Goolsbee, Chicago Fed President: "Fed Should Be More Aggressive With Rate Hikes"

[Financial News]  

Austan Goolsbee, president of the Federal Reserve Bank of Chicago, called for an aggressive and preemptive policy response. The Fed raised its benchmark interest rate by 0.25 percentage point at the Federal Open Market Committee (FOMC) meeting on the 16th, its first hike in more than three years, but Goolsbee argued that this was still far from enough.
Goolsbee stressed that sustained rate hikes would be unavoidable if it turns out that current inflation is being driven by factors more persistent than an oil-price shock.
According to the Financial Times (FT), Goolsbee made the remarks to reporters on the 21st (local time) at the Official Monetary and Financial Institutions Forum.
He said that when inflation is driven by "overheated demand," another 0.25-percentage-point hike alone "would not be enough." The implication was that aggressive rate hikes would be needed if excessive demand in the services sector, triggered by the AI boom, rather than a temporary rise in oil prices caused by the Iran war, is the source of inflation.
Goolsbee said, "We have begun to entertain the idea that some of [inflation] may perhaps be coming from overheated demand," adding, "This kind of services-sector inflation probably will not go away easily." He continued, "If overheated demand is the cause ... the interest-rate response needs to be more aggressive, and more preemptive, than the response to a supply shock (stemming from the Iran war)."
The remarks came as expectations gained traction on Wall Street that the Fed's current policy rate of 3.75%-4.0% could be raised four more times to 4.75%-5.0%.
Goolsbee said that if an energy supply shock were the cause of inflation, one additional rate hike would be enough, but added, "If we come to have evidence that gives us confidence that demand is the cause, this would not be enough."
He expressed particular concern that AI investment spending was "spilling over from its own path and pushing total output beyond what the economy can absorb." He asserted, "If demand overheats, there will no longer be any ambiguity about how the Fed should respond."
Goolsbee does not have voting rights on the FOMC this year, but he will have a vote next year.
US inflation has remained above the Fed's 2% target for more than five years. The Personal Consumption Expenditures (PCE) Price Index, the Fed's preferred measure of inflation, rose 3.7% year on year in July. It was 2.8% in February, but international oil prices surged after President Donald Trump launched the Iran war on the 28th of that month, pushing up US inflation.

[email protected] Song Kyung-jae Reporter