Fed's interest-rate stance is shifting, and Goolsbee's comments may be the latest evidence

By Greg Robb

It's a fraught but intense moment for the economy, Chicago Fed president says

Chicago Fed President Austan Goolsbee said Monday that he is more worried about inflation than unemployment.

The monetary-policy outlook at the Federal Reserve appears to be shifting away from interest-rate cuts and toward potential rate increases, with comments from Chicago Fed President Austan Goolsbee the latest evidence.

On Monday, Goolsbee said the central bank may need to tighten monetary policy in response to the impact of rising oil prices on the U.S. economy - a major shift from his stance just weeks ago.

In an interview with CNBC, Goolsbee said every option is on the table, and interest rates could move in either direction.

"We could be back to the environment with multiple rate cuts for the year, if inflation behaves. I could see circumstances where we would need to raise rates if it was going a different way and inflation was getting out of control," Goolsbee said.

If Fed officials ultimately decide to hike rates, it would mark a big change in policy, as officials have been "laser-focused" on rate cuts over the past several months, said Tim Duy, chief economist at SGH Macro Advisors.

At their meeting last week, Fed officials kept interest rates unchanged and preserved a path to cutting rates this year, with minority of officials pushing for a change in the statement to say the next move could be either a rate cut or a rate hike. Some economists expect that such a change in the statement could come at the Fed's next meeting in late April.

The Fed has two mandates: stable inflation and low unemployment. Oil-price shocks can lead to stagflation, increasing prices for gasoline and food at the same time they weaken demand and the labor market.

This creates a dilemma for the Fed. Should it concentrate on the weak labor market or on rising prices?

In the interview, Goolsbee said he was a little bit more concerned about inflation than the labor market.

"To have already been operating at an inflation rate that was uncomfortably high and stuck well above target, and now to add something that might be a lasting gasoline-price shock, that's what makes this a fraught but intense moment," he said.

Inflation has been above the Fed's 2% inflation target for five years.

This is a significant shift. Before the U.S. and Israel launched attacks on Iran just over three weeks ago, Goolsbee had repeatedly said he thought the Fed would eventually be able to lower rates this year.

"This will be a bitter pill to swallow," SGH Macro's Duy said.

"If the inflation side wins out in the near term, the signal for the Fed will be that it needs to create more demand destruction than the oil shock does on its own to sustain downward pressure on inflation and inflation expectations," he said, adding that the Fed is not likely to rush into rate hikes.

After expectations for two quarter-point rate cuts this year, traders in derivative markets have flipped the script and now see rates staying unchanged through year-end, with about an 8% chance that the Fed hikes rates.

Miran still favors multiple cuts this year

Even as many central-bank officials are talking more about rate hikes, at least one is still pushing for cuts. In a separate interview on Bloomberg, Fed governor Stephen Miran, a former top economist in the Trump White House, said he thought the Fed could still cut rates four times this year.

Traditional Federal Reserve wisdom is that the central bank can "look through" oil-price shocks because, while they hit headline inflation, price hikes don't pass into core prices excluding food and energy, Miran said.

One exception to this rule would be if inflation expectations beyond one year begin to move higher.

"That hasn't happened thus far," Miran said.

The other exception would be if there was an upward spiral in wages as a result of the higher gasoline prices.

"There's little evidence of that. In fact, wage pressures have been declining for the past few years," he said.

Miran was the only dissenter to the Fed's decision to not change interest rates last week. He pushed for a rate cut.

-Greg Robb

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03-23-26 1238ET