Chicago Fed President: Interest rates need to continue to decline to achieve an economic "soft landing".

Chicago Federal Reserve Chairman Gulsby said at a meeting on Monday that in order to achieve an "soft landing" for the economy, interest rates need to continue to fall. Despite a significant decline in inflation and a weakening labor market, interest rates are still close to their highest level in 20 years even after the Federal Reserve lowered its target rate by 50 basis points last week. Gulsby has been serving as the Chicago Federal Reserve Chairman since January 2023 and will have voting rights on the Federal Open Market Committee (FOMC) next year. Gulsby said at the annual meeting of the American State Treasurers on Monday in Chicago, "What I have seen in the past two years is a significant decline in inflation, but it has not caused an economic recession, which is unprecedented in the United States and even worldwide." He added, "Now the unemployment rate is slowly rising to 4.2%, and many people believe this is a fundamentally stable level of full employment that we hope the unemployment rate will maintain." Gulsby pointed out that if the monthly inflation data continues at the current pace, the inflation rate will meet the Fed's annual target of 2% in a year. He also stated that real-time economic activity indicators show robust growth in GDP in the third quarter. "The overall economy has some warning signs, but also demonstrates significant strength," he said. "It would be ideal if we could freeze the current economic situation in its current state." Gulsby also mentioned the decision of the FOMC last Wednesday. The FOMC voted to lower the federal funds rate target by 50 basis points to a range of 4.75% to 5.0%, the first rate cut since July 2023. "Interest rates are still at a high level for the past 20 years, much higher than any neutral level that anyone thinks is reasonable," Gulsby said. The so-called neutral level refers to the level of interest rates that neither stimulate nor suppress economic growth. He further explained, "It may be difficult to maintain the stability of the current economy if interest rates remain this high." For Gulsby, the discussion about whether the Federal Reserve will cut interest rates by 25 basis points or 50 basis points at a particular meeting is not as important as the ultimate target rate. This means that interest rates will continue to fall over the next year or so, gradually approaching the neutral level. According to the median economic forecast of the FOMC in September, it is expected that interest rates will be lowered by 100 basis points this year, and another 100 basis points next year, which will bring the target rate to a range of 3.25% to 3.5%. The median forecast for long-term interest rates was raised for the third consecutive quarter and is currently slightly below 3%. This is seen as the committee's collective prediction for the neutral interest rate.