Goolsbee Labels Fed's 5.5-Year Inflation Overshoot as Playing with Fire

• Oil prices could decline relatively rapidly, but the deeper issue is reactivating refineries.
• Being 5-1/2 years above the inflation target is seen as "playing with fire."
• There is a need to "revisit the logic of looking through supply shocks."
• The Federal Reserve Act does not require ensuring bond markets are happy or stock markets are surprised.

Austan Goolsbee, president of the Chicago Fed, is sounding increasingly hawkish.

Goolsbee's key point is that the Fed ought to "revisit the logic of looking through supply shocks." This directly confronts a core central banking tenet. The standard view holds that energy shocks are fleeting and do not require a tightening response. Goolsbee argues that this textbook reasoning assumes inflation expectations are anchored, and after 5-1/2 years above target, he will not assume that. He labeled it "playing with fire."

WTI crude oil declined $2.29 on an SPR release today, but releasing strategic reserves to keep prices low is just as temporary.

Goolsbee also pointed out that oil prices could fall quickly, but refinery capacity is the more profound difficulty. This implies he expects product prices to remain elevated even after crude cools.

Goolsbee was a reliable dove early in his tenure but has gradually become more hawkish. This shift could be seen as political, or his comments could be taken at face value. He likely did not foresee tariffs and a war when he was more dovish, which he now considers the key factor. I think AI is deflationary, but Goolsbee is correct about the challenging timing and the Fed being overdue in meeting its mandate. However, if the Fed overhikes and AI-driven layoffs occur, it could trigger a race to 1% again.

Then there is his remark on markets: nothing in the Fed's mandate says to keep bond markets happy or avoid surprising stock markets. This is a clear indication that he is ready to deliver a hawkish surprise if the data call for it. Currently, the market sees a 64% probability of a rate hike in October.