Fed president warns inflation is 'going the wrong way' as tariff concerns mount

Chicago Fed President Austan Goolsbee warned that inflation is now "going the wrong way" after several months of increases, reversing its prior downward trend towards the 2% target. He expressed concern that persistent price hikes, particularly those driven by tariffs impacting intermediate goods or contributing to rising services inflation, could lead to a "stagflationary direction." This scenario would create a "really difficult" dilemma for the Fed, challenging its dual mandate as the labor market also cools, making it harder to balance employment support with price stability.

Analysis

Chicago Federal Reserve President Austan Goolsbee has issued a significant warning, noting that inflation is now "going the wrong way" after several months of increases, reversing the prior disinflationary trend. He expressed considerable concern that this could evolve into a "stagflationary direction" if price pressures prove persistent, a scenario compounded by a cooling labor market. Goolsbee highlighted tariffs as a key risk, framing the issue with his "11% lane" concept, and expressed nervousness that tariffs on intermediate goods could push inflation beyond a one-time price adjustment by raising broad production costs. Furthermore, he pointed to rising services inflation as a particularly troubling sign, as it cannot be easily attributed to tariffs and may indicate that price pressures are becoming more embedded. This situation creates a "really difficult scenario" for the Federal Reserve, challenging its dual mandate by forcing a potential trade-off between stabilizing prices and maximizing employment, especially given the context of a recent interest rate cut in September aimed at supporting the weakening labor market.

Key Decisions for Investors

• Investors should recalibrate expectations for future Federal Reserve policy, as these comments suggest a more hawkish stance and cast doubt on the sustainability of rate cuts in the face of re-accelerating inflation.
• Closely monitor incoming data on services inflation and the pass-through effects of tariffs on intermediate goods, as these are the key signals Goolsbee identified for determining if inflationary pressures are becoming entrenched.
• It is prudent to review portfolio exposure to stagflationary risks, which could negatively impact both rate-sensitive growth equities and long-duration fixed income, given the simultaneous concerns over rising inflation and a cooling labor market.