Chicago Fed President Austan Goolsbee said he expects more interest rate cuts this year, but only once inflation is moving back towards the 2% target. He spoke on Tuesday in Washington, D.C., ahead of an event held by the National Association for Business Economics.
He said recent progress on inflation has stalled and that inflation still needs to improve. He also said it is not clear that current Federal Reserve policy is even restrictive.
Inflation Progress Must Resume
Goolsbee said core services inflation excluding housing remains high and that policy-makers should stay alert. He warned that cutting rates based on expected productivity gains could risk overheating.
He said productivity gains cannot be relied on to bring inflation down or used as a reason to cut rates. He also said he is concerned if inflation stays above target.
He said consumer spending has been the main driver of economic growth, rather than AI-related investment. He added that economic growth and the labour market do not appear 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 any return to a scarce reserves regime would require weighing the pros and cons.
Market Implications For Rates
We are seeing a clear signal that interest rate cuts are not coming as soon as many had hoped. The latest Consumer Price Index report for January 2026 showed core inflation at 3.8%, stubbornly refusing to move closer to the 2% target. This means the “higher for longer” rate environment is the most likely scenario for the coming months.
For traders in interest rate derivatives, this suggests positioning against near-term easing. We’ve seen the market quickly reprice Fed Funds futures, which now imply less than a 50% chance of a rate cut before the July meeting. That’s a massive shift from just a month ago when a cut in the second quarter was seen as almost certain.
The underlying economy doesn’t appear fragile, so betting on a major downturn seems risky. January’s jobs report showed a solid gain of 215,000 jobs, and recent retail sales data beat expectations, underscoring that consumer spending is still driving growth. This resilience could put a floor under equities, but the high rates will likely cap any significant rally.
The primary concern remains the stickiness in core services inflation, excluding housing, which is where the inflation battle is truly being fought. Looking back, this component has barely budged from the levels we saw throughout most of 2025. Until we see real progress there, the Federal Reserve will remain vigilant and hesitant to act.
This environment of stalled inflation and a cautious Fed likely means equity market volatility will increase. For options traders, strategies that benefit from sideways movement or provide downside protection, such as selling out-of-the-money call spreads or buying puts on major indices, look attractive. The current VIX reading, hovering around 16, might be underpricing the risk of a sharp move on the next major data release.
