Chicago Federal Reserve President Austan Goolsbee cautioned that the central bank cannot dismiss the growing frequency of prolonged supply shocks, and that policy responses to them could inflict economic discomfort.
"Supply shocks are arriving more often, hitting harder, and lasting longer," Goolsbee said in prepared remarks for a London event on Monday. "Once the effect of a supply shock on inflation becomes persistent, part of the old logic of looking through it no longer holds." He added that while the Fed's response to these shocks and the inflation they generate need not be as aggressive as when demand overheats, the process will still carry a cost.
"This is precisely the painful trade-off that stagflationary shocks always impose on central banks — the balance between employment and inflation," Goolsbee noted. "Unfortunately, in this environment, the only route back to stability is a difficult one."
The Fed raised interest rates last week for the first time in three years and projected one more hike before year-end. Policymakers have grown increasingly concerned about inflation, which has now run above the Fed's 2% target for five and a half years.
Several officials share Goolsbee's worry that price pressures are broadening beyond supply shocks stemming from tariffs and the surge in oil prices following the Iran conflict. Fed Chair Kevin Warsh described the rate increase as a withdrawal of accommodative policy to allow inflation to keep cooling.
Meanwhile, Trump administration officials have repeatedly urged the Fed to hold or even lower rates, citing the conventional view that supply shocks only produce one-off effects on prices. "Do not raise rates at the peak of an energy price shock," Trump's trade adviser Peter Navarro wrote following the Fed's decision. "Warsh has now broken that rule — arguably the worst first rate hike by any new Fed chair in modern history."
Goolsbee acknowledged that since the 1970s, central banks have typically chosen to "look through" supply shocks because they were viewed as temporary. But he said such shocks have become the "norm" in the economy in recent years, and he now assumes they will last longer than initially expected. He pointed to post-pandemic supply chain disruptions, oil prices hovering near $100 a barrel for much of this year, and the ongoing escalation of tariff measures.
Comments