Investing.com -- Federal Reserve Bank of Chicago President Austan Goolsbee said Monday that the U.S. central bank could either raise interest rates or resume rate cuts, depending on how the war in the Middle East affects the economy.

"We could be back to the environment with multiple rate cuts for the year if inflation behaves," Goolsbee said in a CNBC interview. "I could see circumstances where we would need to raise rates if it was going a different way, and inflation was getting out of control."

Goolsbee said most economic indicators show the Fed is closer to full employment than to its inflation target, meaning inflation must be a higher priority in the central bank's decision-making at the moment.

Fed officials kept interest rates unchanged last week and continued to signal one rate cut this year despite uncertainty created by the Iran war. Since the meeting, investors have priced in higher rates as inflation fears have built in financial markets. Federal funds futures now show better odds of a hike in 2026 than a cut.

Last week, alongside the rates decision, one Federal Reserve policymaker projected an interest rate increase for next year, breaking from the consensus view that the central bank's next move will be a rate cut, according to forecasts released last Wednesday.

The projection marks the first time in two-and-a-half years that a Fed official has penciled in a rate hike, as the Iran war and resulting higher oil prices enter a third week.

Most Fed policymakers still anticipate the next move will be a rate cut this year, consistent with their December outlook.