Fed’s Goolsbee Warns Debt-Limit Showdown Is Clouding Economic Outlook
Federal Reserve Bank of Chicago President Austan Goolsbee said a protracted showdown over the debt ceiling will make the Fed’s job much more difficult as it tries to assess the impact of bank-sector turmoil, which he said is leading to tighter credit conditions.
He called on lawmakers to get the job done.
“They have to figure it out. They have to raise the debt ceiling,” he said.
Goolsbee was head of President Barack Obama’s Council of Economic Advisers during the major debt-limit impasse in 2011, when the US avoided default but saw its credit rating downgraded. Fed Chair Jerome Powell, not yet at the central bank at the time, played an integral role convincing Republican lawmakers to reach an agreement to raise the borrowing limit.
Goolsbee said it’s too soon to know what Fed policymakers should do at their next meeting in June, reiterating remarks he made last week. He said the Chicago Fed’s business contacts and lending officers are reporting that a credit crunch — “or at least, a credit squeeze” — is beginning, after a string of bank failures since early March.
A potential default, or even a showdown that goes right up to the deadline, could lead to a severe drop in consumer confidence, add to stress in the financial sector and push up interest rates for consumers, he said.
“We’re more than a month away from the next FOMC meeting,” he said. “I don’t think we can decide what we should do with rates now, we have to see what’s happening with these conditions.”
President Joe Biden will host House Speaker Kevin McCarthy and other congressional leaders at the White House Tuesday to discuss raising the ceiling. Treasury Secretary Janet Yellen has estimated the US could run out of room to keep paying its bills on time as early as June 1.
Fed officials raised interest rates last week by a quarter point to a 5%-5.25% target range, the highest level since 2007, while signaling they could pause rate hikes at their meeting in June. The recent banking turmoil has clouded the economic outlook, but some policymakers have said they remain focused on taming inflation, which has cooled but is still double the Fed’s 2% target.
Goolsbee, who votes on monetary policy decisions this year, said strains from the banking sector could hurt growth and reduce the need for officials to keep raising rates. He said policymakers will need to assess the impact of reduced bank lending on the economy.
A key report on bank lending in the first quarter, from the New York Fed, is due out Monday at 2 pm.
Fed officials will also see fresh data on prices Wednesday when the Labor Department releases the consumer price index report for April.
Data released last week showed the labor market is still resilient, as US employers added an unexpectedly solid 253,000 jobs last month. The unemployment rate fell back to a multi-decade low of 3.4%, and average hourly earnings rose 4.4% from April last year.
Fed officials saw rates peaking at their current level this year, according to the median estimate published in March. Policymakers release their economic projections quarterly, with the next update coming in June. Investors see the Fed holding rates at this level until September.