The Federal Reserve’s inner circle is divided over whether to raise interest rates again this year, but they all agree on one thing: Borrowing costs will remain “higher for longer.”
Various senior Fed officials have emphasized since a major meeting last week that interest rates will remain high “well into next year,” in the words of one of them, Chicago Federal Reserve President Austan Goolsbee.
“That was a little longer than it seemed like markets had thought,” he said in an interview on CNBC Monday.
The Fed last week voted to leave interest rates unchanged at a range of 5.25% to 5%, but the bank also signaled it could raise rates once more this year.
Not everyone is on board with another increase, however. Twelve of the Fed’s 19 governors and regional bank presidents predicted one more hike, but seven expect rates to stay at the current level.
Read: Senior Fed officials say more interest-rate hikes still on the table
Also: Bowman says Fed needs to raise interest rates higher to curb inflation
Those favoring another rate hike appear to be more worried that inflation won’t slow toward the Fed’s 2% target without a somewhat more restrictive monetary policy. The rate of U.S. inflation is running about twice as high as the Fed’s goal.
The camp that prefers to freeze rates at current levels believes rates are high enough to tame inflation and worry that additional rate hikes could tip the economy into recession.
Higher borrowing costs help to tame inflation by depressing demand and slowing the economy.
Goolsbee tried to straddle the divide.
“The risk of inflation staying higher than where we want it is the biggest risk,” he said, but added: “We’ve got to get inflation back down to target. I think we are doing it.”
One thing senior Fed officials all agree on is that interest rates will remain high for quite some time. That’s bad news for prospective home buyers as well as for other consumers and businesses that rely on loans for spending and investing.
The Fed’s new forecast, released last Wednesday, projects just two reductions in interest rates in 2024. As recently as June, the Fed was projecting four rate cuts next year.
Goolsbee said just how long the Fed keeps rates high will be a matter of debate in the months ahead.
“Pretty soon in here, the question is going to stop being how much more are they going to raise and it’s going to transform into how long do we need to hold rates at this kind of restricted level to feel convinced we’re back on this path to 2%,” he said.
What has made it harder to determine the answer, Goolsbee said, is a breakdown in typical economic relationships since the coronavirus pandemic. Case in point: The low U.S. unemployment rate.
The jobless rate stood at 3.6% in March 2022, when the Fed began to rapidly raise its benchmark short-term interest rate from near zero.
Since then, unemployment has barely risen, to 3.8%, even as interest rates have surged. Higher interest rates typically lead to a weaker economy, rising layoffs and higher unemployment.
At the same time, the rate of inflation has been cut in half to 3.7% as of August, from 8.5% in March 2022, based on the consumer-price index.
“The unemployment rate is still basically what it was when inflation was almost twice as high as it is now,” Goolsbee noted.
“There are some things going on in the economy right now, and the coming-out-of-COVID aspects that are unique, that have made predictions based on what happened in previous business cycles look kind of goofy,” he said.
Goolsbee is a voting member this year of the Fed committee that sets interest rates. Another voting member, Minneapolis Federal Reserve President Neel Kashkari, is set to speak at 6. pm. Eastern time.
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