Federal Reserve Bank of Chicago President Austan Goolsbee said policymakers shouldn’t place too much weight on the traditional economic idea that steep job losses are needed to quell inflation, which he said could lead officials to raise interest rates too high.

This traditionalist view, Goolsbee said, “misses key features of our recent inflationary experience and that, in today’s environment, believing too strongly in the inevitability of a large trade-off between inflation and unemployment comes with the serious risk of a near-term policy error.” The comments were prepared for delivery Thursday at the Peterson Institute for International Economics in Washington.

In speech titled “The 2023 Economy: Not Your Grandpa’s Monetary Policy Moment,” Goolsbee argued that historic economic relationships, like that between unemployment and inflation — with prices typically rising when jobs were plentiful — may not be the best guideposts today given how different the post-Covid inflationary period has been.

Goolsbee said policymakers should instead focus on how different components of core inflation are decelerating — with cooling still needed especially in housing inflation — as well as monitor productivity growth, not obsess too much on near-term real wages and keep an eye on inflation expectations.

Avoid Recession

“The unwinding of supply shocks, the composition of demand returning to more stable patterns, and Fed credibility are central to why I think it might be possible today to reduce inflation while avoiding a deep recession,” he said.

Fed officials are trying to carefully calibrate policy now following aggressive action last year to bring down 40-year-high inflation. While prices have cooled, they remain far from the Fed’s 2% target. The US central bank left rates unchanged at their meeting last week, but 12 of the 19 officials forecast one more rate increase for this year.

An update to the Fed’s preferred inflation gauge, the personal consumption expenditures index, is due out Friday, with the median estimate of economists forecasting prices rose 3.5% in August, an acceleration from July.

Goolsbee, a voter on policy this year, didn’t say whether he favors another increase or not, though he called progress so far on inflation “really excellent.”

“I haven’t decided what I’m going to do at the next one but at this kind of progress I feel comfortable with what I’ve said before: We’re moving to a period where the question is not how much more is the rate going to go up - it becomes how long are we going to keep it here,” Goolsbee said in a question-and-answer session following the speech.

He echoed comments made earlier this week that a soft landing — where inflation fully eases without causing a recession — is possible, but risks remain.

He cited higher oil prices, a slowdown in the Chinese economy, the autoworkers’ strike and a potential government shutdown as shocks that could impact the economy.

Goolsbee ended his speech by saying central bankers would be wise to stick to a key piece of advice from his Texas rancher grandfather: “Work ’til it’s dark and pray for rain.”

Speaking on Fox Business in a later interview, Goolsbee said he thinks Fed Chair Jerome Powell “is going to be remembered as a fabulous Fed president.”

“If we pull this off, if we could get inflation down this much without having a deep recession, I think they’re going to name elementary schools P.S. 2023 FOMC — this is an opportunity, not a guarantee,” Goolsbee said.

(Updates with comment from Goolsbee in penultimate paragraph.)