On Monday, August 5th, Austan Goolsbee, the President of the Federal Reserve Bank of Chicago, stated that Federal Reserve policymakers need to carefully monitor the direction of the U.S. economy to avoid being too strict on interest rates. However, current signs indicate that despite weaker-than-expected job data, there are no signs of a recession in the U.S. economy.
During an interview with CNBC on Monday, Goolsbee said, “You only take such strict restrictive measures when you think there’s a concern of overheating (the economy).”
Goolsbee’s interview took place amidst global market turmoil. Due to the soft U.S. job data, concerns about economic recession have triggered a flight to safety, intensifying global stock market sell-offs. Asian stock markets opened on Monday with Japan leading a drastic drop, with the Nikkei index plunging over 7% triggering circuit breakers and closing down more than 12%. The three major U.S. stock indices also opened lower, with the Dow Jones plummeting by 1000 points.
Last Thursday, the Federal Reserve decided not to lower interest rates, raising concerns about policymakers falling behind the curve amid declining inflation and a weak economy. On Friday, the U.S. Labor Department reported that nonfarm payrolls increased by only 114,000, with the unemployment rate rising to 4.3%, triggering signals known as the Sam rule, indicating a possible recession and further deepening concerns.
However, Goolsbee stated that he doesn’t believe the situation will escalate to a recession.
“Job data is below expectations, but it doesn’t currently look like a recession,” he said. “I do believe that you need to have foresight into the trajectory of the economy to make decisions.”
He cautioned against placing too much emphasis on the global stock market sell-offs on Monday, as people worry that the Fed is waiting too long to cut rates. The Bank of Japan’s decision to raise rates last week, along with escalating geopolitical tensions in the Middle East, contributed to the market crash.
Goolsbee emphasized that the margin of error in monthly employment figures is 100,000, urging caution in drawing significant conclusions.
Nevertheless, Federal Reserve officials must also be aware that market trends may indicate a change in the economic direction. “If the market trends over the long term give us a sign that we are seeing a slowdown in economic growth, then we should react to that,” Goolsbee said.
Following the meeting last week, where interest rates were kept at their highest level in over 20 years, indicating that policymakers want to see more evidence of cooling inflation before considering rate cuts, Federal Reserve Chair Jerome Powell suggested that cutting rates as early as the September meeting may be appropriate.
However, the latest employment report released on Friday fell below expectations, prompting some Fed watchers to believe that the central bank should have considered cutting rates at the July meeting.
“The Fed’s job is very simple: to maximize employment, stabilize prices, and maintain financial stability,” Goolsbee said. “Therefore, if there’s any deterioration in any aspect, we will address it.”
After his speech, data showed that U.S. service sector activity rebounded from a four-year low last month, with the service employment index rising for the first time since January. Nonetheless, these positive developments failed to calm market volatility. Despite this, U.S. stock indices moved away from the daily lows after the service sector data was released.
Meanwhile, U.S. Treasury yields plummeted as bond prices surged in a flight to safety. The U.S. dollar depreciated against a basket of major trading partner currencies to near its lowest levels of the year.
Reuters reported that Matthew Martin, an economist at the Oxford Economics Research Institute, stated that the U.S. service sector data “supports our view of an economic transformation rather than imminent collapse,” suggesting that the expectations of a significant rate cut in September may be overstated.
Neil Shearing, Chief Economist at Capital Economics, told Reuters, “The Fed’s response will depend on two factors: the extent to which the real economy downturn risks materialize and whether significant market sell-offs will trigger certain events.”