Chicago Fed flags inflation risk as Goolsbee backs Warsh's shift on rate guidance

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Chicago Fed on inflation risk

Highlights

Core PCE inflation rose to 3.4% in May, the highest since October 2023, with goods up 0.4% and services up 0.5%.
Energy prices increased 6.5% and transportation services 0.8%, underpinning broad price gains and keeping Fed focus on inflation risks.
Chicago Fed President Goolsbee backs Chairman Warsh’s reduction in forward rate guidance, as markets price a 30% chance of a September rate hike.

Inflation data keeps policy focus on prices

As reported by CNBC, Goolsbee says recent inflation readings still move in the wrong direction despite a few encouraging signs in services prices. Speaking in a live interview from the Cboe trading floor, he says the Fed should stay centered on inflation rather than speculate publicly about the path of interest rates.

The comments come hours after the Commerce Department reports that core inflation, measured by the personal consumption expenditures price index, stands at 3.4% in May, the highest level since October 2023. Price gains are broad, with goods rising 0.4% and services up 0.5%, the strongest monthly services increase since January.

Energy drives much of the goods increase, rising 6.5%, while transportation services, a category sensitive to gasoline prices, advances 0.8%. Goolsbee says there has been some improvement in services inflation, but adds that inflation remains the more pressing challenge compared with the labor market side of the Fed's mandate.

Warsh communication reset shapes market expectations

Goolsbee also endorses new Fed Chairman Kevin Warsh's push to scale back forward guidance in central bank communications. He says the shorter post-meeting statement and the removal of language signaling the future rate path represent a healthy reset for the Fed.

Markets currently expect the Fed could raise its benchmark rate in September, though Goolsbee refuses to say how he would lean. He says he applauds Warsh's effort to avoid routine speculation over future moves and describes the chairman as a serious policymaker with a different style.

Goolsbee rejects suggestions of internal tension at the Fed under Warsh, noting the two worked closely during the global financial crisis when Warsh helped design rescue programs and Goolsbee served as a senior economic adviser in the Barack Obama White House. The Federal Open Market Committee next meets on July 28-29, and CME Group's FedWatch shows markets pricing roughly a 30% chance of a rate hike; Goolsbee is a nonvoting participant this year and regains a vote in 2027.

In our earlier article on May’s PCE inflation and U.S. income-and-spending data, we noted that price pressures stayed elevated, with headline PCE running a little above 4% year over year and core PCE near 3.4%, the highest since October 2023. We also highlighted that both personal income and consumer spending increased in May while the personal saving rate held at 3.0%, pointing to resilient demand even as inflation remained sticky.

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