Fed's Goolsbee: US‑Iran conflict is an inflationary shock
Chicago Fed President Austan Goolsbee said that the US-Iran conflict is looking more like an inflationary shock. He added that “It has not yet been a stagflationary-direction shock," with a blow to both the job market and inflation that would force the US central bank to decide which of its goals is more at risk, Goolsbee said on a video call with journalists after participating in a Milken Institute conference in Los Angeles.
Key highlights:
Overhauling the central bank's inflation framework is 'not an easy space'
Kevin Warsh has some fresh ideas worth thinking about
US central bank should incorporate all the data it can, but says he doesn't think there is a silver bullet for inflation problem
He is open to new ways of thinking about inflation
He would be on the lookout for 'underheating' demand if low consumer confidence translates into falling consumer spending
US might be approaching an era of labor scarcity due to combination of population aging and limited immigration
The longer oil prices remain high, the greater the chance people start factoring higher inflation into expectations, which would be 'extremely problematic' for the central bank
Labor market is stable but not great; gains in payrolls are not good measure of slack at this point
It is clear from public statements that there are different world views at the US central bank about path of inflation, nature of job market
Evidence of more persistent inflation might come from sustained price increases in core services, wealth-driven spending among more affluent households, and wage hikes in occupations tied to artificial intelligence investment
Not surprised to see evidence of supply chain problems developing given length of US-Iran conflict
Every policy option is always on the table, and the world should know that
Anything that indicated the US is going the wrong way on inflation on a persistent basis would require a rethink about the right monetary policy path
US productivity gains have proved somewhat durable, but implication for interest rates is more subtle
Labor market seems pretty stable while inflation has been over central bank's target for five years and progress on that front has stopped
US central bank needs to watch for behaviors today that seem premised on a 'bounty' to come, such as spending out of wealth effects or overheating local markets based on data-center investment
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
Author
Christian Borjon Valencia
FXStreet
Markets analyst, news editor, and trading instructor with over 14 years of experience across FX, commodities, US equity indices, and global macro markets.
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