- Price of oil could go down relatively quickly, but deeper problem is getting refineries back online
- The fact we have been 5-1/2 years above inflation target is playing with fire
- Need to revisit the logic of looking through supply shocks
- Nothing in the Federal Reserve Act says make sure bond market is happy, stock markets aren’t surprised
Chicago Fed President Austan Goolsbee is sounding more like a hawk.
The key line is that the Fed needs to “revisit the logic of looking through supply shocks.” That’s a direct challenge to one of the core tenets of central banking. The textbook says energy shocks are temporary and you don’t tighten into them. Goolsbee’s point is that the textbook assumes inflation expectations are anchored, and after five and a half years above target, he’s not willing to make that assumption. He called it “playing with fire.”
WTI crude oil is down $2.29 on an SPR release today but releasing reserves to keep prices low is equally temporary.
Goolsbee also flagged that oil prices could retreat quickly but that refinery capacity is the deeper problem, which suggests he sees product prices staying elevated even if crude cools.
Goolsbee was a reliable dove earlier in his tenure but has steadily shifted more hawkish. You could say that’s politically motivated or you could take his comments at face value. He probably didn’t anticipate tariffs and a war when he was more dovish so that’s what it comes down to in his mind. I think AI is deflationary but he’s right about the timing being tough and the Fed being overdue to hit its mandate. At the same time, if they overhike and the AI layoffs start, it could be a race to 1% again.
Then there’s the shot at markets: nothing in the Fed’s mandate says to keep bonds happy or avoid surprising stocks. That’s a clear signal that he’s comfortable delivering a hawkish surprise if the data warrants it. At the moment, the market is pricing in a 64% chance of an October hike.
This article was written by Adam Button at investinglive.com.