Goolsbee now thinks cuts could slip to 2027.
Fed optimism hit by energy shock
Chicago Federal Reserve President Austan Goolsbee said the conflict involving Iran has changed his view on when the central bank might start cutting interest rates. Look, he told CBS News he had been hopeful earlier in the year that the Fed could lower its benchmark rate multiple times in 2026. But the surge in oil and fuel prices tied to the war has dimmed that outlook and made him more cautious.
He emphasised he was speaking for himself, not the whole Federal Reserve System.
Higher energy costs push inflation up in the short term, making it tougher for the Fed to ease monetary policy. If the price shock sticks around or gets bigger, it could also slow growth and raise unemployment — which would normally pull the Fed toward cutting rates, not raising them.
Right now, policymakers are stuck in a classic dilemma.
Where the numbers stand
Gasoline prices have jumped since the conflict started. The US national average recently hit about $4.09 a gallon, roughly a dollar higher than before the war, according to CBS News. Economists polled ahead of the next US inflation update expect March consumer prices to show a 3.1% annual increase, up from February's 2.4%, according to FactSet, a figure cited in reporting.
That matters because the Fed's favoured core inflation gauges were already above the two per cent target before the war. Core prices excluding food and energy rose 3.1% year over year in January, a reading highlighted in reporting of Federal Reserve data.
In December the Federal Open Market Committee projected inflation would cool to 2.6% by year-end and core inflation to about 2.5%. Those projections also included a forecast for a single rate cut in the calendar year — a view now in doubt. The Fed moved rates higher through 2022 and 2023, then cut three times last year before pausing in January.
What other policymakers and economists are saying
Some economists now think any planned easing might be pushed well into the second half of the year or later. Nathan Sheets, chief global economist at Citi and a former senior Fed economist, said the committee's room for manoeuvre is limited while the Iran energy shock plays out. Tim Duy, chief economist at SGH Macro, argued the Fed should raise its forecast for core inflation in its next projections to at least 2.8% by year-end — a move that would weigh against cuts this year.
Several Fed officials named in recent reporting — including governors Chris Waller, Stephen Miran and Michelle Bowman — are described as reluctant to remove the expectation of rate reductions entirely, signalling internal debate inside the Fed about how to balance short-term price shocks against the broader trajectory of inflation.
That split is what’s making the Fed’s upcoming meetings so tense. One camp focuses on near-term inflation that could pick up from energy; the other looks at labour market strength and longer-run inflation trends and wants to avoid overreacting to a potentially temporary spike.
Signals from markets and Fed mechanics
Market pricing shifted quickly after the conflict. CME Group's FedWatch tool — which derives probabilities of interest rate moves from fed funds futures — has pared back expectations for cuts in 2026, at one point showing a zero chance of any easing this year, according to reporting.
Goolsbee is an alternate member of the Federal Open Market Committee in 2026; he participates in discussions and in economic assessments but doesn't cast a vote this year. He is set to rotate on as a voting member in 2027, the Fed has confirmed.
The FOMC is set to release fresh quarterly economic projections at an upcoming meeting. Those projections are important because they often shape investor expectations: if the committee lifts its inflation forecasts, the case for rate cuts weakens. If the committee keeps its December projections, markets may still bet on cuts later in the year — and that mismatch drives volatility.
How higher energy costs affect the economy
Higher pump prices eat into household budgets. Goolsbee warned that sticker shock at the gas pump could cause some consumers to pull back on other spending. That would hit retail and services growth, sectors that have been propping up overall expansion.
Consumer spending has been described as the backbone of US growth. If households start trimming discretionary purchases because energy bills are higher, the economic expansion could lose momentum. At that point the Fed would face real pressure to change course — but only if the slowdown is clear and sustained.
Timing is key. If the energy-driven rise in prices is short-lived, inflation could roll over and leave room for cuts in 2026. If it lingers or triggers broader price gains, rate relief could be delayed to 2027 or beyond — the timeline Goolsbee floated on CBS.
What's on the Fed's to-do list
The Fed needs to consider new inflation data, labor market numbers, and global risks. Its March meeting produced a pause in policy — officials left the federal funds rate unchanged — while signalling ongoing uncertainty tied to geopolitical developments and economic data.
Officials will also check the March Consumer Price Index report and other real-time data. Private economists and market-derived gauges have tightened their outlooks since the conflict started. Policymakers will have to decide whether the latest price moves are a temporary wobble or evidence of a re-acceleration of core inflation.
Some Fed officials might tolerate higher inflation temporarily if the economy slows sharply; others want to see clear inflation declines first. That disagreement helps explain why Goolsbee and others are more cautious than they were a few months ago.
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"That starts pushing these decisions off to 2027 at the earliest," Goolsbee said.
This article was created with AI assistance.
