After the Federal Reserve statement removed the phrase "supply shocks," Goolsbee warned: demand is driving inflation higher, and the pace of rate hikes may need to be faster.

Chicago Fed President Austan Goolsbee said on Monday that U.S. inflation may have moved beyond the tariff and energy price shocks of the past 18 months, and that strong demand is now also pushing prices higher, which could require the Federal Reserve to raise rates at a faster pace. Speaking in London to the Official Monetary and Financial Institutions Forum and later to reporters, Goolsbee said the rise in inflation over the past 18 months was initially attributed to tariffs and then to an oil price shock, and central bankers tended to "look through" these supply-side issues without raising borrowing costs, expecting them to fade on their own. But this supply-driven inflation is showing persistence, Goolsbee said. He also said there is evidence that strong demand is now aggravating the problembooming investment in artificial intelligence may be pushing prices higher in broader ways, while stubborn services inflation suggests cost pressures are not coming solely from the ongoing oil price shock. "If the story is that it's coming from overheated demand, I think the implication is a more aggressive, more front-loaded rate response," he said. In recent data and conversations with business contacts, "we're increasingly getting the sense that... some of this may be coming from overheated demand." "If demand is overheating, there is no ambiguity about how the Fed needs to respond," Goolsbee said, referring to the possibility of higher rates, and noting that the scale of investment in AI may be "spilling out of its own lane and pushing total output beyond what the economy can absorb." The Fed raised its policy rate by a quarter of a percentage point last week after a two-day meeting. At a post-meeting news conference, Fed Chair Warsh emphasized the strength of domestic consumption, business investment and other aspects of the demand side of the economy. Policymakers also removed from the policy statement language attributing elevated inflation to "supply shocks that are pushing up prices in some sectors, including energy," changing it to say only that "inflation remains elevated." "The Hard Road" Goolsbee said how much of current inflation is driven by demand versus supply remains a matter of debate, and he is open to the possibility that improving supply conditions could still bring prices down without further actionor even pave the way for rate cuts in the future. But he also said the lesson since the COVID-19 pandemic is that supply shocks that in theory should have only a temporary effect on inflation are proving more persistent, so central banks may not be able to look through them when setting monetary policy. The standard approach is to ignore supply shocks on the view that they will largely correct themselves, because once shortages or bottlenecks appear, industry output will eventually rebound. "Oil, tariffs and commodity pricesforecasters have spent more than a year repeatedly pushing back when inflation was supposed to peak and fall. ... This is not a reassuring pattern," Goolsbee said. "We need evidence that these shocks are actually fading, otherwise it is hard to see a credible path back to 2% inflationand even harder to find a reason to keep looking through them." The Fed's inflation target is 2%. The personal consumption expenditures (PCE) price index, the Fed's main inflation gauge, rose 3.7% year over year in July, with little recent improvement. "In an environment like this, the only way back is the hard road," meaning raising rates and accepting the risk that the resulting economic slowdown poses to employment. Goolsbee is not a voting member this year of the Federal Open Market Committee (FOMC), the Fed's rate-setting body. On Monday, he did not comment on the outcome of last week's meeting or his own monetary policy outlook.