Goolsbee: Rate Hikes Needed Despite Pain
Austan Goolsbee, president of the Federal Reserve Bank of Chicago, said Monday that the central bank may have to inflict economic pain through higher unemployment to defeat stubbornly high inflation. Speaking in London, he argued that the Fed faces a run of persistent supply shocks that have pushed up prices, including elevated oil prices stemming from the Iran war and tariffs. Normally, he noted, the central bank would wait for those shocks to fade and for inflation to ease on its own instead of raising borrowing costs.[S1]
Goolsbee cautioned, however, that when supply disruptions keep recurring, the Fed is left with few options other than tightening policy. Raising rates, he explained, is what pulls consumer and business demand back in line with a smaller supply of goods, a step he said is required to steer inflation back to the central bank's 2% goal. In his prepared remarks, he wrote that narrowing the supply-demand gap through higher rates is the sole route to lower inflation, and that achieving the target quickly would require employment to fall short of the Fed's objective. He framed this as an unavoidable near-term conflict between stable prices and maximum employment.[S1]
Goolsbee later told reporters that the process would be painful and necessarily so. His comments contradict Fed Chairman Kevin Warsh, who said last Wednesday at a news conference that he does not believe the labor market must be harmed to achieve the central bank's objective. That news conference followed the Fed's first rate increase in three years, which lifted its key interest rate to about 3.9%.[S1]
The central bank's usual approach to inflation is to lift interest rates, which makes borrowing and spending more expensive. In past episodes, that tightening has frequently dampened growth and sometimes tipped the economy into recession. Even so, during 2022 and 2023 the Fed raised rates aggressively and inflation did come down, all without a notable increase in joblessness or a downturn.[S1]
