Fed’s Goolsbee says inflation may require faster rate hikes

Chicago Fed President Austan Goolsbee indicated on Monday that the Federal Reserve may need to increase interest rates more swiftly if inflation stems mainly from demand, rather than supply concerns. Addressing reporters following an event in London, Goolsbee explained that the Fed is now in an "action scenario" due to the current mix of inflation pressures.

Recent data and discussions with business contacts suggest that some inflation may be arising from overheated demand, especially in the services sector and due to the ongoing artificial intelligence investment surge. Goolsbee stated that if the root cause is demand overheating, the rate response should be more aggressive and front-loaded.

Earlier this year, inflation data seemed to imply that supply shocks were diminishing. Business associates are now reporting concerns reminiscent of traditional demand overheat. Goolsbee noted that the mix of supply and demand pressures on inflation carries more weight in determining the pace of rate adjustments than the ultimate outcome.

If supply shock inflation persists, the Fed's sole option is to diminish aggregate demand, he said. Goolsbee noted that the current unemployment rate is "very close" to full employment. He mentioned that business contacts indicate a tightening labor market, with alternate measures confirming the same. He also pointed out that month-to-month job growth is not a reliable indicator of labor market health when there is uncertainty about population growth due to immigration policies.

Goolsbee made it clear that he is not contemplating any forthcoming hikes as a reversal of last year's rate cuts. He stressed that a central banker's responsibility is not to respond to markets or the president, but to economic conditions.