Supply shocks are repeated, and the Federal Reserve Goulsby warns that fighting inflation may inevitably cause “economic pain”
The Zhitong Finance App learned that Chicago Federal Reserve Chairman Austin Goulsby warned that the Federal Reserve cannot ignore repeated and ongoing supply shocks and must respond in some way that may cause economic pain.
In a speech prepared in advance at an event in London on Monday, Goulsby said, “Supply shocks are more frequent, more intense, and last longer,” and “once the impact of supply shocks on inflation continues, part of the logic behind 'seeing through' no longer holds true.”
He added that although the Federal Reserve's response to these shocks and the resulting inflation need not be as aggressive as dealing with overheated demand, it will not be painless.
Goulsby said, “This is exactly the painful trade-off between employment and inflation that stagflationary shocks have always imposed on central banks. “Unfortunately, in this environment, the only way back is that difficult path.”
Federal Reserve officials raised interest rates for the first time in three years last Wednesday, and expect another rate hike before the end of the year.
Policymakers are increasingly concerned about inflation — inflation hasn't hit their 2% target for five and a half years. Some have echoed Goulsby's concerns that price pressure is spreading beyond tariffs and the supply shock represented by soaring oil prices after the Iran war.
US Federal Reserve Chairman Kevin Walsh, who was appointed by Trump earlier this year, characterized the decision as “removing easing” so that inflation can continue to cool.
When Goulsby issued the warning, Trump administration officials were repeatedly calling on the Federal Reserve to maintain or even lower interest rates. Their traditional argument was that supply shocks only constituted a one-time impact on prices.
Trump's economic adviser Peter Navarro wrote after the Federal Reserve's interest rate decision, “Don't raise interest rates when energy prices hit the hardest,” and “Walsh has now broken this rule — this is the worst decision to raise interest rates for any new Federal Reserve chairman in modern history.”
The Chicago Federal Reserve Chairman acknowledged that since the 1970s, central banks have generally decided to “see through” supply shocks as a temporary factor. However, he said that in recent years, such shocks have become a “normal feature” of the economy, and he expects them to last longer than initially anticipated. He cited post-pandemic supply chain issues, oil prices hovering around $100 per barrel for most of this year, and escalating tariffs.
Pressing down demand
Goulsby said that continuing to ignore repeated and continuous shocks “means failure to fulfill the duty of price stability”.
“If the forecast indicates that large-scale and continuous repeated shocks will occur, the central bank will still need to restore price stability in accordance with its statutory responsibilities — and the only way to reduce inflation is to raise interest rates and close the gap between supply and demand, even if this does not happen in exactly the same industries where cost shocks occur,” he said.
Goulsby said that although the Fed's response to current problems may not be as aggressive as dealing with demand shocks (the latter is often more durable), the economy may still need to experience a decline in employment, wages, and growth because the Fed must cut demand.
“To rebalance the economy after a long-lasting negative supply shock, people need to adapt to a new, less favorable balance, and wages need to fall,” Goulsby said.
This statement contradicts Walsh's point of view. Although the new chairman agreed with the committee in the interest rate hike vote, at the press conference after the meeting, he said he did not think it was necessary to damage the labor market to reach the 2% inflation target.
“I don't think the two parts of our responsibilities — price stability and full employment — will clash with each other in the medium term,” he said.