Fed Official Warns Higher Unemployment May Be Required to Combat Inflation

Austan Goolsbee, president of the Federal Reserve Bank of Chicago, warned that fighting inflation may require causing economic pain in the form of higher unemployment. Speaking in London on Monday, Goolsbee stated that the central bank is facing persistent supply shocks, including higher oil prices from the Iran war and tariffs, which have driven up inflation.

Goolsbee noted that typically, the Fed would wait for such shocks to fade and inflation to fall on its own rather than raise borrowing costs. However, with ongoing supply shocks, the Fed has little choice but to hike rates, he said. The increases are needed to lower consumer and business demand to a level consistent with reduced supply, which should bring inflation back to the Fed's 2% target.

Goolsbee emphasized that 'the only way to bring inflation down is to raise rates and narrow the gap between supply and demand.' He added that this would necessarily be painful and force employment below target in the short run. Goolsbee's comments contradict those of Fed Chairman Kevin Warsh, who stated last week that raising interest rates would not harm labor markets.