Fed Official Warns of 'Painful' Economic Trade-Off in Inflation Fight

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. In a speech in London, Goolsbee stated that the central bank is facing persistent supply shocks, including higher oil prices from the Iran war and tariffs. These shocks have driven up inflation, which typically would be allowed to fall on its own rather than raising borrowing costs.

However, with ongoing supply chain disruptions, the Fed has little choice but to hike interest rates to lower consumer and business demand to a level consistent with reduced supply, said Goolsbee. This is necessary to bring inflation back down to the Fed's 2% target.

Goolsbee acknowledged that this approach would be 'painful,' citing a difficult trade-off between low inflation and maximum employment. He noted that historically, raising interest rates has often slowed growth and even led to recessions.