Goolsbee Warns Road to 2% Inflation May Be Painful Due to Recurring Supply Shocks

Federal Reserve Bank of Chicago president Austan Goolsbee has warned that the road to 2% inflation may not be painless. In a recent speech, he emphasized that supply shocks have become more frequent and persistent, lasting longer than initially thought.

Goolsbee cited the pandemic-induced supply-chain issues, oil prices hovering around $100 a barrel, and ongoing tariff escalations as examples of these recurring shocks. He argued that ignoring them would imply failing to meet the price stability mandate.

The Fed has raised interest rates for the first time in three years and penciled in another increase before the end of the year. Goolsbee acknowledged that the response to these issues may not need to be as aggressive as a response to demand shocks, but the economy still needs to experience drops in employment, wages, and growth.

This view clashes with that of Chairman Kevin Warsh, who believes it's not necessary to harm the labor market to reach the 2% inflation target. He argued that the two parts of the Fed's mandate, price stability and full employment, are not working at cross purposes over the medium term.