The Federal Reserve's stance on interest rates is changing; Goolsbee's comments may be the latest example.

The Federal Reserve’s monetary policy outlook appears to be shifting from rate cuts to potential rate hikes, with the latest evidence coming from Chicago Fed President Austan Goolsbee.

On Monday, Goolsbee stated that the central bank might need to tighten monetary policy in response to rising oil prices and their impact on the U.S. economy. This marks a significant change from his stance just a few weeks ago.

In an interview, Goolsbee said all options are on the table, and interest rates could move in either direction.

Goolsbee said, “If inflation performs well, we might return to a environment of multiple rate cuts this year. I can also foresee that if things go the other way—if inflation gets out of control—we will need to raise rates.”

Tim Duy, chief economist at SGH Macro Advisors, said that if Fed officials ultimately decide to hike rates, it would signal a major policy shift, as over the past few months, officials have been “highly focused on” cutting rates.

At last week’s meeting, Fed officials kept rates unchanged and maintained the path for rate cuts this year, but a few officials suggested modifying the statement to indicate that the next move could be either a rate cut or a rate hike. Some economists expect this wording adjustment to appear at the Fed’s next meeting at the end of April.

The Fed has two mandates: stable inflation and low unemployment. Oil price shocks could lead to stagflation, which involves rising gasoline and food prices while weakening demand and the labor market.

This puts the Fed in a dilemma. Should it focus on a weakening labor market or rising prices?

In the interview, Goolsbee said he is more concerned about inflation than the labor market.

He said, “We are already operating under an uncomfortably high inflation rate, well above the target, and now with the potential for ongoing gasoline price shocks, this makes for a volatile but tense moment.”

Inflation has been above the Fed’s 2% target for five years.

This is a major shift. Just over three weeks ago, before the U.S. and Israel launched strikes against Iran, Goolsbee repeatedly said he believed the Fed would eventually be able to cut rates this year.

Duy from SGH Macro Advisors said, “This will be a bitter pill to swallow.”

He added, “If inflation issues dominate in the short term, the signal to the Fed will be that it needs to create demand destruction greater than the oil price shock itself to keep inflation and inflation expectations in check.” He also noted that the Fed is unlikely to rush into rate hikes.

Market traders previously expected two 25 basis point rate cuts this year, but now their outlook has completely reversed, with expectations that rates will stay unchanged through the end of the year and the likelihood of a rate hike by the Fed at about 8%.

Milan Still Prefers Multiple Rate Cuts This Year

Although many central bank officials are talking more about rate hikes, at least one remains committed to rate cuts. Federal Reserve Board Member Stephen M. Mian said he believes the Fed could cut rates four times this year. Mian previously served as chief economist at the Trump White House.

Mian said that the Fed’s traditional view is that the central bank can “ignore” oil price shocks because, although they affect overall inflation, the price increases do not pass through to core prices excluding food and energy.

An exception to this rule is if inflation expectations for over a year start to rise.

Mian said, “So far, that has not happened.”

Another exception is if rising gasoline prices lead to a wage-price spiral.

He said, “There is little evidence of that. In fact, wage pressures have been declining over the past few years.”

During last week’s Fed decision to hold rates steady, Mian was the only dissenter advocating for rate cuts.