Goolsbee Warns Higher Unemployment May Be Necessary to Combat Inflation

Austan Goolsbee, president of the Federal Reserve Bank of Chicago, said that fighting inflation may require economic pain in the form of higher unemployment. In a speech in London, he stated that the central bank faces persistent supply shocks driving up inflation, including higher oil prices from the Iran war and tariffs. Typically, the Fed would wait for such shocks to fade before raising borrowing costs, but with ongoing supply shocks, it has little choice but to hike rates. Goolsbee said that increases are necessary to lower consumer and business demand to a level consistent with reduced supply, which should bring inflation back to the 2% target.

Goolsbee emphasized that forcing inflation down in the short run means pushing employment below target, which will be 'painful.' He noted that the Fed's goals of low inflation and maximum employment are at odds in the short term. The official also suggested that the Fed may need to implement more than one additional rate hike later this year, as forecast by policymakers last week.

Goolsbee's comments contradict those made by Federal Reserve Chairman Kevin Warsh last Wednesday, who said that raising interest rates would not harm labor markets. Historically, rate hikes have slowed growth and even led to recessions, but in 2022-2023, the Fed sharply raised interest rates without significant unemployment or economic slowdown.