On Tuesday, Eastern Time, Chicago Fed President Goolsbee warned that the energy shock stemming from the Middle East conflict is threatening the US Fed’s dual mandate, complicating its monetary policy outlook and potentially delaying interest rate cuts—echoing earlier remarks by Fed Governor Barr that inflation risks and oil prices support keeping rates unchanged for longer.
Specifically, the energy price shock poses risks to both sides of the US Fed’s dual mandate, making the trade-off between controlling inflation and supporting economic growth more complex.
“The new shock has undoubtedly disrupted the US Fed’s plans... and inflation was already uncomfortably high even before the shock occurred,” Goolsbee said bluntly.
Goolsbee noted that central bank policymakers around the world lack clear historical experience to draw on in dealing with the current mix of geopolitical risks and inflationary pressures, and therefore “this is a bad situation for central banks.”
Goolsbee stressed that the current path of interest rates at central banks around the world still depends heavily on how the conflict evolves, especially its impact on energy markets. As for the US Fed, he said he is not yet able to judge whether it will be able to cut interest rates again, because that outlook depends on the duration of the conflict and the extent to which rising oil prices affect overall inflation.
“Only if inflation shows improvement can one realistically expect rates to fall this year,” he added, further reinforcing the US Fed’s data-dependent stance.
The US Fed’s Internal Stance Is Turning More Cautious
These remarks by Goolsbee were highly consistent with earlier comments by Fed Governor Michael Barr. Barr had previously also emphasized that, given that US inflation remains above target and elevated oil prices are further pushing up inflation, interest rates may need to remain unchanged “for some time.”
In addition, Barr likewise pointed out that although the US labour market appears to be stabilizing, US Fed officials need to see clear evidence of sustained disinflation before considering interest rate cuts.
Taken together, these comments highlight the US Fed’s increasingly cautious shift in stance. As geopolitical developments exert a growing influence on the US inflation outlook, the combination of persistent price pressures and external shocks has reinforced expectations that high inflation will last longer, while also creating uncertainty over the feasibility of further policy easing in the near term.
For markets, the key point is that after the Russia-Ukraine shock several years ago, energy-driven inflation risks have now been firmly incorporated into the US Fed’s reaction function. As a result, US Fed rate expectations may remain sensitive not only to economic data, but also to developments in the Middle East conflict and their impact on oil prices.
