Fed's Goolsbee backs central bank autonomy, questions tariffs

A Federal Reserve official emphasized the importance of the central bank's independence, warning that interference could lead to higher inflation.

Federal Reserve Bank of Chicago President Austan Goolsbee, speaking at an event Wednesday, stressed that while he stays out of "election business," Fed independence from political interference "is vital" to control inflation. 

"Interests of partisan politics are not always lined up with what's best for the economy," Goolsbee said during a luncheon at the Greater Springfield Chamber of Commerce Wednesday in Springfield, Illinois. "The Federal Reserve Act gives the Fed a dual mandate. It doesn't say anything about making the stock market happy. Doesn't say anything about [doing] what the president says. It's important to have that because we don't want inflation to come back."

The commentary comes as the Federal Reserve weighs whether to continue focusing on bringing inflation down to its 2% target or shift its attention to supporting the labor market, a move that could lead to an interest rate cut, something the Trump administration and some central bank officials have strongly advocated for.

One of the variables adding uncertainty to what the Fed's next move should be is the impact of tariffs on the economy.

Golsbee, a voting member of the Federal Open Market Committee, called tariffs a "stagflationary shock" to the system, saying they have made the path forward uncertain because their effects on the overall economy have yet to ripple through.

"It makes both sides of the mandate go bad at the same time, and that's the worst position that a central bank can be in because there's not an obvious answer of what you do," Golsbee said. "It's not like if the economy is overheating, you tighten, if the economy is over cooling, you loosen it. What do you do if they're both going wrong?"

Goolsbee expressed unease about whether the inflationary impact from tariffs would be "transitory ... because they used the word 'transitory' before, and it wasn't that transitory," and said further inquiry is warranted to understand the broader economic implications.

For now the effect of tariffs has been limited with the July Consumer Price Index showing headline price growth of 2.7% over the previous year, the same as the month prior. Core CPI, which excludes food and energy, rose to 3.1%, up from 2.9% in June. 

With inflation data showing little movement and concerns mounting over a weakening labor market, speculation is swirling that the Fed will move to cut rates in September – something Fed Chair Jerome Powell said the FOMC would've already done had it not been for the uncertainty around tariffs and other policy developments.

The FOMC is scheduled to meet on Sept. 16 and 17, during which time the members will have to "figure it out," said Goolsbee.

"When I first got there, they asked me, 'Are you a dove? Are you a hawk?' I don't even know if I like birds. I don't aspire to be a bird. I'm just there to be one of the data dogs," Goolsbee said. "The first rule of the data dogs is to sniff everything and know when it is the time for sniffing. As we go into the fall, there are going to be some live meetings, and we're going to have to figure it out."

"The hardest thing that a central bank ever has to do is try to get the timing right," he said.