Fed’s Austan Goolsbee Says He Is ‘Attuned' To Elevated Service-Sector Inflation – Flags Frequent Supply Shocks Lately

• Goolsbee said the Fed may not respond as aggressively to a supply-driven imbalance as it would to demand overheating.
• He said that if persistent shocks repeatedly push inflation higher, the central bank still has to restore price stability under its legal mandate, and the only way to bring inflation down is to raise rates and narrow the supply-and-demand gap.
• Goolsbee’s remarks come after the Fed hiked rates by 25 basis points last week.

Chicago Federal Reserve President Austan Goolsbee on Monday warned that central banks should not simply “look through” supply shocks when they become persistent, arguing that large supply disruptions have recently become more frequent, hit harder and lasted longer.

In remarks delivered at the Official Monetary and Financial Institutions Forum Event in London, Goolsbee said the usual case for looking through supply shocks is that they are temporary. But if persistent shocks repeatedly push inflation higher, ‘the central bank still has to restore price stability’ under its legal mandate.

“—and the only way to bring inflation down is to raise rates and narrow the gap between supply and demand, even if it’s not in the exact same sectors where the cost shocks are occurring,” he said.

Goolsbee’s presumption, particularly for large shocks, is that they will “end up lasting longer than we initially think.” He pointed to Covid supply chains, oil prices and tariffs as examples of shocks that have lasted longer or evolved differently than initially expected.

AI Data Centers Join Goolsbee’s Watchlist

Goolsbee said he is “especially attuned” to elevated service-sector inflation and to evidence that AI data center construction is “spilling out of its own lane” and raising aggregate output beyond what the economy can absorb. 

Either development could be a sign of “old-fashioned demand overheating,” he said, adding that if demand overheats, “there is no ambiguity about how the Fed needs to respond.” Both are areas of concern in recent data, according to the Chicago Fed President.

On the supply side, Goolsbee noted that forecasts for when inflation would peak and begin to fall have repeatedly shifted — from the fourth quarter of 2025 through successive quarters of 2026, and now into 2027. He said that’s not a comforting pattern.

The ‘Only Way Back Is The Hard Way’

Goolsbee said the Fed may not respond as aggressively to a supply-driven imbalance as it would to demand overheating. 

"If wages adjusted instantly," Goolsbee said, "the central bank's response to supply shocks and demand shocks would be the same." But if the shock is lasting, it "can't simply be ignored." Goolsbee described the result as the painful trade-off between employment and inflation created by stagflationary shocks, concluding: "the only way back is the hard way."

Fed Raised Rates Last Week

Goolsbee’s remarks come after the Federal Open Market Committee (FOMC) unanimously agreed to raise the federal funds target range by 25 basis points to 3.75% to 4% on Sept. 16. The Fed said inflation remained elevated and that the move would support a timelier return to its 2% goal.

Fed Chair Kevin Warsh said after the meeting that the U.S. economy appeared to be strengthening, while inflation remained the problem. He said broad financial conditions were difficult to describe as restrictive and that the Fed had “removed a dose of accommodation.”

Warsh also said the decision reflected the economy’s strength, inflation trends that had not yet improved sufficiently, and changes in the geopolitical environment. He declined to prejudge future policy decisions.

In pre-market trading on Monday, the index futures edged higher. The SPDR S&P 500 ETF (SPY) was up 0.8%, the SPDR Dow Jones Industrial Average ETF (DIA) gained around 0.9%, and the Nasdaq-100 tracking Invesco QQQ Trust (QQQ) climbed 0.9%.

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