Cook sees inflation risks outweighing employment concerns

Federal Reserve Governor Lisa D. Cook highlighted a notable shift in the balance of risks, with inflation concerns now outweighing employment risks.

The labor market remains stable, with the unemployment rate at 4.2 percent in June and moderate payroll growth.

GDP growth for 2025 reached 2.0 percent, and 2026 is forecast at 2.2 percent, both exceeding prior expectations.

Despite this resilience, inflation remains "simply too high," near its highest level since 2023.

Headline inflation for 2026 is projected about 1 percentage point higher than anticipated a year ago, driven by core goods prices increasing at a striking 5 percent annual pace.

Cook identified two unanticipated price shocks: the Middle East conflict pushing energy prices, and increased capital expenditures for AI infrastructure causing significant price increases for chips and high-tech equipment.

These factors reinforce the tilt towards inflation risks.

Reflecting on spring and summer 2025, Cook recalled a subdued outlook for employment and output, with many forecasters expecting a rise in the unemployment rate.

Median FOMC forecasts for GDP growth in 2025 and 2026 were modest, at 1.4 percent and 1.6 percent respectively.

Inflation, though subsiding to 2.3 percent in April 2025, was expected to temporarily step up later in the year due to changes in tariff policy before resuming a downward trajectory by late 2026, with Fed officials forecasting 2.4 percent for 2026.

Given these weakening employment forecasts and a temporary inflation step-up, the FOMC voted to leave rates unchanged at its June 2025 meeting, as risks to both sides of the dual mandate appeared balanced.