(Reuters) -The U.S. economy does not look like it is in recession despite weaker-than-expected jobs data, but Federal Reserve policymakers need to carefully monitor changes in the environment to avoid being too restrictive with interest rates, Chicago Fed Bank President Austan Goolsbee said on Monday.
"You only want to be that restrictive if you think there's fear of overheating," Goolsbee said in an interview with broadcaster CNBC. "These data, to me, do not look like overheating."
Goolsbee also cautioned against taking too much signal from a global stock market selloff that accelerated on Monday, amid fears the U.S. central bank has waited too long to begin cutting interest rates.
"The law doesn't say anything about the stock market, it's about the employment and it's about price stability," he said.
Nonetheless, officials need to be aware of the possibility that the move in markets is signaling a change in the economy's direction.
"If the market moves give us an indication over a long arc that we're looking at a deceleration of growth, then we should react to that."
Stocks were sharply lower in early trading on Wall Street, with their recent slide accelerating on Monday after Japan's Nikkei suffered its biggest drop since 1987.
U.S. Treasury yields, meanwhile, plunged as bond prices shot higher in a safe-haven bid, and the U.S. yield curve normalized from inversion for the first time in more than two years with yields on two-year notes dropping below those for 10-year securities.
The dollar weakened to near its lowest levels of the year against a basket of major trading partner currencies.
The Fed kept its benchmark interest rate unchanged last Wednesday in its current 5.25%-5.50% range and signaled that it was on course to begin cutting rates in September, but that decision was followed by worrying signs that the labor market might already have turned.
The number of Americans filing new applications for unemployment benefits increased to an 11-month high while job gains markedly slowed in July and the unemployment rate rose to 4.3%.
It has cast doubt on Fed Chair Jerome Powell's assertion directly after the latest policy meeting that the labor market appeared to be normalizing gradually, which would allow the central bank to take a bit more time before cutting rates to ensure inflation was fully quelled.
Instead, economists and traders honed in on Powell's other comments that the Fed would respond if there was an unexpected deterioration in the labor market.
Investors in contracts tied to the Fed's policy rate currently put about an 90% probability that the Fed will now deliver a half-percentage-point rate cut at its Sept. 17-18 meeting, and maintained bets that the policy rate will end 2024 in the 4.00%-4.25% range.
"The Fed’s response will be determined by two factors: the extent to which downside risks to the real economy materialize, and whether the sharp sell-off in financial markets causes something to break," said Neil Shearing, group chief economist at Capital Economics.
(Reporting by Lindsay Dunsmuir and Dan Burns; Editing by Toby Chopra and Andrea Ricci)