Federal Reserve's Goolsbee: Returning to the 2% inflation target "won't be painless," with costs in jobs and wages.

As supply shocks continue to accumulate, policy disagreements within the Federal Reserve regarding inflation and employment are becoming increasingly apparent.

On September 21, according to Bloomberg, Chicago Federal Reserve President Austan Goolsbee warned on Monday that supply shocks have become more frequent and longer-lasting in recent years, and the Fed can no longer simply dismiss them as temporary factors. If supply-side price pressures continue to spread to broader areas, the central bank will still need to tighten policy to suppress inflation, but the cost could be job losses, wage declines, and slower economic growth.

Last Wednesday local time, the Federal Reserve raised interest rates for the first time in three years and signaled that it may tighten further this year. Inflation has not fallen back to the 2% target level for five and a half years, and some officials are concerned that supply-side shocks such as tariffs and rising oil prices are gradually evolving into more persistent price pressures.

Goolsbee's statement created a clear tension with the new Federal Reserve Chairman Warsh, who said at the post-meeting press conference that achieving the inflation target does not necessarily have to come at the expense of the labor market.

Supply shocks are no longer just "one-off events".

In a written presentation at a London event, Goolsbee noted that supply shocks have become "more frequent, more intense, and longer-lasting" in recent years. If inflation triggered by supply shocks begins to show persistence, the logic of the Federal Reserve continuing to "see through" these shocks will no longer hold.

In the past, central banks typically viewed supply shocks such as supply chain disruptions and rising energy prices as temporary factors, avoiding further suppressing demand by raising interest rates. However, Goolsbee argues that in recent years, such shocks have become a "normal feature" of economic activity, and their duration often exceeds initial expectations.

He cited three types of pressure: supply chain disruptions, persistently high oil prices this year, and escalating tariff frictions. In his view, if recurring supply shocks ultimately evolve into persistent inflation, the Federal Reserve will still need to take action; otherwise, it may be unable to fulfill its statutory duty to stabilize prices.

Suppressing inflation may come at the cost of jobs and wages.

Goolsbee argues that even if inflation stems from a supply shock rather than overheated demand, the Federal Reserve still needs to tighten policy to suppress demand and narrow the supply-demand gap in order to help prices stabilize again.

However, he also emphasized that such interest rate hikes do not need to be as aggressive as those used to address overheated demand, because the current problem is not simply excessive demand. But as long as supply shocks persist, policy will be difficult to implement "painlessly": a return to economic equilibrium could mean fewer jobs, lower wages, and slower growth.

Goolsbee calls this situation a “painful trade-off between employment and inflation” resulting from the stagflation shock. With supply continuing to deteriorate, central banks can hardly completely avoid shocks to both inflation and economic activity at the same time.

The differences between the Federal Reserve and the White House are escalating simultaneously.

Goolsbee's statement contrasts sharply with Warsh's position. While Warsh voted in favor of the rate hike, defining it as a withdrawal of some easing and a further cooling of inflation, he emphasized at the press conference that he did not believe there was a fundamental conflict between the statutory mandates of price stability and full employment in the medium term, nor did he believe that achieving the 2% inflation target must come at the expense of significantly damaging the labor market.

The White House further pressured the Federal Reserve. Trump's economic advisor, Peter Navarro, publicly criticized the rate hike decision after it was announced, saying it was inappropriate to raise rates at a time when energy prices were most severely impacted, and called the decision "the worst first rate hike decision by any new Federal Reserve chairman in modern history."

As the supply shock persists, the Federal Reserve's policy dilemma has shifted from "whether to look beyond a one-off shock" to "how to deal with potentially persistent inflationary pressures." The cost to jobs, wages, and economic growth if inflation is to be pushed back down to 2% will also be a key topic of discussion within the Fed's policy discourse.

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