MediumIV Macro Policy & Sovereign Debt21 September 2026, Monday
The Fed's Goolsbee: if inflation is coming from demand, the rate response will be sharper and front-loaded
In a speech in London on 21 September, Chicago Fed President Goolsbee said one increase might suffice under a supply-shock scenario, while demand-driven inflation would require a more aggressive path.
In a speech delivered in London on 21 September 2026, Chicago Fed President Austan Goolsbee described two distinct policy paths according to the source of inflation. In his view, if most of the inflation comes from supply shocks, a single further rate increase this year might be enough; if the evidence points to inflation coming from overheating demand, that would not suffice. Goolsbee said the foremost supply shocks are high oil prices stemming from the Iran war and tariffs, while contacts in the business community point to classic demand pressure in the services sector and in the wave of artificial intelligence investment. He said the only way to bring inflation down is to raise rates and narrow the gap between supply and demand, and added that this would not be painless.
The speech followed the Fed's move on 16 September to raise its policy rate to a range of 3.75-4.00%. The Fed's H.15 release dated 21 September puts the effective federal funds rate at 3.88% as of 18 September, the 10-year Treasury yield at 5.01% and the 30-year yield at 5.34%. Goolsbee stressed that the unemployment rate is running close to full employment and that the labour market has tightened according to business feedback, but that monthly employment data should be read with care because changes in immigration policy have made population growth uncertain. Fed Chair Kevin Warsh set out a different frame, saying he does not believe the labour market has to be damaged in order to reach the 2% target.
Talay assessment
Bottom line
Goolsbee's framing shows that the real argument inside the Fed is about the pace rather than the direction of rates: a supply-shock reading points to a single further increase, a demand reading to a front-loaded series. In a setting where the 10-year yield stands at 5.01% and the 30-year at 5.34%, that distinction will set the ceiling for yields at the far end of the curve. Warsh's rejection of the need to damage the labour market points to a clear divergence of view within the committee.
Likely effects
- US far-end Treasury yieldsNegativeWeeks
With a front-loaded series of increases still on the table, any downward correction in the 10-year at 5.01% and the 30-year at 5.34% stays limited; the term premium remains elevated.
- Emerging markets and TürkiyeNegative1–6 months
With the effective funds rate at 3.88% and a sharper path under discussion, capital flows to emerging economies weaken; Türkiye's external financing cost and the pressure on the lira both increase.
- Divergence within the FedUncertainWeeks
The gap between Goolsbee's emphasis on a painful adjustment and Warsh's view that the labour market need not be damaged will test the voting pattern and the consistency of communication at the October and December meetings.
Possibilities, ranked
- 1A single further increase this year50%
It is confirmed that inflation comes mainly from an oil and tariff supply shock; the Fed moves once above the 3.75-4.00% range and then stops.
Watch: A slowdown in core services inflation and Fed officials maintaining their emphasis on supply shocks
- 2A front-loaded series of increases30%
Services inflation and demand pressure from artificial intelligence investment become clearer; the Fed tightens at consecutive meetings and pushes the 10-year yield above 5.01%.
Watch: Faster services inflation, an upward break in wage growth and the 10-year yield passing 5.25%
- 3The end of the tightening series20%
Growth and employment weaken and oil prices fall; the Fed holds within the current range and yields at the far end fall below 5%.
Watch: A rising unemployment rate and the 30-year yield easing below 5.00%
Probabilities are calibrated judgement based on the sources, not measurement, and are revised as new information arrives. Not investment advice.
Market reaction
Indicators affected
Historical context
US 10-year yield, last 6 months
- 117/09 · Fed dot plot median for 2026 rises to 4.00-4.25% while the 10-year yield eases from 5.04% to 4.94%
- 221/09 · The Fed's Goolsbee: if inflation is coming from demand, the rate response will be sharper and front-loaded
- 323/09 · US Treasury sells $70 billion of 5-year notes at 5.033%; after hot PMIs the 10-year yield hits 5.10%, its highest since 2007
- 424/09 · India's Sensex falls 1,247.71 points to 73,580; rupee presses against the 96 threshold as Brent tops $102 and the US 10-year yield exceeds 5.11%
- 524/09 · US Treasury sells 44 billion dollars of 7-year notes at 5.085%: highest yield since April 1993 as indirect demand falls to 57.2%
- 624/09 · No joint statement at Xi–Trump summit: tariff truce extended by just 2 months from 10 November to 10 January, no new decisions on chips or rare earths
- 725/09 · Michigan consumer sentiment at a 4-month low of 48.1, 1-year inflation expectations jump to 4.6%; US 30-year yield rises to 5.50%
- 827/09 · Bessent urges Fed flexibility on rates, citing AI productivity
- 928/09 · US ten-year Treasury yield climbs to a 19-year high
- 1029/09 · US long-dated yield holds above 5.5% despite Treasury buybacks
- 1130/09 · Softer US inflation erodes the odds of an October rate rise
- 1201/10 · US Treasuries pull back from their peak as two-year yield drops 10 basis points
- 1302/10 · Logan seeks 50 more basis points while most of the Fed waits
- 1405/10 · Nasdaq hits record as Treasury yields touch 24-year high
- 1506/10 · Fed's Schmid and Daly keep the door open to hikes despite high yields
- 1607/10 · Fed minutes point to one more rate rise before year-end
- 1707/10 · US ten-year auction clears at the highest yield in a quarter-century
- 1814/10 · US inflation climbs to 3.7%, putting an October hike back in play
- 1915/10 · US producer inflation jumps to 6.3%, yet Treasury yields fall
- 2016/10 · Warsh gives no rate signal in Bangkok and October hike odds fall
- 2119/10 · Barclays now expects Fed hikes in both December and January
- 2220/10 · US pending home sales sink to their lowest since 2001
- 2320/10 · Thirty-year Treasury yield slips below the 20-year point
- 2422/10 · US 10-year yield slips below 5% as tech sell-off deepens
- 2523/10 · US firms raise selling prices at fastest pace since 2022
- 2624/10 · Fed expected to hold on Wednesday as markets price a December hike
- 2727/10 · Domestic buyers displaced foreigners at the US two-year auction
- 2830/10 · Logan calls for at least two more hikes as December odds slip to 76%
- 2902/11 · US manufacturing beats forecasts as input prices stay high
- 3003/11 · Treasury yields climb on election day ahead of the refunding statement
- 3104/11 · US Treasury moves seven-year notes from monthly to quarterly new issues