Chicago Fed President Says Strong Demand Is Driving Inflation, Rate Hikes Are Justified

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Chicago Fed President Goolsbee said on the 21st that U.S. inflation may be being pushed up not only by the shocks from tariffs and energy prices over the past 18 months, but also by strong demand, and that if that is the case, there is "no ambiguity" that higher interest rates would be needed. In a speech prepared for a public monetary and financial institutions forum held in London, he noted that there is no ambiguity about how the Fed would need to respond if demand overheats, and expressed the view that the level of investment in the artificial intelligence sector may be spilling over beyond its proper scope and pushing up aggregate demand beyond what the economy can absorb. He said it is becoming clear that supply shocks are having a more persistent effect, and that as a central bank it cannot ignore such effects when deciding monetary policy. Inflation recently stood at 3.7%, above the Fed's 2% target, with little improvement seen. Goolsbee said there is no easy way to bring it back down, and that it would be necessary to raise interest rates and accept the risks to growth and employment that come with a slowing economy. He does not have a vote on this year's Federal Open Market Committee and did not comment on the outcome of the September 15-16 meeting, at which a 0.25 percentage point rate hike was decided, or on his own monetary policy outlook.

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Goolsbee says strong demand is driving inflation and higher interest rates are justified, implying the policy rate will rise.

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