Chicago Fed President Goolsbee Is ‘Confused’ Over the Stock Market’s Record High

The Dow Jones Industrial Average is at a record high on hopes of interest rate cuts by March, but Chicago Federal Reserve Bank President Austan Goolsbee says he's "confused" by such a bullish reaction.

While the Fed appears on course to reduce inflation to its 2% target without sparking a recession, economic data can still head south, Goolsbee cautioned in a CNBC interview on Monday.

"Our job as central bankers is to be paranoid about everything," he said, "To be on the lookout for what could go wrong, and I always emphasize that easier soft landings than this have been derailed by external shocks."

Generally, Goolsbee is more optimistic, saying last month that the economy may be on a "golden path" to reducing inflation without sparking a recession. But it's too early to speculate on when the Fed will cut rates, Goolsbee said Monday. His colleague, New York Fed President John Williams, made similar remarks on Friday.

The Dow Jones Industrial Average crossed the 37,000 mark for the first time on Thursday following the Fed's decision on Wednesday to hold interest rates steady. And the Dow was edging even higher in early morning trading on Monday. Goolsbee said he was confused by the heady market reaction to the Fed's announcement last week.

“It’s not what you say, or what the chair says. It’s what did they hear, and what did they want to hear,” Goolsbee said. “I was confused a bit — was the market just imputing, here’s what we want them to be saying?”

Markets continue to bet on about a 70% chance of rate cuts by March, according to the CME FedWatch Tool, which is based on Fed funds futures trading. And Goldman Sachs has said it expects the Fed to cut rates five times next year, starting with a cut in March.

"The market expectations of the number of rate cuts is greater than what the SEP project is," Goolsbee said, referencing the Summary of Economic Projections from the Fed's meeting last week.

Investors saw the Fed signaling future rate cuts, but Goolsbee said it wasn't.

"We were not debating or voting on future rate increases at that meeting," Goolsbee said. "We don't debate specific policies speculatively about the future."

The Fed has raised rates 11 times since March 2022 to a 22-year high of 5.25% to 5.5%, but it's held at that level since July, leading markets to increasingly expect that it is done raising rates. But every vote the central bank's rate-setting Federal Open Market Committee takes is based on the latest data.

This week the Fed's preferred inflation gauge, the Personal Consumption Expenditures Price Index, comes at at 8:30 a.m. ET on Friday. Core PCE, which excludes volatile food and energy prices, is expect to decline to a 3.2% annualized rate for November, down from 3.5% in October, according to economists surveyed by Dow Jones.

Every dip in inflation bolsters the market's case for rate cuts next year, but it's not a foregone conclusion for the Fed's voting members.

"Pre-comitting what we're going to do at a future meetings makes no sense in a transitionary environment like this where we're getting new data," Goolsbee said.