Fed Warns Persistent Inflation May Require More Rate Hikes

A top Federal Reserve official has warned that persistent inflation could require more interest rate hikes, potentially leading to economic pain. Susan Collins, president of the Federal Reserve Bank of Boston, expressed her support for last week's decision to raise borrowing costs by a quarter-point to about 3.9%. She cited stubbornly high inflation and geopolitical developments as key reasons for her stance.

Collins noted that hiring has improved, which played a role in her decision to support a rate hike. Solid job gains can signal that the economy may be able to withstand higher rates. Businesses in her district continue to express concern about high costs, and many expect to pass rising costs on to their customers.

Austan Goolsbee, president of the Chicago Fed, also spoke about inflation pressures arising from supply shocks, such as the war in Iran, as well as solid business and consumer spending. He suggested that the central bank may have to cause economic pain in the form of higher unemployment to combat stubbornly high inflation.

Goolsbee stated that the Fed is facing a series of persistent supply shocks that have driven up inflation. He noted that typically, the central bank would wait for such shocks to fade and inflation to fall on its own rather than raise borrowing costs. However, faced with an ongoing series of persistent supply shocks, the Fed now has little choice but to hike rates.

Kevin Warsh, Fed Chairman, previously said that he did not believe higher rates were necessary to achieve their objective and would not harm the labor markets. Goolsbee's comments contradict this view, suggesting that more rate hikes may be needed to combat inflation.