Two Federal Reserve officials expressed some optimism on inflation Thursday, but neither suggested interest rates would change anytime soon.
Chicago Fed President Austan Goolsby said Thursday that despite some bright spots, inflation is still trending in the wrong direction. A little later in the afternoon, New York Fed President John Williams said he expected inflation to start trending downward.
In a live interview with CNBC from his hometown, Goolsby declined to speculate on where he thinks interest rates are headed. But he said the focus remained squarely on inflation, echoing sentiment expressed a week ago by new Fed Chairman Kevin Warsh.
“We’re starting to see a gradual improvement in services inflation, and I know that’s what we want,” Goolsby said on the CBOE trading floor. “But right now, between the two sides of the Fed’s mandate: the inflation side and the job market side, the issue is clearly on the inflation side.”
The comments came hours after the Commerce Department reported that core inflation, as measured by the Personal Consumption Expenditure Price Index, a measure recommended by the Federal Reserve, hit 3.4% in May, the highest level since October 2023.
Prices rose almost evenly, with goods rising 0.4% and services rising 0.5%, the largest increase since January. On the financial side, much of the increase was driven by energy, which rose 6.5%, while services, whose rise was accelerated by 0.8%, was driven by transportation services, a sector sensitive to gasoline prices.
Market expectations are that the Fed may raise its benchmark interest rate in September, but Goolsby did not intend to commit to his position. He said he “applauded” Warsh’s move to block such “forward guidance” from Fed communications. The Federal Open Market Committee’s post-meeting statement was much shorter than usual, and forward guidance language was also removed.
“Let’s try to streamline and get some forward guidance out of that. Let’s stop speculating about the path of interest rates,” he said. “I think it’s healthy to have this reset.”
Mr. Goolsby dispelled any notion of resentment within the Fed now that Mr. Warsh has taken office. He noted that the two were “entrench associates” during the global financial crisis, when Warsh helped design relief programs and Goolsby was a senior economic adviser to President Barack Obama.
“He comes in with new ideas. He’s a serious guy. You could see in the press conference that he brings a different style,” Goldsby said. “Before and since my time at the Fed, I have routinely been concerned about using forward guidance and speculating about the future of interest rates.”
Williams understands the reason for hope.
New York Fed President Williams said he was satisfied with current interest rates but expected inflation to start trending downward.
The first comments from influential policymakers since last week’s meeting suggest concerns about inflation are waning, but still not enough to talk about rate cuts.
“Given the rising levels of inflation, it is imperative that we sustainably return inflation to our long-term goal of 2%,” Williams said in a speech at the Crane Money Fund Symposium in Jersey City, New Jersey. “The current monetary policy stance is well positioned to make that happen.”
Williams gave three reasons why he thinks inflation will ease. The hope is that as the Iran war nears an end, energy prices will ease. And expectations that shelter inflation will slow as rent increases are modest.
He said inflation would fall to 3.5% this year from the current 4.1% and “continue on a modest trajectory” back to the Fed’s 2% target by 2028.
“Like the World Cup, the economy can move in surprising and unpredictable directions,” he said. “One thing is certain: my unwavering commitment to supporting maximum employment and sustainably lowering inflation to our long-term goal of 2%.”
According to CME Group’s FedWatch, the next FOMC meeting will be held on July 28-29, and the market expects the probability of a rate hike to be about 30%. Mr. Goldsby is a non-voting participant at this year’s FOMC meeting, but is scheduled to be eligible to vote in 2027. Mr. Williams is a permanent voter.
