Fed Moves to Ease 'CPI Shock'... "PCE Inflation Important... Entering 2% Inflation Path"

Goolsbee Chicago Fed President
"Cannot Judge Inflation Trend by One Month CPI"
"Monetary Policy Limited... Prolongation May Raise Unemployment"

Austan Goolsbee, President of the Chicago Federal Reserve Bank, has moved to ease market concerns over the unexpectedly high 'January Consumer Price Index (CPI) shock.' He emphasized that the Personal Consumption Expenditures (PCE) price index, not the CPI, is important and that inflation is on a path toward the central bank's 2% target.

In a speech at the Council on Foreign Relations (CFR) in New York on the 14th (local time), President Goolsbee stated, "Even if inflation comes in higher than market expectations over the next few months, it will still be consistent with a path back to our target."

Goolsbee's remarks came just one day after the release of the January CPI. When the January CPI was revealed to have risen 3.1% year-over-year, exceeding the market forecast of 2.9%, market expectations for rate cuts retreated, causing a sharp drop in the stock market.

Regarding this, President Goolsbee pointed out that inflation trends should not be judged based on a single month's figures. This is interpreted as an attempt to calm the market's excessive concerns over the January CPI increase. Just last week, he expressed the view that more data like what has been obtained so far is needed to enter the path of normalization.

He also emphasized that the Fed's 2% inflation target is based on the PCE price index, not the CPI, and that the two indicators can differ significantly. The Fed currently views the core of inflation as the service sector and places the greatest importance on the PCE price index, which has a lower weighting for housing costs. The housing cost weighting in the PCE price index is about 20%, much lower than the 35% in the CPI. Furthermore, the core PCE price index, which excludes energy and food to show the underlying trend in prices, has already fallen to the 2% range. As of December last year, it rose 2.9% year-over-year, falling below 3% for the first time in 2 years and 9 months since March 2021. The January PCE price index will be released on the 29th.

President Goolsbee said, "Rate cuts need to be connected with confidence that we are on the path toward the target," adding, "Many data points we have confirmed over the past six months show that path, but perhaps the standard is too strict."

He also expressed the view that the Fed's monetary policy is quite restrictive. He said, "I do not support waiting until annual inflation on a 12-month basis reaches 2% before starting rate cuts," and added, "The current monetary policy of the central bank is quite restrictive." He further noted, "If we stay at this restrictive level for too long, we will have to worry about a sharp rise in unemployment."

President Goolsbee also said, "Inflation expectations remain well-anchored," and added, "The Fed has committed to bringing inflation back to the target and has backed that up by raising the federal funds rate by more than 500 basis points (1bp = 0.01 percentage points)."

However, President Goolsbee does not have voting rights at this year's Federal Open Market Committee (FOMC) meetings.