Watch CNBC's full interview with Chicago Fed President Austan Goolsbee

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Asks Goolsbee how a policymaker views the incoming news on oil markets, inflation outlook, and effect on policy.

Steve

Austan Goolsbee

Describes this as an intense moment with a lot hanging in the balance. Notes 2025 experienced another inflationary shock, progress on inflation stalled and started inching back up. A new inflation shock is piling on before the previous one has left.

States that before the President's social media post, he was about to discuss how the outlook for the Fed funds rate in December had turned decisively toward a hike, with Fed watchers capitulating to the view that weak job market wouldn't stop the Fed from hiking due to intense inflation.

Asks Goolsbee for his view on the policy outlook even before the current events.

Steve

Austan Goolsbee

Dissented at last meeting because data didn't show inflation going away. Remained optimistic rates could go down by end of 2026 but wanted proof inflation was headed to 2%. Current situation throws a wrench into plans.

Explains key mechanism: if everyone starts expecting inflation to remain high, it becomes extended. Gasoline prices specifically have high impact on inflation expectations. Operating at uncomfortably high inflation and adding a potential lasting gasoline price shock creates an intense moment.

Asks how much weakness in the job market the Fed is willing to look through in the fight against inflation.

Steve

Austan Goolsbee

Points to monetary policy framework for when both sides of mandate go wrong: look at which deviation is bigger and how long each will take to return to acceptable levels.

Prefers unemployment rate, layoff rate, hiring rate, vacancy rate over payroll job creation due to questions about labor supply. Most indicators show stability at levels closer to full employment than inflation is to target. At the moment, inflation has to be a little ahead of employment.

Notes whipsaw reaction in Fed futures suddenly thinking odds favored December rate hike rather than cut. Asks if Goolsbee's own mind follows this whipsaw pattern.

Steve/Becky

Austan Goolsbee

No, central bank's job is to be the steady hand. The most important thing is to figure out the through line of what is happening.

Explains what makes this intense: nobody can tell what will happen in Middle East conflict and how long it lasts. If issues resolved without permanent impact on gasoline/energy prices, that's favorable. If extended and drifts into inflation expectations, you would see more rising long-term interest rates as people try to compensate.

Notes some smart people say inflation looks anchored (looking at spreads). Tariffs and Strait events are one-off. Asks if inflation is anchored and what inflation hawks see that makes them think it's ready to be back to 4%.

Host

Austan Goolsbee

Doesn't totally know others' views. Personally optimistic longer term, more pessimistic shorter term. Worried this could repeat transitory mistake where everyone assumed supply chain would fix itself quickly.

Inflation expectations seem anchored so far, but uses sunburn theory: once they start to go wrong, you'll wish you put on sunscreen. Times most pessimistic: looking at components not tariff-related like services inflation, which historically doesn't go away quickly. More concentrated in goods/tariffs felt better.

Notes 30% probability of hike by December (been as high as 60%). Asks if a hike is in the arsenal to address surge in oil prices and resulting inflation.

Steve

Austan Goolsbee

Everything is always on the table. Could be back to multiple rate cuts if inflation behaves, or could need to raise rates if inflation gets out of control.

Key: historically oil shocks are stagflationary direction shocks that make employment worse while making inflation worse. That's the worst kind of shock, most uncomfortable for central bank with no obvious playbook. Absolutely depends how it plays out and whether lasting or not.

Notes historical rule from 80s was to address inflation, but since then it's been economic state dependent. Hawks say Fed has abided inflation above target for long time, maybe reached end of rope, time to think about addressing oil shock.

Steve

Austan Goolsbee

Agrees. Cautions about intuition from 70s/80s because US wasn't nearly as big energy producer then.

On output side, if oil price goes way up and stays up, at least some part of US economy benefits. Would probably see significant investment from fracking and energy production. In 70s it was more purely a cost shock with worse impact on employment relative to inflation.

Asks what Goolsbee has asked his researchers to look at relative to current situation.

Steve

Austan Goolsbee

Trying to think through impact of extended higher oil prices: how long before showing up in greater investment on employment/output side.

If short-lived conflict and prices go back down, might be stuck where consumers respond immediately to high gas prices affecting consumption, but investment part takes months because producers want to be sure price will remain high before fracking investments. Trying to think through dynamics and overall magnitude of output effect that might balance against inflation part.

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