Chicago Fed’s Goolsbee Emerges As First Rate Hike Dissenter, Urges “Caution” Amid Bank Failures

There appears to be “some” confusion at the Fed, or perhaps just a rising tide of politically-motivated dissent.

One day after NY Fed president John Williams, the man who sparked a revolt at the most important regional Federal Reserve bank for being too clueless, said that he doesn’t think rate hikes are behind the “issues” at failed banks, and even more idiotically, just hours after saying this morning that he doesn’t think bank failures will be a “big negative” for the US economy, another Fed president – this time the Fed’s extremely political Chicago Fed president – who previously served as Obama’s chief economist (and whose ascent to the top of the Chicago Fed was marred in yet another Fed scandal), refuted everything Williams said earlier when he warned that the Fed should exercise “prudence and patience” in raising interest rates further as central bankers assess just how much last month’s banking turmoil will contribute to tighter lending conditions.

“Given how uncertainty abounds about where these financial headwinds are going, I think we need to be cautious,” Goolsbee said Tuesday in prepared remarks for an Economic Club of Chicago event. “We should gather further data and be careful about raising rates too aggressively until we see how much work the headwinds are doing for us in getting down inflation.”

Translation: it’s time to pause the Fed’s rate hikes (which effectively would mean the end of the tightening cycle) and assess the damage the Fed has already unleashed.

Goolsbee, the Fed’s newest policymaker  whose highly politicized appointment as head of the Chicago Fed saw big internal dissent as well as two opposing votes, and whose job may have been a political favor catalyzed by intervention from his headhunting wife, is even more remarkably a voter on monetary policy this year and is now the first official to signal that he may support holding rates where they are at the Fed’s May 2-3 meeting — though he stopped short of explicitly endorsing a pause.

Unlike Goolsbee, who is viewed as the Biden admin’s most dedicated plant at the Fed now that Lael Brainard has been shifted to the Treasury, most Fed officials have emphasized that even amid the uncertainties created by the bank crisis, the Fed has more work to do to bring inflation down to its 2% target (to avoid confusion, these are the same clueless hacks and career academics who two years ago said inflation was transitory).

Echoing analyses by Goldman and others, the Chicago Fed chief said that inflation and labor market data came in “surprisingly strong” at the end of 2022 and beginning of this year, but the knock-on effects of the Silicon Valley Bank collapse in March and the resulting financial-market stress may help the Fed in its campaign to cool the economy.

While Goolsbee was careful to say that the Fed should still prioritize its mission to bring down elevated price pressures, he said that signs are emerging that banks are pulling back on lending, helping the Fed. Almost as if the Fed precipitated the bank failure to enable it to achieve its economic slowdown mission faster.

“We’ve been tightening financial conditions to bring inflation down, so if the response to recent banking problems leads to financial tightening, monetary policy has to do less,” he said.

According to Goolsbee, that contraction could equal somewhere between 25 to 75 basis points of tightening, which not coincidentally is exactly what Goldman calculates last week; Goldman of course is the same bank that has also been pushing for a rate hike pause to “assess” the economic damage before resuming hikes again later in the year.

Goolsbee’s emphasis on watching credit conditions differ from that of his even dumber colleagues who insist that the Fed needs to do more to tame prices (the same prices which are soaring thanks to the Fed’s inaction in 2021), recession and credit crunch be damned.

Goolsbee’s most prominent foil is another Wall Street muppet, formern Goldman staffer and upward failing Minneapolis Fed President Neel Kashkari, who said last month that though it’ll take a while to see the full effects of the banking fallout, the Fed still has more work to do to lower inflation, and may have to hike rates all the way until 6%.

New York Fed President John Williams, a permanent voter on the Federal Open Market Committee, said Tuesday at a separate event that one more rate increase is a “reasonable starting place” for officials.

Goolsbee also nodded to the standoff in Congress about raising the country’s debt limit. “Moments of financial stress are a particularly bad time to take actions that could ignite a financial crisis on their own like, say, defaulting on U.S. Treasuries in a fight over the debt limit,” Goolsbee said.