Federal Reserve will need to be ‘aggressive’ on inflation, says top official

The Federal Reserve would need to adopt an “aggressive” and “frontloaded” policy response if the current burst of inflation turned out to be fuelled by more enduring factors than the oil price shock, according to one of the central bank’s top officials.

Austan Goolsbee, president of the Chicago Fed, said that an additional quarter-point increase in interest rates “likely would not be enough” if price rises were being driven by “overheating demand” — from the services sector and the AI boom — rather than just the supply shock from the Iran war.

“We’ve been getting a little more sense . . . that some of [the inflation] maybe is coming from overheating demand — and the services inflation, maybe, isn’t going away,” Goolsbee told reporters at the Official Monetary and Financial Institutions Forum on Monday.

“If the through line is that it’s coming from overheating demand, I think the implication is the rate response is more aggressive and more frontloaded than if it’s coming from supply shocks.”

The Chicago Fed president’s comments come as the US contends with a stubborn bout of inflation, which has exacerbated this year since Donald Trump’s invasion of Iran sent oil prices surging.

The Fed last week raised interest rates for the first time in three years as it sought to cool price growth. Rate-setters expect another quarter-point increase this year before being placed on hold in 2027, according to officials’ median “dot plot” projections.

Goolsbee said that “could be enough” if inflation proved to be underpinned by the energy supply shock, but “if we get evidence that convinces us that it’s coming from demand, then it likely would not be enough”.

In separate remarks to the forum on Monday, Goolsbee warned that spending on AI could be “spilling out of its own lane and raising aggregate output beyond what the economy can absorb”.

“If demand overheats, there is no ambiguity about how the Fed needs to respond,” he said.

Goolsbee is not a voting member of the rate-setting Federal Open Market Committee this year, but will be in 2027.

Inflation has been above the Fed’s 2 per cent target for more than five years. The central bank’s preferred personal consumption expenditures gauge sat at 3.7 per cent in July, up from 2.8 per cent in February, when the war broke out.

“In this world going forward, it still behoves us, importantly, to determine, is the reversal of inflation progress — do we think it’s coming from supply shocks that are going to go away in the immediate term?” Goolsbee said.

“Or, are these persistent inflation shocks from the supply side? Or is this now AI demand and services inflation that’s not from the supply shocks . . . Those are three different scenarios, and two of those involve higher rates, and one of those is . . . the kind of the traditional look through.”