Chicago Fed President Goolsbee rejects calls for Fed rate cuts to ease US debt burden

Speaking in London, Goolsbee said fiscal policy and deficits should remain “background weather” for the Fed and matter only when they affect inflation.

“Should the Fed try to reduce the rates to make the deficit smaller or to make it less costly to increase the debt?” Goolsbee asked. “Let’s be a little careful with that. … Because I think that is the canonical argument” for central bank independence.

Goolsbee described efforts to push interest rates lower as government debt rises as a “monetise the debt” argument. Economists warn such a move could fuel inflation and backfire by raising market borrowing costs as inflation expectations rise, Reuters reported.

President Donald Trump has urged the Fed to cut its policy rate to around 1%, well below the current 3.75–4% range. Meanwhile, rising long-term Treasury yields are increasing the cost of financing annual deficits equivalent to about 6% of US economic output.

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Strong demand may warrant faster Fed rate hikes
US inflation may no longer be driven solely by tariff and energy-price shocks, with strong demand also adding to price pressures and potentially requiring the Federal Reserve to raise interest rates more quickly, Chicago Fed President Austan Goolsbee said on Monday.Inflation over the past 18 months was initially attributed to tariffs and then to oil-price shocks. Policymakers were inclined to “look through” these supply-side pressures without raising borrowing costs, expecting them to fade over time, Goolsbee said at an event hosted by the Official Monetary and Financial Institutions Forum in London.

However, supply-driven inflation has proved persistent, while evidence suggests that robust demand is broadening price pressures. Goolsbee said booming investment in artificial intelligence could lift prices across the economy, while elevated services inflation indicates that the problem extends beyond the latest oil shock.

“If the through line is that it’s coming from overheating demand, I think the implication is the rate response is more aggressive and more and more front-loaded,” he said. Recent economic data and discussions with businesses suggest “that some of it maybe is coming from overheating demand.”

“If demand overheats, there is no ambiguity about how the Fed needs to respond,” Goolsbee said, referring to the potential need for higher interest rates. He added that AI investment could be “spilling out of its own lane and raising aggregate output beyond what the economy can absorb.”

The Fed raised its policy rate by a quarter of a percentage point last week. Fed Chairman Kevin Warsh subsequently highlighted the strength of consumer spending, business investment and other demand-side indicators.

Policymakers also removed language from their policy statement attributing elevated inflation to “supply shocks that have driven price increases in certain sectors, including energy.” The revised statement simply said, “inflation remains elevated”.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)