Chicago Fed president weighs in on interest rates in Indianapolis visit

Speaking in Indianapolis Thursday, Federal Reserve Bank of Chicago President Austan Goolsbee said he supports additional interest rate cuts—although he also said it’s difficult to determine the ideal rate.

Goolsbee, who is on the board of directors of the Indianapolis-based Lumina Foundation, was in town for a board meeting of that organization. While here, he also spoke at Ivy Tech Community College’s Indianapolis campus to a group of about 40 members of the Central Indiana Corporate Partnership.

The Fed’s two primary goals are to maximize U.S. employment and to stabilize prices, which the Fed defines as an inflation rate of 2%. Interest rate adjustments are the Fed’s main tool to accomplish both of these things.

Goolsbee told the group that the Fed’s rapid series of interest rate hikes over the past few years have been successful at both cooling an unsustainably hot job market and reducing inflation.

“In 2023, the inflation rate was out of control coming out of COVID, and we cut the inflation rate by almost as much as it has ever gone down in a single year without there being a significant recession, which is largely unprecedented,” Goolsbee said.

According to data from the U.S. Bureau of Labor Statistics, the Consumer Price Index rose 8.59% between the second quarter of 2021 and the second quarter of 2022. Inflation began to ease after that, and as of the third quarter of this year the Consumer Price Index was up 2.65% year-over-year.

The unemployment rate, which had hit a 50-year low of 3.4% in January and April of last year, stood at 4.1% in October. Economists generally consider an unemployment rate of less than 5% to represent full employment.

The Fed raised interest rates 11 times between 2022 and 2023, taking the target federal funds rate from less than 1% in March 2022 to a high of 5.5% in July 2023. The Fed has since cut its target rate twice, reducing it to 5% in September of this year and to 4.75% earlier this month.

Goolsbee said he favors further cuts.

“Over the next 12 to 18 months, one of the things that has to happen is the interest rate has to go down to where we think it should be settling, just like the other conditions [unemployment and inflation] have settled.”

But, when asked what he thinks the neutral rate should be, Goolsbee was not as certain. The neutral rate is the interest rate that has a neutral effect on the broader economy, neither spurring nor dampening economic growth.

Goolsbee said he thinks the neutral rate is around 2%, but noted that this is a point of disagreement among economists, who generally believe the neutral rate is between 2.5% and 3.5%.

“I started calling it our ‘Sasquatch,’ because it’s an unmeasurable unknown,” Goolsbee said.

Goolsbee also addressed a range of other topics while in Indianapolis, among them housing affordability, consumer economic sentiments and the value of a college education.

The Federal Open Market Committee, of which Goolsbee is a member, meets every six weeks to discuss monetary policy and decide whether to adjust interest rates. The committee’s final meeting this year is Dec. 17-18.