The Fed raised its policy rate a quarter of a percentage point last week, and in remarks at a press conference Fed Chairman Kevin Warsh emphasized the strength of domestic spending, business investment, and other aspects of the demand side of the economy.
Goolsbee is not a voter on interest rates this year, and did not comment on the outcome of last week's meeting or his monetary policy outlook.
Persistent supply shocks complicate the path back to 2% inflation
In addition, he said, supply shocks that in theory should have only a temporary, one-off impact on inflation are proving to have a more persistent influence, and thus can't be ignored by the central bank in setting monetary policy.
While standard thinking is to ignore supply shocks as largely self-correcting, as industry output inevitably bounces back after shortages or bottlenecks develop, the experience since the COVID-19 pandemic indicates they are becoming more frequent and lasting longer.
"Oil, tariffs, and commodity prices — forecasters have spent more than a year pushing back the date when inflation was supposed to peak and start falling ... That's not a comforting pattern," Goolsbee said. "We need evidence that these shocks are actually fading, or it’s hard to see a credible path back to 2% inflation — and harder still to justify continuing to look through them."
The Fed's 2% target compares to inflation that was estimated most recently for July at 3.7%, and has shown little recent improvement.
"In environments like that, the only way back is the hard way," namely with higher interest rates and the risks that poses to growth and jobs as the economy slows, Goolsbee said.
Goolsbee says demand may be driving inflation along with supply shocks
U.S. inflation may have moved beyond the tariff and energy price shocks of the last 18 months and now be being driven by strong demand as well, Chicago Fed President Austan Goolsbee said on Sunday, leaving "no ambiguity" about the need for higher interest rates if that proves to be the case.
"If demand overheats, there is no ambiguity about how the Fed needs to respond," Goolsbee said in remarks prepared for delivery at the Official Monetary and Financial Institutions Forum in London, noting that the level of investment in artificial intelligence could be "spilling out of its own lane and raising aggregate output beyond what the economy can absorb."
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