Chicago Fed President Austan Goolsbee sees inflation from Iran war as risk to 2026 rate cuts

The Federal Reserve Bank of Chicago President Austan Goolsbee has expressed concerns that the ongoing Iran war could lead to inflation, making it more challenging for the central bank to lower interest rates in 2026. Goolsbee, speaking in a personal capacity and not on behalf of the Federal Reserve as a whole, stated in an interview with CBS News that prior to the conflict, he was optimistic about the Fed’s ability to reduce its benchmark rate this year. However, the escalation of the war has resulted in a surge in oil and fuel prices, causing Goolsbee to reevaluate his stance.

“Before the war, before we got the oil shock, I’ve been on the optimistic side of the rate — I believed rates could come down even multiple times in 2026,” Goolsbee said. The energy shock caused by the war has complicated the economic outlook, with Goolsbee now suggesting that any rate cuts may be postponed until 2027 at the earliest. The Federal Reserve had initially indicated a plan to cut rates once in 2026, but the mounting economic uncertainty stemming from the Iran war has put this decision in question.

The rise in energy costs, with gasoline prices hitting $4.09 a gallon, has further fueled concerns about inflation and its impact on the economy. Private economists are revising their forecasts for interest rate cuts in light of the risk posed by higher oil prices. The latest projections suggest that the Fed may not implement any rate cuts in 2026, as inflation remains above the target rate of 2%.

Goolsbee, serving as an alternate member of the Federal Open Market Committee in 2026, highlighted the potential consequences of higher energy prices on consumer spending. He warned that the pressure on household budgets could lead to a slowdown in consumer activity, affecting the overall economic growth. Consumer spending has been a key driver of the economic boom, and any disruptions could jeopardize the recovery.

Additionally, Goolsbee expressed concerns about the labor market, which has shown signs of uncertainty amid the Iran war. While the March job report indicated a gain of 178,000 new jobs, economic uncertainty has led to a cautious approach by businesses. Goolsbee described the current state of the labor market as “low hire, low fire,” with companies hesitant to make significant hiring decisions until there is more clarity on geopolitical issues and economic conditions.

Overall, the economic outlook for 2026 remains uncertain, with the Iran war and rising energy prices posing challenges for the Federal Reserve and policymakers. Goolsbee’s insights shed light on the potential impact of these factors on inflation, interest rates, consumer spending, and the labor market, highlighting the need for a cautious approach to monetary policy in the coming months.