A top Federal Reserve official indicated Monday that the central bank may need to induce economic hardship, including increased unemployment, to combat persistent inflation. Austan Goolsbee, president of the Federal Reserve Bank of Chicago, stated in London that the Fed is grappling with a series of ongoing supply shocks that have driven inflation higher, citing factors such as increased oil prices stemming from the conflict in Iran and the impact of tariffs.
Typically, Goolsbee explained, the Federal Reserve would await the natural fading of such shocks and the subsequent decline in inflation rather than raising borrowing costs. However, he argued that in the current environment of persistent supply disruptions, the Fed has limited options beyond increasing interest rates. These hikes are intended to reduce consumer and business demand to a level that aligns with reduced supply, thereby guiding inflation back toward the Fed's 2% target.
"The only way to bring inflation down is to raise rates and narrow the gap between supply and demand," Goolsbee said in prepared remarks. "Forcing inflation back to target in the short run means pushing employment below target. ... In the short run, supply shocks force a difficult trade-off" between the Federal Reserve's dual mandates of low inflation and maximum employment.
"It’s going to be painful," Goolsbee added in subsequent comments to reporters. "It would necessarily be painful."
These remarks diverge from those of Fed Chairman Kevin Warsh, who stated last Wednesday following the Fed's decision to raise its key interest rate for the first time in three years to approximately 3.9%, "I don’t believe that we need to do harm to the labor markets to achieve our objective."
The Federal Reserve traditionally combats inflation by raising interest rates, which tends to cool borrowing and spending. Historically, such actions have frequently slowed economic growth and, in some instances, led to recessions. Notably, between 2022 and 2023, the Fed implemented significant interest rate hikes, which successfully lowered inflation without a substantial increase in unemployment or a notable economic slowdown.