Several Federal Reserve officials spoke out in quick succession on Tuesday, reinforcing expectations that monetary policy will need to be tightened further this year, even as market bets on a near-term hike cooled.
New York Fed President John Williams said in a speech in Buffalo, New York, that if the economy evolves broadly in line with his expectations, one more rate increase later this year may be appropriate to help bring inflation back to target in a more timely manner.
At the same time, he stressed that the Fed's September rate move had bought policymakers more time to observe developments, and that "there is no need to rush."
After Williams' remarks, the market-implied probability of a rate hike at the Fed's Oct. 27-28 meeting quickly fell from about 70% to roughly 50%.
Multiple Officials Issue Warnings in Unison, Bolstering Rate-Hike Expectations
On Tuesday, several Fed officials delivered similar signals on different occasions, strengthening the view that policy still needs to be tightened.
Chicago Fed President Austan Goolsbee reiterated that if supply shocks prove persistent, the Fed may need to respond with rate increases. He noted: "If we continue to face permanent or highly persistent supply shocks, the Fed must consider responding to such shocks to preserve the credibility of the 2% inflation target."
Fed Governor Michael Barr, speaking the same day in Detroit, again warned that controlling inflation may require further rate increases. "In my baseline scenario, policy may still need further adjustment to ensure inflation returns to target in a timely manner," he said. "I have not yet seen a clear trend of inflation returning to 2% in a timely fashion."
The Fed raised rates by 25 basis points at its September meeting, the first increase since 2023. According to economic projections published after the meeting, most officials expect one more hike this year, while another eight officials foresee a similar-sized increase in 2027.
AI and Middle East Tensions Are Main Inflation Drivers, With 2% Target Seen in 2028
In his remarks, Williams identified two core factors currently pushing inflation higher: geopolitical conflict in the Middle East and expanding demand linked to artificial intelligence.
"The inflationary impact of AI-related demand shocks is becoming increasingly prominent, and I now expect energy prices to have a larger and longer-lasting effect on inflation," he said. He added, however, that there is no evidence yet that these pressures have spread into broader and more persistent price increases.
On tariffs, Williams said their upward effect on goods price inflation has largely faded. He stressed that while monetary policy cannot directly clear supply chains or restart infrastructure, it can reduce the risk that supply shocks turn into broad-based, persistent inflation.
On the inflation outlook, Williams expects inflation to reach 3.5% this year, edge down to slightly above 2% in 2027, and for the Fed to achieve its 2% target in 2028.
With the economy currently resilient and the labor market steady, Williams said inflation risks have risen against this backdrop. He said the macro environment requires policymakers to stay alert to prevent supply-side disruptions from becoming more entrenched inflationary pressure.
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