Goolsbee of the Fed Warns of U.S. Economy Heading Towards 'Stagflation'

The Chicago Fed Chairman Austan Goolsbee warned in an interview on Thursday that the energy crisis triggered by conflicts in the Middle East is putting the Federal Reserve's decision-making in a dilemma. The ongoing energy shock and stubborn inflation could push the US economy towards stagflation, where prices and unemployment rates rise simultaneously. This worst-case scenario would weaken the effectiveness of monetary policy, forcing the Fed to make choices between curbing recession and controlling inflation.

Currently, US inflation has been above the target level for five consecutive years, with not only a halt in progress in reducing inflation but also signs of rebound. Apart from the short-term disruptions of geopolitical events, inflation in the US service sector continues to rise, and the deceleration of tariff-driven goods inflation is significantly slower than expected. Given the high stickiness of inflation, Austan Goolsbee had cast a vote against rate cuts at the interest rate meeting at the end of last year and emphasized that the current inflation risks are far more urgent than employment issues.

Over the past 18 months, the US labor market has performed steadily, showing characteristics of "low hiring, low firing." However, the physical manufacturing industry's tolerance for the energy crisis is approaching a critical point. Automakers within its jurisdiction reported that while they can barely maintain operations relying on component inventories, if high oil prices persist for several months, the "just-in-time" production model will face a severe test, and obstacles in the freight sector are expected to lead to serious disruptions in the supply chain.

Regarding the new Federal Reserve Chairman Wosh, Austan Goolsbee, based on their shared experience working in the government, pointed out that Wosh is an official who exhibits rationality and pragmatism in crises. Even facing political pressure from President Trump, it is expected that the new chairman will decisively take rate hike measures when necessary.