Goolsbee, a member of the Federal Open Market Committee (FOMC), has made a minority argument within the current FOMC by advocating for slower hikes in interest rates. While his comments may seem dovish at first glance, they are actually rooted in a nuanced analysis of inflation and its determinants. In this blog post, we will delve into Goolsbee’s arguments and explore their implications for the Federal Reserve’s monetary policy.

Firstly, Goolsbee distinguishes between demand-pull and cost-push / supply shock inflation. Demand-driven inflation is characterized by a rapid increase in prices due to strong demand, while supply shock inflation is caused by disruptions in the production process. Goolsbee’s key point is that the Federal Reserve should move more gradually when dealing with supply shock inflation, as hiking rates too quickly can lead to unnecessary labor market damage.

Secondly, Goolsbee emphasizes the importance of separating the terminal rate (how far rates need to go) from the pace (how fast they need to get there). He argues that the source of inflation does not change where rates ultimately need to go, but rather how quickly they need to reach their destination. This is a crucial distinction, as it highlights the need for a more deliberate and quarterly-based cadence in Fed hikes, rather than consecutive meetings.

Thirdly, Goolsbee’s comments provide a counterweight to those who argue that inflation is broad-based and demand-driven, justifying a more aggressive pace of rate hikes. By drawing attention to the nuances of inflation and its determinants, Goolsbee adds a valuable perspective to the FOMC’s deliberations, potentially influencing the Fed’s monetary policy decisions.