Federal Reserve officials intensively release hawkish signals! The "third-in-command" says there may be another rate hike this year; Goolsbee warns that inflation persistently above target is "playing with fire"

According to Zhitong Finance APP, on Tuesday, multiple Federal Reserve officials spoke about inflation and interest rate prospects. The Fed's "number three," New York Fed President Williams, stated that after the September rate hike, the Fed does not need to rush into the next move and can wait for more economic data before making a decision. However, if the economic outlook generally aligns with expectations, another rate hike later this year may be appropriate.

Meanwhile, Federal Reserve Governor Barr believes that the rise in energy prices and the artificial intelligence (AI) investment boom have caused the process of inflation cooling to become "derailed." His baseline scenario still expects further adjustments to monetary policy. Chicago Fed President Goolsbee also warned that U.S. inflation has exceeded the Fed's target for five and a half consecutive years, a situation tantamount to "playing with fire," and massive fiscal deficits could further overheat the economy.

This means that although Fed officials still place different emphasis on the timing of the next rate hike, there is an obviously increasing hawkish tone regarding the view that "inflation remains too high and monetary policy may need further tightening."

Williams: No Rush to Act in October, Another Rate Hike Possible This Year

In a speech prepared for an event at the State University of New York at Buffalo on Tuesday, Williams stated that after the Fed had already raised rates in September, there is "no need to hurry." He believes the Fed can continue to observe economic data as it’s released, to more clearly assess the economic situation before determining the next policy move.

He noted that if economic developments broadly match his forecasts, it might be helpful to raise the federal funds target rate range once more later this year to help bring inflation back to the target level more promptly. However, he emphasized that this is merely his personal projection at present and will ultimately depend on timing and all economic data.

This statement is noteworthy because financial markets are currently heavily betting that the Fed may continue raising rates at its next meeting scheduled for October 27-28. Previously, the Fed raised its benchmark rate by 25 basis points in September to 3.75%-4.00%.

Compared to the market's positive pricing for an October rate hike, Williams' remarks appear more patient. He did not deny the possibility of further rate hikes, but instead suggested the Fed has room to wait for more data, and that the next action does not necessarily need to happen immediately.

Economy and Employment Remain Resilient, Fed’s Policy Focus Shifts to Inflation

Williams believes the U.S. economy still maintains strong growth and the job market remains robust, allowing the Fed to focus more attention on controlling prices. He emphasized that ensuring inflation steadily returns to the 2% target is "crucial." The Fed must ensure that adverse inflation shocks do not become entrenched, while also avoiding further widespread "second-round effects" from increases in energy, tariffs, and other costs.

U.S. inflation has been above the Fed’s 2% target for more than five consecutive years. This year, trade tariffs and energy price increases due to Middle East conflicts have further heightened inflationary pressure, and Fed officials are becoming increasingly concerned that if inflation does not return to target for a long time, the public and businesses may gradually accept a higher inflation level as normal, making inflation expectations more difficult to control.

It is worth noting that Williams also mentioned that the AI investment boom is also increasing price pressures. At the same time, he believes that as long as there are no new rounds of tariff hikes, inflationary pressure related to previous tariffs has largely dissipated. He expects the U.S. inflation rate to be around 3.5% by the end of this year, to fall further next year as price pressures ease, and to return to near the 2% target by 2028.

On the economic front, he estimates that U.S. economic growth will be about 2.25% this year. However, factors such as immigration, an aging workforce, and relatively modest productivity growth will limit the long-term growth rate of the economy. He also expects next year’s unemployment rate to be about 4%.

Barr: Disinflation is "Derailed," Further Rate Hikes May Still Be Necessary

Compared to Williams’ emphasis on "no rush to act," Barr expressed the necessity of further tightening policy even more clearly. Barr said on Tuesday that persistently high energy prices and surging AI-related investments have caused the U.S.’s path to the 2% inflation target to become "derailed."

He noted that there is still no clear trend of inflation returning to 2% in a timely manner. Inflation remains too high, and related risks have increased; meanwhile, the job market remains resilient, and downside risks for employment are decreasing.

Barr believes that the Fed needs to recalibrate monetary policy so that it can better balance the risks facing both of its mandates: maximum employment and price stability. "In my baseline scenario, it may still be necessary to further adjust policy to ensure inflation falls back to target in a timely manner."

On the economy, Barr expects the growth rate of U.S. GDP for the remainder of 2026 to be somewhat faster than the first half’s roughly 2% pace, with business investment and consumer spending still supporting the job market.

AI Investment Becomes a New Inflation Variable: Boosting Short-term Demand, Possibly Lifting Productivity in the Long Term

Barr specifically addressed the dual impact of AI investment on the U.S. economy and inflation. He pointed out that the Middle East conflict has pushed up global oil prices, while the boom in AI infrastructure construction has increased demand for some high-tech products, in turn driving prices faced by businesses and consumers higher.

Barr expects that in the coming year, AI investment may continue to drive strong economic activity in the U.S. In the longer term, he is optimistic about AI’s ability to increase productivity. If productivity rises significantly, the U.S. economy could achieve faster growth in the future without generating additional inflation.

However, the question is when these productivity dividends will emerge, as there remains significant uncertainty. Before the productivity gains are fully realized, the initial effect of AI investments might be a rapid increase in capital expenditures and demand for related goods, which could add to short-term inflationary pressure.

Barr also cautioned that AI could cause significant short-term disruptions to the labor market, which will require proper management to ultimately realize the long-term economic benefits of this technology. He said it is still difficult to determine how AI will ultimately affect the economy and the Fed’s appropriate policy rate, but one thing is already very clear: current inflation remains too high.

Goolsbee Warns: Five and a Half Years of Excessive Inflation Is "Playing with Fire"

Chicago Fed President Goolsbee likewise issued a warning about persistently high inflation. He said that U.S. inflation has been above the Fed's target for five and a half consecutive years—"this is tantamount to playing with fire."

Goolsbee noted that in 2023 and 2024, U.S. inflation once moved toward the Fed's 2% target, but the process subsequently stalled. Therefore, the Fed now needs to see clearer evidence that inflation has resumed its downward path. He also cautioned that massive fiscal deficits may cause the economy to overheat, making inflation control even more challenging.

Mousalem Warns Fed Against "Silence"—Too Little Communication Could Push Up Rates

At the same time, St. Louis Fed President Mousalem on Tuesday focused on the issue of the Fed’s policy communication.

Since Fed Chair Walsh took office in May, he has set up a working group to re-examine the central bank’s communication methods. Walsh believes that the Fed’s public communication in recent years has been too frequent and liberal, and has suggested that a "quieter and more purposeful communicating Fed" could help improve monetary policy outcomes.

Mousalem warned, however, that while the Fed does not need to make specific commitments about future rates, it also cannot completely withdraw from communication with the public. He thinks that if the central bank does not explain the logic behind policy decisions, nor does it allow households and businesses to understand how the Fed will respond to various economic changes, the market would have to guess the future policy path on its own. This would increase uncertainty premiums and could ultimately result in higher and more volatile rates for businesses and households.

In more extreme cases, insufficient policy communication could increase the risk of self-fulfilling inflation or deflation expectations. Mousalem said that a predictable and clearly explained policy framework does not bind the central bank; on the contrary, it is a crucial part of maintaining the democratic legitimacy of a central bank administered by non-elected officials.