High oil prices could delay Fed rate cuts until 2027, Goolsbee warns

Underlying inflation is projected to have surged to 3.2% in March — the highest gain in the core personal consumption expenditures price index in two years — threatening the Federal Reserve’s timeline for cutting interest rates. Chicago Fed President Austan Goolsbee said Tuesday that if high oil prices, driven by the Iran war, continue to delay inflation’s return to the Fed’s 2% goal, rate cuts may not begin until 2027. He had previously been optimistic that tariff-driven inflation would recede this year, allowing the Fed to resume rate reductions. Now, he warns that prolonged inflation could push easing out of 2026 entirely. The Fed has held its target range for short-term rates steady at 3.50%-3.75% since March, when a majority of policymakers projected at least one cut would likely be appropriate in 2024. But with gasoline prices above $4 a gallon and inflation pressures reemerging, that outlook is under strain. Goolsbee noted that while rate cuts remain possible if oil prices stabilize and inflation resumes its decline, the window for 2026 cuts is narrowing. San Francisco Fed President Mary Daly has also indicated that the path forward depends on how long oil prices remain elevated, though she views a rate hold or a cut as more likely than a hike.