Goolsbee says strong demand could force faster Fed rate hikes

Strong demand may be feeding U.S. inflation and could require faster interest-rate increases, Chicago Fed President Austan Goolsbee said Sept. 21, according to Reuters. The warning came after the Fed raised rates by a quarter percentage point last week.

The labor-market risk is where Goolsbee’s assessment diverges from Fed Chair Kevin Warsh’s. Persistent supply shocks could force the central bank to accept higher unemployment to bring inflation down, Goolsbee said in London, according to The Associated Press. Warsh offered a different assessment after last week’s rate decision: “I don’t believe that we need to do harm to the labor markets to achieve our objective,” AP reported.

Inflation remains well above the Fed’s 2% target. The Personal Consumption Expenditures Price Index, the Fed’s preferred measure, rose 3.7% in July from a year earlier and has shown little recent improvement, according to Reuters. Policymakers last week also removed language from their statement attributing elevated inflation to supply shocks in particular sectors, including energy.

Goolsbee pointed to booming artificial-intelligence investment as a possible source of broader price pressure. High services inflation also suggests the problem extends beyond oil, he said. Central bankers had initially expected tariff and energy shocks to fade without higher borrowing costs, but those pressures have proved persistent.

“If the through line is that it's coming from overheating demand, I think the implication is the rate response is more aggressive and more and more front-loaded,” Goolsbee said, Reuters reported.

Goolsbee, who does not vote on the Fed’s rate-setting committee this year, said the balance between supply and demand pressures remains open to debate. He also left room for improving supply conditions to lower inflation without further Fed action, potentially allowing lower rates in the future.