Two more Federal Reserve officials have signaled support for raising interest rates. On September 24, New York Fed President John Williams said another rate hike before the end of the year would be reasonable. Williams said market participants believe that "another increase before the end of the year could be appropriate," and he considers that judgment reasonable. At the same time, however, he stressed that the Fed still needs to watch the data, saying, "We will gather data, just as we did from July through September." Earlier, at its September meeting, the Fed raised the target range for the federal funds rate by 25 basis points to 3.75% to 4.00%. According to the economic projections released at the same time, 16 of the 18 Fed officials expected at least one more rate hike before the end of the year.
Hammack Reiterates Inflation Risks
On the same day, Cleveland Fed President Beth Hammack, in opening remarks at a conference on "Inflation Drivers and Dynamics," also again highlighted the upside risks to current inflation. Hammack noted that "a particularly challenging aspect for monetary policy is that we have recently continued to experience a string of shocks. These shocks come from the supply side, such as tariffs and oil prices, and also from the demand side, such as the artificial intelligence-related capital spending boom." Hammack said the traditional view is that monetary policy can look through supply shocks because they are usually temporary and may cause a one-time rise in the price level rather than persistently push up the inflation rate or inflation expectations. But she pointed out that if the economy becomes more vulnerable to shocks, or if "a series of shocks occur one after another," while inflation has already been high for many years, then the risk increases that inflation expectations and inflation behavior become more entrenched. "The longer high inflation persists, the harder and potentially more costly it may be to bring it back down," she said.
Institutions Expect More Fed Hikes, but Not by Much
Compared with market expectations for further rate increases, some institutions believe the Fed's subsequent hikes may be limited. On September 24, Goldman Sachs said in its latest report that it expects the Fed to complete its final rate hike of the year at its October 27 policy meeting, after which the current Fed hiking cycle may end. But it should be noted that the bank added that the precondition for this forecast is a sustained decline in oil prices to curb inflation. Goldman Sachs Chief Economist Jan Hatzius also said that part of the reason for expecting the Fed to continue raising rates in October is that in recent years the Fed has had almost no precedent of pausing rate hikes at a policy meeting before an election. Six days before the 2022 U.S. midterm elections, the Fed had still raised rates by 75 basis points. Goldman Sachs believes there is no obvious reason to think Fed Chair Kevin Warsh will act differently this year. Tiffany Wilding, chief U.S. economist at Pacific Investment Management Company (PIMCO), said the Fed may still continue raising rates in its next few meetings, and she expects one to two more hikes of 25 basis points each this year and early next year. However, she stressed that this is more like a "policy recalibration" rather than the start of a new sustained rate-hiking cycle. Wilding believes that as temporary cost pressures from factors such as tariffs, energy, and computing equipment gradually fade, the need for further monetary policy adjustment may decline by early 2027.
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