Chicago Federal Reserve President Austan Goolsbee hinted at a series of interest rate cuts over the next 12 months in a discussion at the Economic Club of Minnesota on Monday.

"We have a long way to come down to get the interest rate to something like neutral," Goolsbee said, suggesting that the Fed is preparing to shift away from its current restrictive stance to support economic conditions as the key focus shifts from inflation to the labor market.

Goolsbee warned a 0.7% increase in unemployment within a year is typically a precursor to a recession, noting that labor market deterioration often happens rapidly.

While acknowledging unemployment is on an upward trajectory, he highlighted that the overall rate remains relatively low, and the Fed remains watchful of the balance between inflation risks and employment trends.

"At this time, there's little evidence that inflation is stalling out at 3%," Goolsbee added, underscoring the Fed's commitment to managing inflation risks without undermining the labor market.

"There are some warning signs, but the economy still has underlying strength," Goolsbee said. He highlighted recent upticks in unemployment primarily reflect an increase in labor force participation, with payrolls continuing to grow and consumer spending holding steady.

Interest rate futures are currently pricing in nearly equal odds of a 25 or 50 basis point cut at the Fed's November meeting, according to the CME FedWatch tool.

U.S. Treasury bonds edged lower on Monday, with the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) slipping 0.2% by the close of trading.

Fitch Ratings See Only 'Modest' Rate Cuts Ahead

The Federal Reserve's easing cycle is expected to be "modest" compared to historical rate-cutting episodes, despite the surprising 50-basis-point reduction at last week's FOMC meeting.

Fitch Ratings now forecasts the federal funds rate to fall to 4.5% by the end of 2024, and further to 3.5% by the close of 2025. By mid-2026, the rate could stabilize at a neutral level of 3.0%.

Fitch Ratings expects the Fed to implement a 25-basis-point rate cut in both November and December 2024, followed by four additional 25-basis-point cuts through 2025. The agency anticipates that the Fed will lower rates at alternating FOMC meetings next year, signaling a gradual approach to easing monetary policy.

Despite the anticipated cuts, Fitch does not foresee a sharp decline in the U.S. job market. Instead, the agency believes the labor market's current softness is part of a natural recovery in the workforce after the volatility of the past 12-18 months.

With payroll growth continuing and consumer demand holding up, the Fed's cautious approach appears to be aimed at managing economic risks without triggering a sharp downturn.

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