Federal Reserve Bank of Chicago President Austan Goolsbee said Tuesday that the U.S. economy is overheating, with inflation readings showing broad-based price pressures that have moved further from the Fed's 2 percent target than a year ago.
Goolsbee identified energy inflation as the primary culprit, noting it has proven more stubborn than expected. He also pointed to spending financed by stock market and asset wealth occurring before artificial intelligence productivity gains fully materialize, creating near-term overheating risk.
The labor market presents an unusual signal. Goolsbee described it as characterized by persistently low rates of both hiring and firing—a dynamic suggesting underlying imbalances in employment.
Current GDP expansion is driven narrowly by artificial intelligence advancement and data center buildout, Goolsbee said. This sectoral concentration raises questions about the sustainability of growth.
The Fed faces significant uncertainty in calibrating policy. Goolsbee expressed skepticism about theoretical benchmarks such as r*—the natural rate of interest—highlighting the difficulty in determining effective cooling measures.
In response, Goolsbee is adopting Kevin Warsh's approach of reducing forward guidance, providing less explicit communication about future monetary policy to increase the central bank's flexibility.
The Fed has established task forces to analyze economic indicators and inform its reaction function, Goolsbee said.
Geopolitical disruptions, including U.S.-Iran tensions, add further complications to energy markets and supply chains, he noted.
