Goolsbee Warns Fed Rate Hikes May Come with Painful Job Costs

Austan Goolsbee, president of the Federal Reserve Bank of Chicago, has warned that fighting inflation may come at a cost to employment. In a speech in London, he stated that the central bank is facing persistent supply shocks, including higher oil prices from the Iran war and tariffs.

Goolsbee noted that typically, the Fed would wait for such shocks to fade before raising borrowing costs. However, with an ongoing series of supply shocks, the Fed has little choice but to hike rates to lower consumer and business demand, bringing inflation back to its 2% target.

The Fed's goal is to narrow the gap between supply and demand, which Goolsbee said requires 'forcing inflation back to target in the short run.' This means pushing employment below target, a 'difficult trade-off' for the Fed between low inflation and maximum employment.

Goolsbee emphasized that this decision would be 'painful,' contradicting previous comments from Fed Chairman Kevin Warsh who stated that raising interest rates should not harm labor markets to achieve their objective.