Watch CNBC's full interview with Chicago Fed President Austan Goolsbee

Summary

• Inflation progress has stalled and is inching back up, with a new inflationary shock from oil prices due to Middle East conflict, compounding existing high inflation.
• Gasoline prices have a very high impact on individuals' inflation expectations, risking unanchoring if prices remain elevated, which could lead to more persistent inflation.
• Austan Goolsbee was optimistic about potential rate cuts by end-2026 but now emphasizes the need for proof that inflation is decisively returning to the 2% target before easing.
• Labor market indicators (unemployment rate, layoff rate, hiring rate) show stability and are near full employment levels, so inflation fighting currently takes priority over employment concerns.
• Oil shocks are stagflationary, simultaneously worsening both inflation and employment, posing a significant challenge for Fed policy with no obvious playbook.
• The U.S. is now a larger energy producer compared to the 1970s, so higher oil prices might stimulate domestic investment in fracking and energy production, partially offsetting negative impacts.
• Fed policy remains data-dependent; rate hikes are on the table if inflation gets out of control, while cuts are possible if inflation behaves, with no predetermined path.
• Services inflation has been persistently high in recent months, a concern because it historically doesn't recede quickly and isn't tariff-related.
• Research is focused on the dynamics of oil price impacts: immediate consumption effects versus lagged investment responses in energy production, which could balance output effects.
• Key uncertainty is the duration of the Middle East conflict and whether it results in a lasting oil price shock that drifts into inflation expectations.
• Inflation expectations appear anchored for now, but there's a risk of them becoming unanchored if high inflation persists, akin to a "sunburn theory" where prevention is easier than cure.
• The Fed aims to be a steady hand and not react to short-term market whipsaws in rate expectations, emphasizing a through-line analysis of economic conditions.