Federal Reserve Bank of Chicago President Austan Goolsbee told CNBC on Monday that the U.S. central bank's policy path remains contingent on developments stemming from the war in the Middle East. His comments made clear that the Fed could either move to lower interest rates later in the year or pivot to further tightening, depending on how the conflict affects inflation and economic activity.
"We could be back to the environment with multiple rate cuts for the year if inflation behaves," Goolsbee said in the interview. He added, "I could see circumstances where we would need to raise rates if it was going a different way, and inflation was getting out of control."
Goolsbee emphasized that, based on most economic indicators, the labor market appears closer to full employment than the Fed is to reaching its inflation target. That assessment, he said, means inflation considerations should carry greater weight in near-term policymaking.
Last week the central bank maintained the current level of interest rates while policymakers continued to signal one rate cut for the year, even as uncertainty from the Iran war persists. Since that policy meeting, markets have shifted: investors have priced in higher rates amid renewed inflation concerns, and futures markets now show better odds of a rate hike in 2026 than a cut.
In the same policy round, one Federal Reserve policymaker broke from the consensus by projecting an interest rate increase for next year rather than the widely anticipated cut. That projection was the first time in two-and-a-half years that any Fed official has penciled in a rate hike, a development that coincided with the Iran conflict and associated higher oil prices entering their third week during that period.
Despite that dissenting forecast, most Fed officials continue to expect the next policy move to be a cut this year, a stance consistent with the central bank's December outlook.
Summary takeaways and market context are straightforward from Goolsbee's remarks: policymakers remain data-dependent, and the path for rates now hinges materially on how geopolitical events influence inflation. Financial markets have already begun to price that uncertainty, altering expectations for the timing and direction of future Fed action.