Fed's Goolsbee: with inflation rising, further rate cuts could be a mistake

By Ann Saphir

Sept 25 (Reuters) - Federal Reserve Bank of Chicago President Austan Goolsbee on Thursday cautioned against further interest-rate cuts while inflation is still above the central bank's 2% target, especially with the labor market showing signs of only mild cooling.

"I'm still basically optimistic that we're going to find that we haven't left the golden path and rates can come down," Goolsbee told reporters after an event in Grand Rapids, Michigan, referring to an optimal economic path where the labor market stays healthy and inflation heads towards the Fed's 2% goal.

Tariffs have not driven up inflation as much as feared, and their impact has mostly been confined to goods prices rather than pressuring prices more broadly, he said. But he's still worried they could.

"I want us to be vigilant and that makes me think that heavy front-loading of cuts before you know whether this is all there's going to be on inflation and before you know whether this inflation is going to be persistent runs a risk of a mistake," he said.

The Fed cut the policy rate last week by a quarter of a percentage point, and while Fed projections show policymakers are leaning towards further rate cuts this year, a good number of them don't feel that any further easing is wise.

Goolsbee did not say what his own rate-path projection is, but he did say he believes Fed policy has been "mildly restrictive, moderately restrictive," rather than so tight as to require rapid rate cuts, as new Fed Governor Stephen Miran, on leave from his job at the White House, has argued.

"If excessively restrictive rates were pushing the economy toward recession, you would think that the cyclical and interest-rate sensitive parts of the economy would be showing that, canary-in-the-coal-mine style," he said. But business investment has been surprisingly strong, he said, and while housing is weak, that weakness is not new.

In fact, he said, with inflation above the Fed's 2% target for more than four years and headed up, not down, even holding the policy rate steady at this point is the equivalent of cutting the real rate.

"I'm comfortable...cutting on a gradual path while we continue to gather information to make sure that we have not been knocked off where we want to be," Goolsbee said. "But that is the source of my discomfort with excessively front-loading rate cuts before we have determined whether we are still on the path of inflation coming back down."