Chicago Fed President Austan Goolsbee said strong demand, not just supply shocks, may now be adding to US inflation. He warned there would be no ambiguity about how the Fed would respond if that proves true, hardening the case for higher rates.
Strong US demand may now be feeding inflation alongside lingering supply shocks, Chicago Fed President Austan Goolsbee said in remarks prepared for the Official Monetary and Financial Institutions Forum in London. According to Reuters: "there is no ambiguity about how the Fed needs to respond" if demand keeps overheating.
Goolsbee pointed to investment in artificial intelligence as a factor that could push output beyond what the economy can absorb. He argued that supply shocks, which theory suggests should fade quickly, have instead proven more persistent and can no longer be ignored in setting policy.
Forecasters keep pushing back the inflation peak
Goolsbee noted that oil, tariffs, and commodity prices have led forecasters to repeatedly delay the date when inflation was expected to peak and start falling, calling that pattern not comforting. He said the central bank needs evidence the shocks are actually fading, or it becomes hard to see a credible path back to the Fed's 2% target.
Inflation was most recently estimated at 3.7% in July, well above that target, and has shown little recent improvement. Goolsbee said that in an environment like this, the only way back is the hard way, meaning higher interest rates and the growth and jobs risks that come with them.
Rate path already hardening
The comments follow last week's Fed decision, when policymakers unanimously raised rates by 25 basis points to 3.75%-4.00%, describing economic activity as solid and domestic spending as resilient. At the press conference, Fed Chairman Kevin Warsh emphasized the strength of domestic spending and business investment.
Goolsbee is not a voter on the FOMC this year, and he did not comment on the outcome of last week's meeting or offer a monetary policy outlook of his own. Still, his remarks signal that further resilience in demand would make it increasingly difficult for the Fed to justify holding off on additional rate hikes.
Sources: Investinglive, Investing.com
Trading involves risk.
Risk Disclaimer
