1 hour ago
19
Austan Goolsbee, president of the Federal Reserve Bank of Chicago, delivered a notably candid message to a London audience this week: the era of clean, textbook inflation management is over, and the Fed knows it.
Speaking at an Official Monetary and Financial Institutions Forum event on September 21, Goolsbee argued that central banks can no longer treat supply-driven inflation the way they treat demand-driven inflation. The problem is that ignoring repeated supply shocks entirely risks letting inflation expectations drift, while fighting them aggressively risks crushing jobs. Neither option is comfortable, which is precisely the point.
A harder road than the last mile
US inflation came in at an estimated 3.7% as of July, still well above the Fed’s 2% target. More troubling for policymakers, forecasters have pushed back their expectations for when inflation might peak, with some projections now stretching into 2027.
Goolsbee’s diagnosis of the problem centers on the nature of supply disruptions since the pandemic. They have become more frequent, more severe, and longer-lasting. Tariffs, energy price volatility, geopolitical conflicts, and fractured supply chains have compounded on top of each other rather than resolving neatly.
His position is that the Fed must respond to persistent supply shocks, even knowing the response will carry costs. The painful trade-off he referenced is the classic tension between maximum employment, one of the Fed’s two mandates, and price stability, the other. When supply shocks keep inflation elevated, the only tools available tend to work by slowing demand, which often means slower hiring or even job losses.
AI demand and the risk of overheating
Goolsbee also flagged a newer complication: demand itself may be running hotter than expected, partly because of a surge in investment tied to artificial intelligence. If AI-related capital expenditure keeps adding fuel to demand while supply constraints persist, the Fed’s calculus shifts. The central bank’s response in that scenario, Goolsbee suggested, would not be ambiguous. Tighter policy would follow.
For now, markets did not react sharply to the speech. The US dollar index held near 100.30 in the hours following Goolsbee’s remarks, suggesting investors absorbed the message without dramatically repricing rate expectations in real time.
Analysts who track Fed communication scored the speech at 7.4 out of 10 on a hawkishness scale, against a historical average of 6.4 for comparable Fed addresses.
Disclosure: This article was edited by Editorial Team. For more information on how we create and review content, see our Editorial Policy.
English (US) ·