A top Federal Reserve official warned Monday that the central bank’s fight against inflation may come with a painful cost: higher unemployment.
Austan Goolsbee, president of the Federal Reserve Bank of Chicago, said in remarks delivered in London that the Fed is confronting a series of persistent supply shocks that have kept inflation elevated, according to reporting adapted from the Associated Press.
Goolsbee cited higher oil prices tied to the Iran war and tariffs as examples of pressures that have driven up costs.
A tougher choice for the Fed
Ordinarily, Goolsbee said, the Fed might wait for supply shocks to fade rather than raise borrowing costs in response. But he argued that repeated and persistent shocks leave the central bank with fewer options.
“The only way to bring inflation down is to raise rates and narrow the gap between supply and demand,” Goolsbee said in a written copy of his remarks.
He added that forcing inflation back to the Fed’s 2% target quickly would likely require weaker employment conditions.
“Forcing inflation back to target in the short run means pushing employment below target. … In the short run, supply shocks force a difficult trade-off” between low inflation and maximum employment, Goolsbee said.
Speaking later with reporters, he put the trade-off more bluntly: “It’s going to be painful,” adding, “It would necessarily be painful.”
Remarks contrast with Fed chairman’s stance
Goolsbee’s comments contrasted with Federal Reserve Chairman Kevin Warsh’s remarks last week after the Fed raised its key interest rate for the first time in three years to about 3.9%.
“I don’t believe that we need to do harm to the labor markets to achieve our objective,” Warsh said at the news conference.
The Fed typically combats inflation by lifting interest rates, which makes borrowing more expensive and can cool spending by consumers and businesses. Historically, rate increases have often slowed economic growth and, in some cases, contributed to recessions.
But the recent record is mixed. In 2022 and 2023, the Fed sharply raised interest rates, and inflation fell without a significant rise in unemployment or a major slowdown, according to the source material.
More than one hike?
Goolsbee also suggested the Fed may need more than the one additional rate hike this year that policymakers forecast last week as a group.
He told reporters that rising investment in artificial intelligence data centers may also be contributing to inflation, suggesting strong demand could be playing a role alongside supply pressures from oil.
If inflation is driven mainly by supply shocks, Goolsbee said, one more rate hike could be enough. But he warned that the outlook changes if the evidence points to stronger demand.
“And if we get evidence that convinces us that it’s coming from demand, then it likely would not be enough,” he said.
