Chicago Fed President Guursby said in an interview that the long-term trend of the labor market and inflation data proves that the Fed's interest rate cut should start soon and gradually relax its monetary policy within the next year.

Guursby said that from a long-term perspective, inflation is significantly declining, and the speed of the rise in unemployment exceeds the expectations of Fed officials in June.

Given the more optimistic inflation data and less optimistic unemployment rate data, Guursby said, "It is obvious that interest rates not only need to be lowered as soon as possible," but also need to be lowered multiple times within the next 12 months, as predicted by the Fed in its recent dot plot.

Guursby sees more warning signs of labor market cooling. In recent months, officials have welcomed the cooling of the labor market, believing that it could lead to sustained economic growth. However, the continued weakness increases the possibility of further labor market cooling and may "evolve into a worse situation".

The US Department of Labor will release the August nonfarm payroll report on Friday, which will provide clues to this key issue. The August employment report can generally help determine the expected magnitude and pace of rate cuts.

At the same time, Guursby said he will not rely too much on employment data for a single month. He said, "I don't want us to make decisions based on a data point."

Over the past year or so, the Fed has kept its benchmark interest rate between 5.25% and 5.5%. With the decline in inflation during the same period, Guursby said that the Fed's benchmark interest rate has exerted increasing downward pressure on economic demand.

He stated that the policy is now at the tightest level in the entire tightening cycle, which began in early 2022. "If we maintain the tightening for a long time, we will have to deal with the employment aspect of our mission," which means high interest rates will harm the labor market.

Over the past year, the unemployment rate has gradually risen, reaching 4.3% in July, the highest level since October 2021. The median forecast of Fed officials is that the unemployment rate will only rise to 4.2%.

He said, "This does not necessarily mean a recession. But it does mean that we must now pay more attention to the employment aspect of our mission."

Gulspie expressed more confidence in inflation being able to reach the Fed's 2% target path. He believes that an economic soft landing, where inflation cools without a recession, is still possible.

Despite conflicting information in the data, the recent Federal Reserve Economic Conditions Survey (the Fed's Beige Book) indicates some uncertainty about the outlook. In the survey, nine out of twelve Fed districts reported flat or negative growth.

The Chicago Fed president stated that due to the significant differences between this business cycle after the pandemic and other expansion periods, it is difficult to interpret the economic outlook.

Earlier, during a speech in Jackson Hole, Wyoming, Fed Chairman Powell explicitly stated that the central bank is prepared to cut interest rates.

Traders in the financial markets are debating the potential scale of the Fed's actions at the meeting on September 17-18. Economists generally expect a 25 basis point rate cut, but some believe that if Friday's employment report shows weakness, it may prompt the Fed to take a larger 50 basis point rate cut.

Editor/Rocky