Chicago Fed president warns falling inflation and high interest rates could make things worse

It would be convenient if every member of the Federal Open Market Committee was always in agreement about what to do with the base interest rate— for Wall Street at least .

There would be no need for analysts to pore over remarks made by FOMC members between meetings, looking for clues, or sit through the two nail-biting days during which the committee’s 12 economists debate the state of the economy. They could simply sit back and wait for the announcement.

Unfortunately, this scenario would also massively increase the odds of the committee making a grave error, according to Austan Goolsbee, president of the Federal Reserve Bank of Chicago and member of the FOMC.

Goolsbee took office in January 2023 and immediately became a voting member when the committee was under more scrutiny than ever.

Approaching the enormous table around which the group gathers to look at historic unemployment data, auto prices, and housing costs may seem daunting—especially if you have to argue your point of view against the different opinions of others .

But Goolsbee tells Fortune he loves his job. Indeed hearing differences of judgment from around that table “isn’t hard at all. It’s great.”

More important, Goolsbee believes this gamut of perspectives from around the States keeps the FOMC on track.

“I said as soon as I got there—and nothing has changed in my observation—that in the 21st century, I think the FOMC is the world’s greatest deliberative body. No offense to the U.S. Senate or anything else,” Goolsbee tells Fortune in an exclusive interview.

“Hearing the different geographic perspectives and worldviews is super important. If we filled the committee with everybody who had the same background, from the same place and thought the same thing, I think the chance that the FOMC would make a terrible error goes way up.”

Even critics of the Jerome Powell–led FOMC might be forced to admit that, since the COVID crisis, the committee has avoided making any cataclysmic errors.

For months the question on analysts’ lips was: “Will Powell land the plane?” Will the Fed manage to wrangle rocketing inflation back down to its target of 2% without forcing the economy into a recession?

Some said it couldn’t be done.

Former Treasury Secretary Larry Summers believed that to bring inflation into the 2% range, unemployment would have to spike to 6%, and the economy would have to shrink.

Others hoped for a soft landing—JPMorgan CEO Jamie Dimon still believes the U.S. may suffer a harder landing —but so far the unemployment rate has stayed relatively steady around the 4.2% mark, while inflation has begun to wind its way down .

And while a shaky jobs report at the start of the month will jangle the nerves of some FOMC members looking nervously at the second half of the committee’s dual mandate—bringing down inflation and maintaining maximum employment—Goolsbee paints the meeting as a well-oiled machine .

“We’re pretty good. Chair Powell has been really impressive in his ability to corral a bunch of cats,” Goolsbee adds. “He impressively builds consensus among some very different thinking folks.”

Public input, not politicians

Goolsbee, who was a member of President Obama’s cabinet, is a proponent of ensuring the Fed is accountable to the public.

But this accountability does not equate to handing power to politicians over monetary policy, he says.

Individuals such as vice presidential hopeful JD Vance have framed the Fed’s independence as being at odds with American democracy . Speaking to CNN in August he said: “Agree or disagree, we should have America’s elected leaders having input about the most important decisions confronting the country.

“Whether the country goes to war, what our interest rates are—these are important questions that American democracy should have important answers for.”

But the public and politicians are two different entities with very different motivations.

Goolsbee said: “Central banks should be held accountable for their actions. And they are. The evidence of what happened during the COVID times, in my view, [is that] there’s a lot of public accountability on the central banks—not just in the United States but everywhere—and that’s totally fine.

“That’s a completely different issue than: ‘Do elections drive monetary policy decisions?’”

While White House hopeful Kamala Harris has made it clear she has no interest in meddling with the autonomy of the Fed, candidate Donald Trump wants the FOMC to work more closely with politicians.

“I think that, in my case, I made a lot of money. I was very successful,” Trump said at a press conference this month at his Mar-a-Lago club in Palm Beach. “And I think I have a better instinct than, in many cases, people that would be on the Federal Reserve or the chairman.”

Chairman Powell has resoundingly knocked back any attempts to embroil the FOMC in political discourse. If history is anything to go by, Goolsbee says, combining central banks with central government has not worked out well.

“The independence is important,” Goolsbee added. “The Federal Reserve Act is set up precisely so that the Fed chair’s term is not on an election cycle. It’s not a normal political appointee.

“There’s a federal election in the United States every two years: Is the Fed gonna not do its job every second year because there’s an election?

“All the Fed can do, and all the Fed does, is take the Federal Reserve Act—which says, you go look at maximizing employment and stabilizing prices and go base your decisions on that—that’s what we do.

“You can read the minutes for yourself. The transcript will come out. You can read word for word what everyone says. It’s not about elections, it’s about economic conditions.”

Where does that leave a September cut?

Wall Street, of course, has already placed its bets. It’s expecting a long-awaited cut in September to the base rate, which—at 5.25%—remains at a more than two-decade high.

While members of the FOMC can’t speak specifically on when or by how much a base rate cut might occur, that doesn’t stop experts from searching for hints.

The general consensus among analysts is that a first Fed cut will come in September, with a reduction of 25 basis points, to 5%. This will be followed by another in December.

The likes of Goldman Sachs expect a third in between, with the majority view agreeing that the Fed will bring the base rate back down to just over the 3% mark in 2025.

Goolsbee made no promises to those hankering for a cut , though he acknowledged that the economy has shifted in 2024.

Inflation is seemingly headed in the right direction. In the 12 months through to July the CPI increased 2.9% . While that is still above the 2% target, it was the smallest annual rise since March 2021.

“The conditions were very different when we set the rate at this level. Every month that we get an inflation like the one we just saw—where inflation is lower than expected—we just tightened in real terms,” Goolsbee said.

“If you take the rate we were holding at while inflation goes down, we’re getting tighter and tighter, and you gotta be careful.”

So Goolsbee is asking himself a question: When does the Fed really need to be that tight?

“The answer is you only want to be that tight for as long as you have to and if you’re afraid that the economy is about to overheat,” he explained. “ This, to me, is not what an overheating economy looks like.

“So I do think we need to be cognizant of being this tight for too long, because if we are, we’re going to have to think about the real side of the mandate, and employment is gonna get worse.”

This story was originally featured on Fortune.com