Chicago Fed President Austan Goolsbee indicates that supply shocks are proving more persistent than anticipated, challenging the Fed's previous 'transitory' view on inflation. He also raises concerns that AI investment could be contributing to demand-side overheating, suggesting the Fed may need to respond with higher rates, which increases the likelihood of an October rate hike.
Chicago Fed President Austan Goolsbee's remarks signal a shift in the Federal Reserve's perspective on inflation, moving away from the 'transitory' narrative for supply shocks. His concern that AI investment could be creating demand-side inflation adds a new dimension to the inflation debate, suggesting that the problem is not solely supply-driven. This increases the probability of further interest rate hikes, as evidenced by the CME FedWatch showing over 50% odds for an October hike. This outlook implies continued pressure on bond markets, as seen with the iShares 20+ Year Treasury Bond ETF (TLT) hitting new lows, and could lead to slower economic growth and weaker hiring, impacting broader equity markets.