Fed’s Goolsbee says inflation may require faster rate hikes

Investing.com -- The Federal Reserve may need to raise interest rates more aggressively if inflation proves to be primarily driven by demand rather than supply issues, Chicago Fed President Austan Goolsbee said on Monday.

Speaking to reporters after an event in London, Goolsbee said the Fed is now more in an "action scenario" given the current mix of inflation pressures. Recent data and conversations with business contacts suggest that some inflation may be coming from overheating demand, particularly in the services sector and from the ongoing artificial intelligence investment boom.

"If the through line is that it's coming from overheating demand, I think the implication is that the rate response is more aggressive and more front-loaded," Goolsbee said.

Earlier this year, inflation data appeared to show supply shocks were waning. District contacts are now relaying concerns that sound like traditional demand overheating, Goolsbee said.

The Chicago Fed president noted that the mix of supply and demand pressures on inflation has more impact on the pace of rate changes than on the final destination. If supply shock inflation proves persistent, the Fed's only choice is to reduce aggregate demand, he said.

Goolsbee said the current unemployment rate is "pretty close" to full employment. Business contacts report the labor market is getting tighter, with alternate measures telling the same story. He added that month-to-month job growth is not a good measure of labor market health when there is doubt about population growth due to immigration policies.

The Fed official said he is not thinking about any coming hikes as reversing last year's rate cuts. He emphasized that the job of a central banker is not to respond to markets or the president, but to economic conditions.

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