Fed’s Austan Goolsbee sees no sign of recession

New York — Chicago Federal Reserve president Austan Goolsbee says there are no signs of a recession in the US despite weaker-than-expected jobs data.

Goolsbee said on Monday US Federal Reserve policymakers needed to carefully monitor changes in the economy to avoid being too restrictive with interest rates.

“You only want to be that restrictive if you think there’s fear of overheating,” Goolsbee told CNBC. “These data, to me, do not look like overheating ... as you see jobs numbers come in weaker than expected but not looking yet like recession, I do think you want to be forward looking at where the economy is headed for (in) making the decisions.”

Goolsbee also cautioned against taking too much of a signal from a global stock market sell-off that accelerated on Monday, amid fears the US central bank has waited too long to begin cutting interest rates. The aftermath of the Bank of Japan’s decision last week to raise rates, as well as increasing geopolitical tensions in the Middle East, also contributed to the rout.

“The law doesn't say anything about the stock market; it’s about the employment and it’s about price stability,” Goolsbee said, citing the Fed’s dual goals set by Congress, as he noted how prone financial markets are to volatility.

Nonetheless, officials needed to be aware of the possibility that markets were signalling a change in the economy’s direction, he said.

“If the market moves give us an indication over a long arc that we’re looking at a deceleration of growth, then we should react to that,” Goolsbee said.

After he spoke, data showed activity in the vast US services sector rebounded from a four-year low last month, with a measure of services employment rising for the first time since January.

US stocks remained sharply lower, with their recent slide accelerating after Japan’s benchmark Nikkei index suffered its biggest drop since 1987. US indices, though, were off their lows on Monday after the services sector data.

US treasury yields, meanwhile, plunged as bond prices shot higher in a safe-haven bid. Earlier in the session, the yield on two-year notes had briefly fallen below those for 10-year notes, though that relationship has since returned to the “inverted” state that has prevailed for more than two years.

The dollar weakened to near its lowest levels of the year against a basket of major trading partner currencies.

The US services data “aligns with our view of an economy in transition rather than one on the brink of collapse”, said Matthew Martin, a US economist at Oxford Economics. “Expectations for aggressive rate cuts in September are overdone.”

The Fed kept its benchmark interest rate unchanged in the 5.25%-5.50% range last week and signalled it was on course to begin cutting rates in September, but that decision was followed by worrying signs the labour market might already have turned.

The number of Americans filing new applications for unemployment benefits increased to an 11-month high while job gains markedly slowed in July and the unemployment rate rose to 4.3%.

The data cast doubts on Fed chair Jerome Powell’s assertion directly after the latest policy meeting that the labour market appeared to be normalising gradually, which would allow the central bank to take a bit more time before cutting rates to ensure inflation was fully quelled.

In-between rate cut?

Instead, economists and traders homed in on Powell’s other comments that the Fed would respond if there was an unexpected deterioration in the labour market, a sentiment echoed repeatedly by Goolsbee on Monday.

Asked about the possibility of an intermeeting rate cut, Goolsbee said “everything is always on the table” from rate increases to cuts as the Fed maintains its focus on employment, inflation and financial stability.

“If the conditions collectively start coming in on the through line that there's deterioration on any of those parts, we're going to fix it,” Goolsbee said.

Investors in contracts tied to the Fed’s policy rate are now pricing in an intermeeting cut before the next policy meeting on September 17-18 and maintained bets the policy rate will end 2024 in the 4%-4.25% range.

“The Fed’s response will be determined by two factors: the extent to which downside risks to the real economy materialise, and whether the sharp sell-off in financial markets causes something to break,” said Neil Shearing, group chief economist at Capital Economics.

Powell, who has come under a renewed political lens ahead of the US presidential election in November, was given short thrift by Democratic senator Elizabeth Warren.

“He’s been warned over and over again that waiting too long risks driving the economy into a ditch,” she said in a post on X following the jobs report on Friday. “Powell needs to cancel his summer vacation and cut rates now — not wait 6 weeks.”

Reuters