Fed’s Goolsbee: Demand, tariffs, energy, supply shocks all are fuelling inflation

Chicago Federal Reserve's President Austan Goolsbee highlighted at a recent event several factors contributing to the United States' inflationary pressures, including strong demand, tariffs, energy costs, and supply shocks. He stated that strong demand, alongside energy, tariff, and other supply shocks, may be adding to inflation.

Goolsbee emphasized that supply shocks pose a persistent impact on inflation and must be considered when setting monetary policy. He stressed the need for evidence that inflation resulting from supply factors is fading, or it would be difficult to envision a credible path back to the 2% inflation target. The reaction of the US Dollar following Goolsbee's remarks remained unaltered, with the US Dollar Index trading slightly higher around 100.30 at press time.

Goolsbee's speech was moderately hawkish, scoring a 7.4/10 on the FXS Speechtracker, which surpassed the 6.4/10 historical average, indicating a stronger stance compared to the baseline. This tone, combined with the clarity that the Fed would take action against excess demand with "no ambiguity," suggests a readiness to tighten monetary policy or resist the prospect of easing prematurely.

However, the focus on persistent supply shocks and the necessity of seeing evidence that supply-driven inflation is subsiding underscores a cautious, data-driven approach that maintains the Dollar's strength while limiting the potential for a more aggressive hawkish turn. Despite a slight decline in the perceived hawkishness, as evidenced by a 1.07-point drop in the FXS Fed Sentiment Index to 149.54, the Fed is still perceived as operating in a hawkish manner, aligning with Goolsbee's conditional optimism about achieving the 2% inflation target.

The AUD/USD exchange rate stayed above 0.7100 in the Asian session on Monday, as the US Dollar showed restraint from its minor retreat following a peak since late July, amid ongoing geopolitical uncertainties. Meanwhile, the People's Bank of China (PBOC) maintained its stance on Loan Prime Rates, which also exerts a downward pressure on the Australian Dollar.

Conversely, expectations of a potential rate hike by the Reserve Bank of Australia (RBA) continue to bolster the AUD, particularly ahead of the Trump-Xi Summit. The USD/JPY pair slipped below 157.00 in the Asia session, weakened by slight appreciation of the Japanese Yen due to potential intervention risks following the Bank of Japan's (BoJ) rate check on Friday.

Additionally, a Japanese public holiday further unsettled traders amid mounting geopolitical tensions in Russia-Ukraine and the Middle East, limiting the downside for the US Dollar. Gold maintained its cautious tone throughout the initial half of the European session, trading near $4,350, which represented a decline of over 0.50% for the day.

Despite the bearish sentiment, the precious metal remained above a six-week low observed last Wednesday, as traders await further developments related to the Middle East crisis and its implications for inflation. Consequently, this situation influences interest rate expectations and subsequently impacts the non-yielding price of gold.

Financial markets are currently navigating a challenging phase as we approach the concluding weeks of Q3. Uncertainty and volatility continue to permeate the markets, yet the oil price is declining, and both European and US stocks are expected to open higher later on Monday. However, market stresses are concentrated in sovereign bonds, with European and US yields experiencing another scare late on Friday, rising higher.

The Bank of Japan (BoJ) raised its short-term interest-rate target to 1.25% from 1.00% in a 7-2 vote, marking another stride towards normalizing monetary policy, in line with what many had anticipated for weeks.