On Tuesday, several Federal Reserve officials spoke about inflation and the interest rate outlook, with hawkish voices growing louder around the judgment that inflation remains too high and monetary policy may need to tighten further.
New York Fed President John Williams, the Fed's No. 3 official, said there is no need for the Fed to rush its next move after September's hike, and that it can wait for more economic data before deciding, but if the economy broadly matches his expectations, one more rate increase later this year could be appropriate.
Fed Governor Michael Barr said rising energy prices and an artificial intelligence (AI) investment boom have pushed the disinflation process "off track," and his baseline scenario still anticipates further adjustments to monetary policy.
Chicago Fed President Austan Goolsbee also warned that U.S. inflation has exceeded the Fed's target for five and a half straight years, a situation he likened to "playing with fire," while large fiscal deficits could further overheat the economy.
This means that although Fed officials differ on the exact timing of the next hike, hawkish sentiment is clearly strengthening around the view that inflation is still too high and monetary policy may need to be tightened further.
Williams: No need to rush an October move, one more hike possible this year
Williams said in remarks prepared for an event at the State University of New York at Buffalo on Tuesday that after the Fed's September rate move, there is currently "no need to hurry." He believes the Fed can continue to observe upcoming economic data to more clearly assess how the economy is performing before deciding on its next policy action.
He said that if the economy evolves broadly in line with his forecast, raising the federal funds target range one more time later this year could help bring inflation back to target more promptly. He stressed, however, that this is only his current personal forecast and will ultimately depend on time and all the economic data.
The remarks are notable because financial markets are currently betting heavily that the Fed may continue hiking at its next meeting on October 27-28. The Fed raised its benchmark rate by 25 basis points to 3.75%-4.00% in September.
Compared with the market's aggressive pricing of an October hike, Williams' language appeared more patient. He did not rule out the possibility of further increases, but suggested the Fed has room to wait for more data and that the next move need not happen immediately.
Economy and jobs remain resilient, Fed focus shifts to inflation
Williams believes the U.S. economy is still growing strongly and the labor market remains fairly solid, which means the Fed can focus more attention on controlling prices. He stressed that bringing inflation sustainably back to the 2% target is "critical."
The Fed must ensure that adverse inflation shocks do not become entrenched, while avoiding broader "second-round effects" from higher energy, tariff and other costs.
U.S. inflation has now exceeded the Fed's 2% target for more than five consecutive years. This year, trade tariffs and higher energy prices caused by Middle East conflict have added to inflation pressure, and Fed officials are increasingly worried that if inflation fails to return to target, the public and businesses may gradually come to view higher inflation as normal, making inflation expectations even harder to control.
Notably, Williams also mentioned that the AI investment boom is adding to price pressures. At the same time, he said that as long as there is no new round of import tariff increases, inflation pressure related to earlier tariffs has largely faded.
He expects U.S. inflation to be around 3.5% by the end of this year, to decline further next year as price pressures ease, and to return to near the 2% target by 2028.
On the economy, he estimates U.S. growth of about 2.25% this year. However, factors such as immigration, an aging workforce and relatively moderate productivity growth will limit the pace of growth the economy can sustain over the longer term. He also expects the unemployment rate to be about 4% next year.
Barr: Disinflation 'off track,' further hikes may still be needed
In contrast to Williams' emphasis on "no need to rush," Barr expressed the need for further tightening more clearly. Barr said on Tuesday that persistently high energy prices and a surge in AI-related investment have put the United States "off track" in reaching the 2% inflation goal.
He said he has not yet seen a clear trend of inflation returning to 2% in a timely manner. Inflation is still too high and related risks have risen, while the labor market remains solid and downside risks to employment are diminishing.
Barr believes the Fed needs to recalibrate monetary policy so it can more evenly address the risks to both sides of its dual mandate of maximum employment and price stability. "In my baseline scenario, further policy adjustments may still be needed to ensure inflation returns to target in a timely manner," he said.
On the economy, Barr expects U.S. GDP growth over the remainder of 2026 could accelerate from the roughly 2% pace in the first half, with business investment and consumer spending still supporting the labor market.
AI investment becomes a new inflation variable, lifting demand short term and possibly productivity long term
Barr specifically highlighted the dual impact of AI investment on the U.S. economy and inflation. He noted that Middle East conflict has pushed up global oil prices, while the AI infrastructure buildout has increased demand for some high-tech products and thereby pushed up prices faced by businesses and consumers.
Barr expects AI investment may still drive strong U.S. economic activity over the next year. Over the longer term, he is optimistic that AI can raise productivity. If productivity improves markedly, the U.S. economy could potentially grow faster in the future without generating additional inflation.
The problem is that when these productivity gains will appear remains highly uncertain. Before productivity gains fully materialize, AI investment may first bring rapid growth in capital spending and demand for related goods, adding to short-term inflation pressure.
Barr also cautioned that AI could cause significant short-term disruption to the labor market, which must be managed properly to ultimately realize the technology's long-term economic benefits. He said it is still hard to judge how AI will ultimately affect the economy and the appropriate level of the Fed's policy rate, but one thing is already very clear: inflation is still too high.
Goolsbee warns inflation above target for five and a half years is 'playing with fire'
Goolsbee also warned about persistent high inflation. He said U.S. inflation has exceeded the Fed's target for five and a half straight years, which he said is "nothing short of playing with fire."
Goolsbee noted that U.S. inflation was heading down toward the Fed's 2% target in 2023 and 2024, but that progress has since stalled. As a result, the Fed now needs to see clearer evidence that inflation is re-entering a downward path.
He also warned that a huge fiscal deficit could overheat the economy, further complicating efforts to control inflation.
Musalem warns the Fed cannot go 'silent,' too little communication may push rates higher
Meanwhile, St. Louis Fed President Alberto Musalem focused on Fed policy communication on Tuesday. After taking office in May, Fed Chair Kevin Warsh set up a working group to re-examine how the central bank communicates. Warsh believes the Fed's public communication in recent years has been too frequent and too freewheeling, and has suggested that a "quieter, more purposeful Fed" could help improve monetary policy.
Musalem warned that while the Fed does not need to make specific commitments about future rates, it also cannot fully withdraw from communicating with the public. He argued that if the central bank does not explain the logic behind policy decisions or help households and businesses understand how the Fed will respond to different economic changes, markets can only guess at the future policy path themselves.
That would raise the uncertainty premium and could ultimately leave businesses and households facing higher and more volatile interest rates. In more extreme cases, insufficient policy communication could also increase the risk that inflation or deflation expectations become self-reinforcing.
Musalem said a predictable and clearly explained policy framework does not constrain the central bank; rather, it is an important part of maintaining democratic legitimacy for a central bank run by unelected officials.
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