US stocks: Fed’s Goolsbee says rate cuts are appropriate as inflation falls, but too early to bet on productivity

The U.S. Federal Reserve could resume cutting rates if inflation starts to fall, but it would be risky to use expected productivity growth as a reason to ease monetary policy now, Chicago Fed President Austan Goolsbee said as he waded into what is becoming a core debate at the U.S. central bank. “I’m optimistic that by the end of ’26 it would be appropriate for (the policy rate) to undergo a number of further cuts,” Goolsbee said in comments to reporters on Monday, ahead of a speech on Tuesday to the ⁠National Association ⁠for Business Economics. “But… I’m a little concerned about too much frontloading when there’s no evidence yet that inflation is going back to 2%, and so far my view is that we don’t have that yet.”Inflation is about one percentage point above the Fed’s target, with little progress made over the past year.

Goolsbee said the Fed especially should not rely on productivity growth leading to lower price pressures, a key argument made by Fed Chairman Kevin Warsh and current Governor Stephen Miran. Both have said they see evolving productivity growth as solid enough to warrant looser monetary policy, likening the moment to when former Fed Chairman Alan Greenspan argued against raising interest rates in the mid-1990s, at a time when he suspected that improved productivity would allow strong growth without inflation.“It’s really not the same situation,” Goolsbee said, noting that Greenspan has merely postponed eventual rate hikes, while the argument now turns to the wisdom of cutting the policy rate at a time when inflation remains above target and has been for several years. “You want to be extremely careful… You can easily overheat the economy” if policy is based on expectations about the impact of investments that don’t produce results “as great as what was predicted. Then you have a big overhang and you just end up in a regular recession,” Goolsbee said. “Let’s be a little careful, observant.”

He noted that expectations of future productivity gains today could also drive consumption, a dynamic he said he sees playing out in places like Cedar Rapids, Iowa, where local contacts told him that data center construction has made it difficult to hire workers. “No one can hire an HVAC worker because data centers are absorbing all the people… Things are getting expensive,” he said. The situation “feels like we haven’t let go of the limits of gravity. It feels like we have a limited scarce resource in the short term, and the huge demand for AI data centers is kind of overheating and overloading.”

Similar ideas were reflected in staff presentations at the Fed’s January meeting, according to minutes of the session that reflected an emerging focus at the Fed on how AI investments and changes in productivity could impact the outlook.

Staff predicted a modest boost in the economy’s underlying potential, but also said that in the short term, demand was “expected to exceed potential growth” over the next two years, potentially putting upward pressure on prices. The Fed is expected to hold rates steady again at its upcoming March 17-18 meeting; with investors not expecting another cut until July, when Fed Chairman Kevin Warsh is expected to be confirmed.

Goolsbee said he expects inflation to fall by then, with the impact of tariffs on import prices likely to diminish, a process he said could be accelerated by the recent Supreme Court ruling eliminating many of the duties.

But interest rate cuts must wait for evidence. “We fail when we have three to three and a half percent inflation that doesn’t go away,” he said.