indices remain higher than at the start of the year.
Speaking at a virtual event hosted by the National Association for Business Economics, Barkin emphasized that the Fed’s policy focus is more aligned with the ongoing decline in inflation. “All the elements of inflation seem to be settling down, and I’m relatively hopeful, based on the conversations I’m having, that this trend will continue,” he said. Barkin also noted that the cooling labor market appears to result from slower hiring rather than increased layoffs.
Kansas City Fed President Jeff Schmid, known for his more hawkish stance, acknowledged the recent turmoil in financial markets. In remarks prepared for the Kansas Bankers Association’s annual meeting, Schmid stressed that while financial conditions can provide valuable insights into the economy’s trajectory and impact the real economy, the Fed’s primary focus remains on achieving its dual mandate of full employment and price stability.
Schmid pointed to recent data showing inflation around 2.5% as encouraging, giving him greater confidence that inflation is on track to meet the Fed’s 2% target. “If inflation continues to come in low, my confidence will grow that we are on track to meet the price stability part of our mandate, and it will be appropriate to adjust the stance of policy,” he said. Schmid described the economy as resilient, with strong consumer demand and a labor market that, while cooling, remains healthy.
Chicago Fed President Austan Goolsbee also weighed in on Thursday, reiterating his view that the Fed’s current policy is restrictive. He warned that maintaining borrowing costs at their current level as inflation falls could tighten conditions further, potentially harming the labor market. However, Goolsbee, like his colleagues, emphasized that neither the stock market nor the upcoming presidential election would influence Fed policy decisions. “The Fed’s out of the election business. The Fed is in the economic business,” Goolsbee stated in an interview on Fox News. “We’re not in the business of responding to the stock market. We’re in the business of maximizing employment and stabilizing prices.”
