Chicago Fed President Austan Goolsbee said he expects more interest rate cuts this year, but only after inflation is clearly moving back toward the 2% target. He spoke Tuesday in Washington, D.C., ahead of an event hosted by the National Association for Business Economics.
He said recent inflation progress has stalled and that inflation still needs to improve. He also said it is unclear whether current Federal Reserve policy is even restrictive.
Inflation Progress Must Resume
Goolsbee said core services inflation excluding housing is still high, and that policymakers should stay alert. He warned that cutting rates based on hoped-for productivity gains could overheat the economy.
He said productivity gains should not be counted on to bring inflation down, and should not be used as a reason to cut rates. He added that he is concerned if inflation remains above target.
He said consumer spending has been the main driver of economic growth, not AI-related investment. He added that economic growth and the labour market do not look especially fragile.
He said low hiring and low firing are being driven by uncertainty, which he linked to a Supreme Court tariff ruling. He also said that any return to a scarce reserves regime would require weighing the pros and cons.
Market Implications For Rates
The message is clear: rate cuts are not likely as soon as many had hoped. The latest Consumer Price Index report for January 2026 showed core inflation at 3.8%, still far from the 2% target. That makes “higher for longer” the most likely rate outlook in the coming months.
For interest-rate derivatives traders, this points to positioning against near-term easing. Markets have repriced Fed Funds futures quickly. They now suggest less than a 50% chance of a rate cut before the July meeting. That is a big change from a month ago, when a second-quarter cut looked almost certain.
The economy still does not look fragile, so betting on a steep downturn looks risky. January’s jobs report showed a solid gain of 215,000 jobs. Recent retail sales also beat expectations, showing that consumer spending is still powering growth. This strength could support equities, but high rates will likely limit the size of any rally.
The main concern is still sticky core services inflation, excluding housing—the area where the inflation fight is hardest. This measure has barely moved from where it sat through much of 2025. Until it shows real improvement, the Federal Reserve is likely to stay cautious and slow to act.
With inflation stalled and the Fed cautious, equity volatility may rise. For options traders, strategies that benefit from sideways markets or add downside protection—such as selling out-of-the-money call spreads or buying puts on major indices—may look appealing. The VIX, near 16, may be underpricing the risk of a sharp move after the next major data release.
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