For decades, the Federal Reserve's playbook for oil shocks has been to wait them out. Chicago Fed President Austan Goolsbee said Monday that approach has reached its limit.
The case for waiting out supply shocks is that they fade on their own, usually before higher interest rates would take effect. But recent shocks haven't behaved that way, Goolsbee argued in a speech in London and in comments to reporters afterward. Forecasters and investors expected oil to fall quickly after the war in the Persian Gulf began, and instead, it's recently hovered close to $100 a barrel. Tariffs have escalated repeatedly rather than arriving as a one-time price increase.
Forecasters have pushed back the date inflation was supposed to peak every quarter since late 2025. It's now expected sometime in 2027. "That's not a comforting pattern," Goolsbee said.
Goolsbee highlighted three takeaways.
-- First, it will hurt. If shocks persist, the Fed has to respond even when the problem isn't the demand-driven overheating it usually fights. But the Fed can't pump oil or slow data-center construction. Higher rates mainly bite housing, business investment and big-ticket consumer purchases. "It would necessarily be painful," he said. "You will certainly hear about it from the sectors who say, 'We didn't do this. Why are we being punished?'"
-- Second, the source of the inflation matters more for how fast the Fed moves than for how far, he said. Because supply shocks force a trade-off between the Fed's inflation and employment goals, responding to a persistent supply shock calls for raising rates more gradually than the Fed would if demand were running too hot.
-- Third, Goolsbee is rethinking the AI boom. Until recently, data-center spending seemed to be "staying in its lane," pulling workers and resources from elsewhere without overheating the whole economy, he said. Now his business contacts describe a tightening job market and rising wages in jobs tied to the build-out.
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