Policymakers can no longer afford to look through supply shocks that have become a regular feature of the economy, Chicago Fed President Austan Goolsbee said Monday.
Lately, supply shocks such as wars and tariffs have occurred more frequently and lasted longer than they used to in the past, Goolsbee said in remarks at an event in London.
"We need evidence that these shocks are actually fading, or it's hard to see a credible path back to 2% inflation -- and harder still to justify continuing to look through them," said Goolsbee, who is an alternate member of the Federal Open Market Committee this year.
Alternate members get to vote on policy decisions if a scheduled voter is not available.
In a unanimous vote last week, the FOMC lifted the policy rate for the first time in just over three years to combat sticky inflation. At the time, the committee signaled another hike later this year.
Annual headline personal consumption expenditure inflation held steady at 3.7% in July, while the annual core measure, which excludes food and energy, was unchanged at 3.3%.
Oil prices have retreated in recent days, with US benchmark West Texas Intermediate crude back below $100 a barrel, but they remain on track for their third consecutive monthly gains amid continuing hostilities in the Middle East that have disrupted supplies.
"Our policy response to persistent supply shocks may not need to be as large as it would be if the inflation were coming from demand overheating," Goolsbee said. "But it won't be painless either.
"This is exactly the painful trade-off between employment and inflation that stagflationary shocks always impose on a central bank. Unfortunately, in environments like that, the only way back is the hard way."
Morgan Stanley recently said that higher oil prices had slowed the progress of US inflation toward the Fed's 2% target. The Wall Street giant, along with Deutsche Bank and Macquarie Group, expects two more Fed rate hikes of 25 basis points each by March.
Goolsbee expressed concerns that the US economy may be overheating especially amid the artificial intelligence boom, which could be fueling inflation.
"I'm especially attuned to elevated inflation in service-sector industries, and to any evidence that AI data center construction is spilling out of its own lane and raising aggregate output beyond what the economy can absorb," Goolsbee said. "Either could be signs of old-fashioned demand overheating -- and if demand overheats, there is no ambiguity about how the Fed needs to respond. Both are areas of concern in the recent data."
