Another Federal Reserve official hinted at an interest rate cut: waiting too long to act poses risks of a recession

Another Federal Reserve official hinted that the Fed is closer to cutting interest rates. This time it was the dovish Chicago Fed President, Guersby.

On Thursday, July 28, 2025, Guersby, who has voting rights at the 2025 FOMC meeting of the Federal Reserve's Federal Open Market Committee, warned that there is a risk of causing an economic recession if Fed officials wait too long to relax monetary policy. He told the media that the Fed may need to lower borrowing costs quickly to prevent further deterioration in the labor market, which has been cooling for the past few months.

Guersby stated that the Fed's fight against inflation is ongoing, but the improvement in inflation data over the past few months has convinced him that inflation has returned to the Fed's target of 2%. He said, "The fight against inflation is not over yet, but when I see the data improve for several months in a row, I feel much better." He pointed out that the U.S. labor market is "definitely a worrying area," and while price pressures ease, maintaining high interest rates means that monetary policy is "significantly tightening."

Guersby declined to reveal when he expects a rate cut. When asked if the Fed has the basis for a rate cut, Guersby replied that this is the way to achieve the 2% target. When asked if Fed officials would jeopardize what Guersby called the "golden path" - the prospect of winning the anti-inflation war without causing a recession, Guersby immediately responded, "Yes. If you want to be as restrictive as we are now, you are taking a risk on the golden path."

Guersby said that the real federal funds rate, the difference between the interest rate and the inflation rate, is at a multi-decade high. This means that the real federal funds rate has tightened significantly. "When would you want this kind of restrictive (environment)? As I said, if you are worried about the economy overheating, you should adopt restrictive policies, but the economy is not overheating."

Also on Thursday, Dallas Fed President Logan, who has voting rights at the 2026 FOMC meeting, did not discuss monetary policy. She stated at a banking and finance conference at the Dallas Fed that the Fed is ensuring that banks can make progress in using the Fed's emergency liquidity when necessary. The Fed's discount window, a liquidity tool that provides loans to deposit-taking banks, "effectively supports the stability of banks and the financial system, thereby promoting credit flow to households and businesses."

Logan believes that the current federal deposit insurance limit may be too low, especially considering the Silicon Valley bank collapse that triggered the U.S. banking crisis last year. The last time the U.S. Congress raised the federal insurance deposit limit was in 2008, and the economy has grown significantly since then. If the limit on such deposit insurance grows in line with GDP, the current limit of close to $500,000 is far above the $250,000 limit from 2008 to now. The demand to protect depositors after the Silicon Valley bank collapse shows that this limit is too low.

Before the speeches of Guersby and Logan this week, several Fed officials had hinted at an imminent rate cut.

Fed Chairman Powell said earlier this week that, including data from last week, U.S. inflation made more progress in the second quarter of this year, and the recent three inflation reports were "quite good," "indeed to some extent strengthened" the Fed's confidence that inflation will continue to decline to the target On Wednesday, the "third in command" of the Federal Reserve and President of the New York Fed, Williams, stated that if inflation continues to slow, there will be a rate cut in the coming months. There are signs that the labor market in the United States is cooling down, and the inflation data for the past three months is "getting closer to the deflation trend we want."

Earlier this year, considered a top candidate for the next Federal Reserve Chairman, Federal Reserve Board Member Warsh stated on Wednesday that the Fed is closer to cutting rates, but hinted that the timing is not yet right. The media believes that Warsh's remarks this time show a change in his attitude. Two months ago, he hinted that there might not be a need to cut rates before December this year, but this Wednesday, he said that recent data shows progress in inflation recovery and hinted that he hopes to see "more evidence indicating" that inflation is on a sustained downward trajectory