Fed’s Goolsbee says prolonged inflation above target is "playing with fire"

Chicago Federal Reserve President Austan Goolsbee cautioned on Tuesday that inflation persisting above the central bank's target for five-and-a-half years presents a perilous scenario that may necessitate policy intervention. Goolsbee remarked that the five-and-a-half year divergence from the inflation target is akin to playing with fire.

He further explained that the Federal Reserve might need to address supply shocks with enduring impacts. Describing the current situation as unpleasant, Goolsbee emphasized that the central bank must contemplate responding to enduring shocks. He noted that prior to the Fed being able to lower interest rates, there must be evidence that inflation is declining, indicating that temporary issues are now resolved.

Goolsbee, among the more optimistic Fed policymakers, projected inflation returning to the 2% target by 2023 and 2024 before leveling off. He underscored several economic concerns, including the risk that expectations of productivity gains from artificial intelligence could fuel overheating in the economy. Goolsbee also cautioned that substantial budget deficits function as a form of stimulus, potentially overheating the economy.

Regarding supply-side issues, he cautioned that oil prices could drop swiftly, but a more significant challenge lies in getting refineries back online. Goolsbee stressed the need for policymakers to reassess the notion of looking through supply shocks. He added that there is no provision in the Federal Reserve Act mandating the Fed to ensure the bond market remains content or that stock markets are not caught off guard.