WASHINGTON, Feb 24 (Reuters) – The U.S. Federal Reserve could resume cutting interest rates if inflation starts to fall, but it would be risky to use expected productivity growth as a reason to loosen monetary policy now, Chicago Fed president Austan Goolsbee said as he waded into what is emerging as a core debate at the U.S. central bank.
“I’m optimistic that by the end of ’26…it would be appropriate that (the policy rate) go down several more cuts,” Goolsbee said in comments to journalists on Monday ahead of an address on Tuesday to the National Association for Business Economics. “But…I’m a little concerned about front loading that too much if there’s not yet evidence that inflation is headed back to 2%, and so far my read is we do not yet have that.”
Indeed inflation is running about a percentage point above the Fed’s target with little progress over the past year.
Goolsbee said in particular the Fed should not bank on growth in productivity to lead to lower price pressures, a key argument advanced by Fed chair nominee Kevin Warsh and current Governor Stephen Miran. Both have said they consider a developing productivity surge solid enough to justify looser monetary policy, likening the moment to when former Fed chair Alan Greenspan in the mid-1990s argued against rate hikes at a time when he suspected improved productivity would allow strong growth without inflation.
“It really isn’t the same situation,” Goolsbee said, noting that Greenspan merely delayed eventual rate hikes, while the argument now is about the wisdom of cutting the policy rate at a moment when inflation remains above target and has been there for several years.
“You want to be extremely careful…You can overheat the economy easily” if policy is based on expectations about the impact of investments that do not produce results “as grand as what was forecast. Then you have a big overhang and you just go into a regular downturn,” Goolsbee said. “Let’s be a little bit careful, circumspect.”
He noted that expectations of future productivity gains can also boost consumption today, a dynamic he said he sees playing out in places like Cedar Rapids, Iowa, where local contacts told him data center construction has made it hard to hire workers.
“Nobody can hire an HVAC person because data centers are absorbing all the people….Stuff’s getting expensive,” he said. The situation “feels like we have not loosed the bounds of gravity. It feels like, hey, we got a limited scarce resource in the short run, and massive demand of AI data centers is kind of overheating and overloading.”
Similar ideas were echoed in staff presentations at the Fed’s January meeting, according to minutes of the session which reflected an emerging focus at the Fed about how AI investment and changes in productivity may influence the outlook.
Staff projected some modest boost in the economy’s underlying potential, but also said that in the near term demand “was expected to outpace potential growth” for the next two years, potentially putting upward pressure on prices.
The Fed is expected to hold rates steady again at the upcoming March 17-18 meeting,; with investors not expecting another reduction until July, when Fed chair nominee Kevin Warsh is expected to be confirmed.
Goolsbee said he anticipates inflation will be heading downward by then, with the influence of tariffs on import prices likely waning, a process he said could be sped up by the recent Supreme Court ruling tossing out many of the levies.
But rate cuts need to wait for proof.
“We are failing if we’ve got three to three and half percent inflation that is not going away,” he said.
(Reporting by Howard Schneider; Editing by Chizu Nomiyama )
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