Fed Official Warns Higher Unemployment May Be Price of Lower Inflation

A top Federal Reserve official has warned that fighting inflation may require causing economic pain in the form of higher unemployment.

Austan Goolsbee, president of the Federal Reserve Bank of Chicago, made the comments while speaking in London. He stated that the Fed is facing a series of persistent supply shocks that have driven up inflation, including higher oil prices due to the Iran war and tariffs.

The central bank typically waits for such shocks to fade before raising interest rates, but Goolsbee said this approach may not be feasible given the ongoing nature of these shocks. He argued that hiking rates is necessary to lower consumer and business demand to a level consistent with reduced supply, which should bring inflation back down to the Fed's 2% target.

Goolsbee acknowledged that this approach would come at a cost: 'The only way to bring inflation down is to raise rates and narrow the gap between supply and demand,' he said. 'Forcing inflation back to target in the short run means pushing employment below target.' He also stated that it 'would necessarily be painful.'