The outlook for the Federal Reserve's monetary policy is undergoing a significant shift, moving from the previously widely anticipated path of interest rate cuts towards a possible rate hike. Recent comments from Chicago Fed President Austan Goolsbee vividly illustrate this shift.

Goolsby has significantly shifted its stance, prioritizing inflation risks.

On Monday (March 23), Goolsby made it clear that the Federal Reserve may need to tighten monetary policy to address the impact of rising oil prices on the U.S. economy. This statement contrasts sharply with his stance a few weeks earlier.



In the interview, Goolsby pointed out that all policy options are on the table, and interest rates could move in either direction. He further explained, "If inflation performs well, we may return to an environment of multiple rate cuts this year. I also foresee that if things go the other way and inflation gets out of control, we will need to raise interest rates."

Goolsby also emphasized that he is currently more concerned about inflation than the labor market. He stated, "We are already operating at an alarmingly high inflation rate, well above target, and now with the added threat of a continued gasoline price shock, this makes it a very uncertain and tense time."

The fact that inflation has been above the Federal Reserve’s 2% target for five years makes current policy decisions particularly complex.

Oil price shocks trigger stagflation concerns, Federal Reserve faces a dilemma.

The Federal Reserve has a dual mandate: to maintain price stability and to achieve full employment. The recent surge in oil prices could trigger stagflation , meaning that while pushing up gasoline and food prices, it could also weaken overall demand and impact the labor market.

This situation puts the Federal Reserve in a dilemma: should it prioritize the weak labor market or focus on addressing rising price pressures?

In the interview, Goolsby made it clear that he currently prefers to prioritize inflation risks over the labor market.

Signs of a policy shift are emerging, with hints already appearing at last week's meeting.

At last week's Federal Open Market Committee meeting, Federal Reserve officials decided to keep interest rates unchanged while retaining the possibility of a rate cut later this year. However, a minority of officials advocated revising the policy statement to explicitly state that the next move could be either a rate cut or a rate hike. Some economists expect this wording adjustment to likely appear at the next Fed meeting at the end of April.

Tim Duy, chief economist at SGH Macro Advisors, pointed out that if Federal Reserve officials ultimately decide to raise interest rates, it would mark a major shift in monetary policy, as officials have been highly focused on the issue of rate cuts for the past few months.
He added, "This will be a bitter pill to swallow. If inflation gains the upper hand in the short term, the signal to the Fed will be that it needs to create more demand destruction than the oil price shock itself to maintain downward pressure on inflation and inflation expectations." He also stated that the Fed is unlikely to rush into raising interest rates.

Market expectations reversed rapidly; while the probability of an interest rate hike remains low, it has begun to emerge.

Derivatives market traders' expectations have completely shifted. Previously, the market widely anticipated two 25-basis-point rate cuts by the Federal Reserve this year; now, traders believe interest rates will remain unchanged by the end of the year, while also estimating the probability of a Fed rate hike to be around 8%.

Milan maintains its stance on interest rate cuts, contrasting with the mainstream opinion.

While many Federal Reserve officials are increasingly discussing the possibility of interest rate hikes, at least one official is still actively advocating for rate cuts.

Federal Reserve Governor Stephen Miran said he believes the Fed could still implement four interest rate cuts this year. Miran previously served as White House chief economist during the Trump administration.

He pointed out that the Fed’s traditional view is that central banks can “ignore” oil price shocks because while rising oil prices will affect overall inflation, such price changes usually do not translate into core inflation measures that exclude food and energy.

He added that there are two exceptions to this rule: one is if inflation expectations over a year begin to rise significantly; and the other is if rising gasoline prices trigger a wage spiral.

Stephen Miran stated, "So far, that hasn't happened." He further noted, "There's little evidence that rising petrol prices have led to a wage spiral. In fact, wage pressures have been declining over the past few years."

Stephen Miran was the only dissenter at the Federal Reserve’s decision last week to keep interest rates unchanged, advocating for a rate cut.

The stance taken three weeks ago contrasts sharply with that of today; geopolitical factors remain a key variable.

Just over three weeks ago, before the US and Israel launched their attack on Iran, Goolsby had repeatedly stated publicly that he believed the Federal Reserve would eventually be able to cut interest rates this year.

As geopolitical tensions continue to push up energy prices, the Federal Reserve's policy focus is quietly shifting. How the oil price shock further transmits to inflation, monetary policy expectations, and the overall economy will be a core factor determining the future path of interest rates.

Overall, the Federal Reserve's interest rate stance is undergoing a subtle shift.

Goolsby's latest remarks highlight rising inflation risks, while Milan's insistence shows that the policy debate remains divided. Ultimately, the Fed's decision will depend on the combined evolution of oil price trends, inflation performance, and labor market dynamics; the market needs to closely monitor signals from subsequent meetings.