Goolsbee Warns Fighting Inflation Will Be Painful, May Require Higher Unemployment

Austan Goolsbee, president of the Federal Reserve Bank of Chicago, warned that fighting inflation will be 'painful' and may require higher unemployment. Speaking in London, Goolsbee said the Fed is facing persistent supply shocks, including higher oil prices from the Iran war and tariffs, which are driving up inflation.

Goolsbee stated that the central bank would typically 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 no choice but to hike rates to lower consumer and business demand to a level consistent with reduced supply, he added.

This is necessary to 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 also acknowledged that this would mean pushing employment below target in the short run, forcing a difficult trade-off between the Fed's goals of low inflation and maximum employment.

Goolsbee's comments contradict those made by Fed Chairman Kevin Warsh last week. Warsh stated that the Fed does not need to harm the labor markets to achieve its objective. Historically, rate hikes have often slowed growth and led to recessions. However, in 2022-2023, the Fed sharply raised interest rates, and inflation declined without a significant rise in unemployment or economic slowdown.