For markets, the message is that senior Fed officials now treat war-driven energy costs as a persistent inflation driver, which suggests the central bank may stay inclined to tighten for as long as crude remains a source of pressure. That sets up a two-way link: firmer oil raises the odds of further rate rises, while higher rates are meant to curb demand over time, a factor that can weigh on the fuel consumption outlook. Rates traders may lean toward a firmer policy path if energy prices climb further, while a sustained pullback in crude would test how far this hawkish framing holds. The debate over the size of the tightening path still appears open, so incoming inflation data and energy price moves may carry extra weight.
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Two non-voting Fed officials pointed to Iran war supply shocks as a reason for higher rates, with Goolsbee's talk of economic pain contrasting with Chair Warsh's message on jobs.
Summary:
A senior Federal Reserve official said the renewal of fighting in the Middle East in August was a key reason she supported last week's interest rate rise, according to an interview with The Associated Press. Susan Collins, president of the Federal Reserve Bank of Boston, said she agreed with the Fed's decision on Wednesday to lift its benchmark rate by a quarter point to about 3.9%, and that she also pencilled in a second increase for later this year. She said she expects the Fed to hold rates steady next year.
Collins said she had not seen the inflation progress she was hoping for, and that geopolitical developments could keep adding pressure on the energy side. She pointed to an increased likelihood of scenarios in which inflation gets stuck above the Fed's 2% target, which it has not reached for more than five years. Businesses in her district, which covers Massachusetts, Connecticut, Maine, Rhode Island and Vermont, remain worried about high costs, she said, and many expect to pass them on to customers, which could lift measured inflation.
Chicago Fed President Austan Goolsbee, who spoke in London earlier on Monday, offered a more pointed view of the trade-off, AP reported. He argued that persistent supply shocks, including higher oil prices tied to the Iran war and tariffs, leave the central bank little choice but to raise rates, even though it would normally wait for such shocks to fade. In his view, higher rates are needed to narrow the gap between supply and demand, which would mean pushing employment below target and would be painful. That stance contrasts with remarks by Fed Chairman Kevin Warsh last week, when he said he did not believe the labour market needed to be harmed to meet the Fed's objectives. AP noted that when the Fed raised rates sharply in 2022 and 2023, inflation fell without a significant rise in unemployment.
Goolsbee also suggested the Fed may need more than the one additional hike that policymakers projected as a group last week. He said signs that AI-related data center investment is adding to inflation point to strong demand as well as the oil supply shock. If inflation is mostly a supply issue, one more hike could be enough, he said, but evidence that demand is the driver would likely mean it is not. Neither Collins nor Goolsbee votes on rate decisions this year, though both take part in the meetings. Goolsbee will vote next year and Collins in 2028.
Goolsbee
This article was written by Eamonn Sheridan at investinglive.com.
Source: Investing Live - Central Bank
