Federal Reserve Bank of Chicago President Austan Goolsbee voiced concerns on Tuesday that current inflation readings, particularly in the services sector, suggest the US economy might be overheating. Speaking in an NPR interview, Goolsbee highlighted that if non-energy components like services are indicating an underlying economic overheat, the Fed must consider strategies to curb escalating inflation.
This concern aligns with a broader hawkish sentiment among Fed officials, as indicated by recent remarks at the Jackson Hole symposium. Goolsbee, typically known as a dove, expressed that persistent inflation is the most significant variable for the US economy and that current long-term Treasury yields, around 5%, are not historically high, suggesting there might be room for further interest rate hikes. This stance is further supported by the fact that inflation has remained above the Fed's 2% target for 65 consecutive months.
The Personal Consumption Expenditures (PCE) price index for July, released on August 26, showed a 3.7% year-over-year increase, significantly above the Fed's target. Core PCE, excluding food and energy, remained at 3.3%. While these figures were largely in line with market forecasts, the sustained inflation in the 3% range presents a challenge for the Fed. Other regional Fed presidents, including Beth Hammack of Cleveland and Jeffrey Schmid of Kansas City, also delivered hawkish messages at Jackson Hole, reinforcing the call for higher rates to bring inflation back to target. Even Susan Collins of Boston, often seen as a centrist, indicated she could support another rate increase if clear evidence of cooling inflation doesn't materialize.
Goolsbee's primary fear in the short term is that inflation is not under control, cautioning on the Rapid Response podcast that "everybody should be on edge" because if inflation starts rising again, it will be very difficult to bring down. He also noted that rising energy costs due to the war in Iran and fluctuating tariffs are complicating the inflation outlook, impacting households amid already high inflation. Despite these concerns, Goolsbee acknowledged that the recent three-month inflation trend "doesn't look terrible" and reiterated that interest rates could be lowered if inflation shows signs of returning to the 2% target, advising interest-rate-sensitive industries to focus on data rather than market sentiment regarding policy outlook.
Markets currently lean towards a hold in September, with CME FedWatch indicating a 66.3% probability of no change versus 33.7% for a hike. However, the increasing hawkish tone from regional Fed presidents at Jackson Hole has heightened the likelihood of another rate increase later this year, with the probability of the benchmark rate remaining unchanged at the December FOMC meeting standing at 25.8%.
