Federal Reserve Bank of Chicago President Austan Goolsbee indicated on Monday that, depending on inflation trends, the U.S. central bank could either resume a path of multiple interest rate cuts or be compelled to restart raising rates.
In an interview with CNBC, Goolsbee described the current situation as "serious," noting that a new wave of inflationary pressures stemming from the Middle East has, to some extent, disrupted the Fed's original plans. He pointed out that even before this latest shock, inflation was already at an uncomfortably high level. With the labor market close to full employment but inflation still above the 2% target, he emphasized that inflation must take precedence in the Fed's policy considerations.
Last week, the Federal Reserve held interest rates steady and continued to signal the possibility of one rate cut this year. However, uncertainty due to Middle East tensions has caused market expectations to shift rapidly. Federal funds futures now indicate a higher probability of a rate hike in 2026 than a rate cut.
Goolsbee's remarks were cautious but clear. He stated, "If inflation behaves well, we could return to an environment with multiple rate cuts this year. But if the situation moves in the opposite direction and inflation begins to spiral out of control, I can also envision a scenario where we would need to raise rates."
This represents a subtle shift in the public messaging from Fed officials, who had previously focused more on the timing and pace of rate cuts rather than openly considering the possibility of further hikes. Goolsbee's comments reflect increased uncertainty within the Fed regarding the policy outlook, especially as external shocks continue to emerge.
On the balance between the Fed's dual mandate, Goolsbee made clear that the current focus leans more toward inflation. He noted that most economic indicators suggest the Fed is "closer to its full employment goal than to its inflation target," with the unemployment rate not rising significantly.
This implies that, with no clear deterioration in the labor market, the Fed has considerable room to concentrate its policy efforts on controlling inflation, without feeling pressured to ease policy prematurely to protect employment.
Goolsbee explicitly identified the situation in the Middle East as a key external variable influencing the Fed’s policy path. He stated that new inflationary shocks are emerging one after another, making the current environment challenging. The direction of the conflict in the Middle East will largely determine the Fed’s next policy move.
Although the Fed acknowledged uncertainty from external shocks in its policy meeting last week, officials chose to keep rates unchanged for now. Market reaction has been more aggressive—investors have quickly repriced expectations, pushing the likelihood of higher rates further into the future. Federal funds futures currently show a higher probability of a rate hike in 2026 than a cut, aligning closely with the two-sided policy scenario Goolsbee described.
