Chicago Federal Reserve Bank President Austan Goolsbee warned Monday that inflation is flashing 'orange, or worse,' posing risks to expected interest rate cuts later this year.

Speaking in an interview published by The Detroit News, Goolsbee described the inflation outlook as troubling, citing tariffs that increased prices and a new 'stagflationary shock' from the ongoing Iran war driving up energy costs. 'I was optimistic that we would get back to this path to 2% inflation, but yikes, it's going from orange to red lately,' he said. Gasoline prices have surged to an average of $4.09 per gallon, more than $1 higher than before the conflict began, straining household budgets and threatening consumer spending that has supported economic growth.

Before the war's escalation, Goolsbee had expressed optimism for multiple rate cuts in 2026 if inflation continued toward the Fed's 2% target. However, the energy shock has complicated that view. 'Before the war, before we got the oil shock, I've been on the optimistic side... I believed rates could come down even multiple times in 2026,' he told CBS News last week. Now, he indicated decisions could shift to 2027 or later if inflation shows no improvement.

The Federal Reserve held its benchmark federal funds rate steady at 3.50%-3.75% following its March meeting, reflecting uncertainty from the Middle East conflict. Inflation has hovered above target, with the Consumer Price Index rising 2.4% year-over-year in February. Economists expect the March figure, due April 10, to climb to 3.1% annually, fueled by higher energy prices.

Market expectations have shifted accordingly. Tools like the CME FedWatch now price in no rate cuts for 2026, a change from earlier forecasts that included reductions. Goolsbee, who serves as an alternate voting member on the Federal Open Market Committee this year, emphasized the need for clearer progress on prices before easing policy. In a March 23 interview, he noted scenarios for hikes if inflation accelerates or cuts if it cools, depending on the war's trajectory.

The labor market remains resilient but cautious. March nonfarm payrolls increased by 178,000, though February's figure was revised to a loss of 133,000 jobs. Unemployment ticked down to 4.3%, with low hiring and firing amid geopolitical risks, tariffs, and rate uncertainty. Goolsbee rated the job market 'yellow,' prioritizing inflation control over employment concerns.

Cleveland Fed President Beth Hammack echoed similar worries, calling inflation 'vibrant orange' after five years above target and two years of sideways movement. Businesses, Goolsbee noted, are 'sitting on their hands' awaiting resolution on oil prices and policy direction.

The Fed's focus remains on achieving sustained 2% inflation before further easing, even as growth holds steady.