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Fed President Austan Goolsbee warns that inflation expectations could become a self-fulfilling prophecy if markets start factoring them into forecasts, despite inflation having worked downward toward the 2% target. With uncertainty surrounding upcoming policy decisions—such as potential tariffs—Goolsbee and other experts stress the importance of carefully managing rate cuts and inflation expectations to maintain economic stability.
Consumers might be concerned about inflation coming down the pike, but Fed President Austan Goolsbee has warned price rises will become a self-fulfilling prophecy if markets begin baking them into forecasts.
As a voting member of the Federal Open Market Committee (FOMC), Goolsbee, who leads the Chicago branch of the Fed, is one of those responsible for deciding when and by how much to cut the base rate.
In the past few years the decision-making of the FOMC has come under increased scrutiny by members of the public and policymakers alike, as the group has attempted to pull down inflation by hiking rates to their highest in decades.
It seems that inflation is finally tracking down to its target level of 2%—it had an annual rate of 2.8% in February 2025—but fears over White House policies such as tariffs are causing long-term expectations to spike.
So far consumers are the group which have the gloomiest outlook on inflation, with expectations issued by Wall Street coming in somewhat lower.
For example, the University of Michigan's highly regarded Survey of Consumers found in its most recent report that 12-month inflation expectations sat at 3.5%. On top of that, more than 10% of consumers said they expect price rises to spike by more than 15% in the coming year.
More worryingly, the survey also found that the longer-term five-year expectation has spiked to 3.9%, up from the 3% expected at the end of last year.
Conversely Goldman Sachs, for example, is forecasting PCE (personal consumption expenditures) inflation of 2.75% year over year, while JPMorgan Chase previously put the range for the year between 2.1% and 2.5%.
However, if financial institutions and economists begin raising their long-term rate noticeably, Gooslbee said, this would be a "major red flag."
Goolsbee told the Financial Times that in this scenario the Fed would have to change course, adding: “Almost regardless of the circumstances, you must address that.”
He added: "If you start seeing market-based long-run inflation expectations start behaving the way these [consumer] surveys have done in the last two months, I would view that as a major red flag area of concern."