Goolsbee warns inflation wrong way as 88% bet on Fed hike

Chicago Fed President Austan Goolsbee said inflation is moving in the wrong direction, reinforcing market bets that the central bank's next move will be a rate hike rather than a cut.

Chicago Fed President Austan Goolsbee said US inflation is moving in the wrong direction, with core prices still too high, as markets boosted the probability of a rate increase before year-end to 88 percent.

"Inflation has been going the wrong way," Goolsbee, a 2027 FOMC voter, said Wednesday. "Core inflation remains too high, and the trend is not improving," though he noted service inflation has slightly improved.

The comments reinforce a hawkish shift that has reshaped rate expectations since the Fed's June 17-18 meeting. The central bank held its benchmark rate at 3.5 percent to 3.75 percent, but half of 19 officials projected a rate increase this year — a stark reversal from January when markets expected borrowing costs to fall. The December rate hike probability surged from 61 percent before the meeting to 88 percent as of Tuesday, according to OIS pricing. The 10-year Treasury yield stood at 4.481 percent while the 2-year yielded 4.190 percent.

The repricing has hit risk assets across the board. Gold dropped to $4,091 before stabilizing near $4,134, while the Nasdaq Composite fell sharply and South Korea's Kospi crashed during Asian trading. Thursday's Personal Consumption Expenditures report — expected to show headline inflation at 4.1 percent and core at 3.4 percent — will be the next test of whether the hawkish repricing has further to run.

Goolsbee's latest remarks echo his comments Monday on Marketplace radio, where he described service-sector inflation — running in the 3.5 percent range for more than a year — as "a little more disturbing" than price pressures from transitory sources such as tariffs or the Middle East conflict. Services account for the bulk of US consumer spending, and their persistent inflation has been a key concern for Fed officials who worry that price pressures are becoming entrenched.

The last time the Fed faced a comparable inflation persistence dynamic was in the second half of 2023, when the central bank held rates at 5.25 percent to 5.5 percent for seven months before beginning cuts in September 2024. The S&P 500 fell 6 percent over that holding period while the 2-year yield oscillated between 4.6 percent and 5.1 percent.

Rate Hike Path Comes Into Focus

The shift in rate expectations has been unusually rapid. A market that began 2026 pricing in multiple cuts has, in the span of two weeks, flipped to pricing a hike before December. The speed of the repricing — from 61 percent to 88 percent in five sessions — has left little room for orderly repositioning, amplifying moves across asset classes.

Brent Meyer, an Atlanta Fed vice president who oversees the bank's survey research, said Wednesday that firms have "fewer and fewer levers they can pull on the cost side before they are forced to push through price increases." A quarterly Fed survey of CFOs showed two-thirds of firms experienced higher unit production costs from the oil shock, but only one-third raised prices — suggesting further pass-through may be coming if energy costs remain elevated.

Thursday's PCE data will be the first major inflation print since the Fed's hawkish hold. If the core reading comes in above the 3.4 percent consensus, it would validate the market's rate hike expectations and likely push yields higher. A softer number could trigger a partial unwind of the repricing, though Goolsbee's comments suggest the committee is in no rush to signal accommodation.

The Fed's next meeting is July 28-29, followed by Sept. 15-16. The September meeting is now the earliest window for a potential rate increase, contingent on the trajectory of inflation and employment data over the summer.

This article is for informational purposes only and does not constitute investment advice.