Fed president says a ‘major red flag’ will probably be if gloomy inflation expectations unfold from shoppers to Wall Street

• 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.”  

He added that “anchoring” inflation expectations is a key part of the role of central banks—if these spiral out of control then the public is likely to seek higher wages to get ahead of foreseen price rices, pushing up the costs of goods and services as a result.

As FOMC chairman Jerome Powell highlighted in his speech following the last meeting of the group earlier this month: “Some near-term measures of inflation expectations have recently moved up. We see this in both market- and survey-based measures, and survey respondents, both consumers and businesses, are mentioning tariffs as a driving factor.

“Beyond the next year or so, however, most measures of longer-term expectations remain consistent with our 2% inflation goal. The median projection in the SEP for total PCE inflation is 2.7% this year and 2.2% next year, a little higher than projected in December. In 2027, the median projection is at our 2% objective.”

An uncertain path

Even Wall Street titans like Jamie Dimon who have previously poured cold water on inflation fears have cautioned that growing uncertainty in the market is not good for the economy.

And Goolsbee cautioned the same also goes for decisions about the base rate. He explained: “My view is that when there’s dust in the air, ‘wait and see’ is the correct approach when you face uncertainty.

“But ‘wait and see’ is not free—it comes with a cost. You gain the ability to learn new information, [but] you lose some of the capacity to move gradually.”

With April 2 looming—a date many on Wall Street have earmarked in their calendar for the next expected tariff announcement—Goolsbee said the next month or so will set the tone for the near-term.

The next three to six weeks will be “a critical period [when] we’re going to resolve a series of policy uncertainties”, he added: “When I’m out talking to executives here in the district, they are frequently citing April 2nd as a key point of their uncertainty.” 

This story was originally featured on Fortune.com