Fed Official Says Inflation Fight May Require Higher Unemployment

A senior Federal Reserve official suggested on Monday that the central bank may need to inflict economic pain, potentially through higher unemployment, to curb persistent inflation. Austan Goolsbee, president of the Federal Reserve Bank of Chicago, speaking in London, cited ongoing supply shocks, including higher oil prices and tariffs, as key drivers of current inflation.

Traditionally, Goolsbee explained, the Fed would allow such shocks to dissipate naturally before resorting to rate hikes. However, he argued that a series of persistent supply shocks leaves the Fed with little choice but to increase borrowing costs to manage demand.

The rate increases are intended to reduce consumer and business demand to a level that aligns with reduced supply, thereby bringing inflation back to 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 stated in remarks. He added that achieving the inflation target in the short run necessitates pushing employment below its target level.

Goolsbee described the situation as creating a "difficult trade-off" between the Fed's goals of low inflation and maximum employment. He further commented to reporters that the process "It’s going to be painful." His remarks contrast with recent statements by Fed Chair Kevin Warsh, who expressed belief that achieving inflation goals would not require harming labor markets.