How Upcoming Economic Data Could Affect Fed’s Decisions on Interest Rates

Federal Reserve officials said Monday their large interest rate cut last week doesn’t mean that they think the economy is weak—but they are keeping a close eye on indicators for possible warning signs,

In a spate of appearances Monday, Fed officials defended their move to reduce interest rates by 50 basis points, a larger than typical move. Officials said the larger cut better aligns rates with the economy’s performance.  

Inflation has cooled to 2.5%, moving closer to the Federal Reserve’s annual 2% target, while unemployment unexpectedly fell to 4.2% in August, a low level by historical standards. Chicago Fed President Austan Goolsbee said the Fed used the half-point cut to keep the economy from worsening.

“Inflation is basically close to where you want it and unemployment is close to where you want it,” Goolsbee said at a state treasurers’ meeting in Chicago.  “If rates are this high, we’re not going to remain at that freeze frame moment for too long.”

Upcoming Rate Cuts Hinge on Data

Minneapolis Fed President Neel Kashkari said in an interview on CNBC that the Fed would likely make “smaller” cuts at upcoming meetings depending on the economic data. He said despite the most recent cut being larger than normal, interest rates are still putting pressure on the economy.

“There’s a lot of uncertainty about where ultimately we are headed,” Kashkari said. “We just have to watch and see how the economy evolves.”

Fed in Position to Move if ‘Warning Signs’ Appear

Goolsbee said there have been some “warning signs” in recent economic measures, including job vacancy rates and delinquencies on auto loans and credit cards. However, consumer spending and wage growth remained strong, showing continued economic momentum. 

“It’s a little bit of a cautionary period,” Goolsbee said.

Atlanta Fed President Raphael Bostic said the 50-basis-point cut puts the central bank in a better position to react if officials are wrong about their economic projections. If inflation doesn’t continue to fall, the Fed can slow its pace of rate cuts, but if the labor market continues to weaken, the central bank won’t have to cut as quickly.

“There remains some uncertainty about whether we can really be fully confident that both our inflation and employment goals are fully within reach,” Bostic said.