Federal Reserve officials are intensively sending hawkish signals! The “top three” say Goulsby warns that inflation continues to be higher than the target during the year and that they are “playing with fire”

The Zhitong Finance App learned that on Tuesday, a number of Federal Reserve officials spoke out about the outlook for inflation and interest rates. The Federal Reserve's “top three” and New York Federal Reserve Chairman Williams said that after the September rate hike, there is no need for the Federal Reserve to rush to take the next step; it can wait for more economic data before making a decision, but if the economic trend is generally in line with its expectations, it may be appropriate to raise interest rates again later this year.

Meanwhile, Federal Reserve Governor Barr believes that rising energy prices and the boom in artificial intelligence (AI) investment have “derailed” the downward inflation process, and the benchmark scenario is still expected to require further monetary policy adjustments. Chicago Federal Reserve Chairman Goulsby also warned that US inflation has been above the Federal Reserve's target for five and a half years in a row. This situation is tantamount to “playing with fire,” and that huge fiscal deficits may further cause the economy to overheat.

This means that although Federal Reserve officials still have different focuses on the exact timing of the next rate hike, hawkish voices are clearly growing around the judgment that “inflation is still too high and monetary policy may need to be further tightened.”

Williams: No need to rush to act in October or raise interest rates once more during the year

In a speech prepared for the SUNY at Buffalo event on Tuesday, Williams said that there is currently “no need to worry” after the Federal Reserve has already taken action to raise interest rates in September. He believes that the Federal Reserve can continue to observe the economic data to be released later to more clearly judge the state of economic performance and then decide on the next policy action.

He said that if economic development is generally in line with his predictions, then raising the federal funds target interest rate range again later this year may help push inflation back to the target level in a more timely manner. However, at the same time, he stressed that this is only a current personal forecast; in the end, it will still depend on time and overall economic data.

This statement is worth watching because the financial market is currently betting heavily on the possibility that the Federal Reserve will continue to raise interest rates at the next meeting to be held from October 27th to 28th. Previously, the Federal Reserve raised the benchmark interest rate by 25 basis points to 3.75%-4.00% in September.

Compared to the market's aggressive pricing of the October rate hike, Williams' wording seemed more patient. He did not deny the possibility of further rate hikes, but rather hinted that the Federal Reserve has room to wait for more data, and that the next move might not need to happen right away.

Economy and employment remain resilient The focus of the Federal Reserve's policy shifts to inflation

Williams believes that the US economy is still growing strongly and the job market is relatively stable, which means that the Federal Reserve can focus more attention on controlling prices. He stressed that keeping inflation back to the 2% target is “critical”. The Federal Reserve must ensure that adverse inflationary shocks do not solidify, while at the same time preventing rising costs such as energy and tariffs from further forming a broader “two-round effect.”

US inflation has surpassed the Federal Reserve's 2% target for five consecutive years. Since this year, trade tariffs and rising energy prices due to the Middle East conflict have further increased inflationary pressure. Federal Reserve officials are also increasingly worried that if inflation is delayed to return to target, the public and businesses may gradually regard higher levels of inflation as the norm, making inflation expectations more difficult to control.

Notably, Williams also mentioned that the AI investment boom is also increasing price pressure. At the same time, he believes that as long as there is no new round of import tariff increases, the inflationary pressure associated with previous tariffs has basically subsided. He expects the US inflation rate to be around 3.5% by the end of this year, fall further next year as price pressure eases, and return to near the 2% target in 2028.

On the economic side, he estimated that the US economy will grow at about 2.25% this year. However, factors such as immigration, an aging workforce, and relatively moderate productivity growth will limit the rate of growth that the economy can achieve in the long term. At the same time, he estimates that the unemployment rate will be around 4% next year.

Barr: Inflation falls “off track” and further rate hikes may still be necessary

Compared to Williams's emphasis on “no need to rush to act,” Barr was more clear about the need for further policy tightening. Barr said on Tuesday that high energy prices and a surge in AI-related investment have left the US “off track” on the path to achieving the 2% inflation target.

He said that there is currently no clear trend of inflation returning to 2% in a timely manner. Currently, inflation is still too high, and related risks have risen; at the same time, the job market remains stable, and downside risks in employment are being reduced.

Barr believes that the Federal Reserve needs to recalibrate monetary policy so that the policy can deal with the risks faced by the two missions of full employment and price stability in a more balanced manner. “In my benchmark scenario, further policy adjustments may still be needed to ensure that inflation falls back to target levels in a timely manner.”

On the economic side, Barr predicts that the US GDP growth rate for the rest of 2026 may be faster than the level of about 2% in the first half of the year, and that corporate investment and consumer spending will still support the job market.

AI investment has become a new variable in inflation to boost demand in the short term, or increase productivity in the long term

Barr specifically mentioned the dual impact of AI investment on the US economy and inflation. He pointed out that the Middle East conflict has boosted global oil prices, while the boom in AI infrastructure construction has increased demand for some high-tech products, thereby driving up the prices faced by enterprises and consumers.

Barr anticipates that AI investment may still drive the US economy to maintain strong activity in the coming year. In the longer term, he is optimistic that AI will increase productivity. If productivity increases significantly, the US economy is likely to grow faster in the future without additional inflation.

The problem, however, is that there is still a great deal of uncertainty about when these productivity dividends will occur. Until productivity increases are fully reflected, AI investment may first bring about rapid growth in capital expenditure and demand for related commodities, thereby increasing short-term inflationary pressure.

At the same time, Barr warned that AI may also cause obvious disruptions to the labor market in the short term, and proper management is needed to finally achieve the long-term economic benefits of this technology. He said that it is still difficult to determine how AI will ultimately affect the economy and the Federal Reserve's appropriate policy interest rate level, but one thing is already very clear, that is, current inflation is still too high.

Goulsby warns that inflation has exceeded the standard for five and a half years in a row is “playing with fire”

Chicago Federal Reserve Chairman Goulsby also warned against continued high inflation. He said that US inflation has been above the Federal Reserve target for five and a half years in a row, “this is tantamount to playing with fire.”

Goulsby pointed out that in 2023 and 2024, US inflation once fell towards the Federal Reserve's 2% target, but this process has stalled since then. Therefore, the Federal Reserve now needs to see more clear evidence that inflation has re-entered a downward channel. At the same time, he warned that huge fiscal deficits may cause the economy to overheat, making it even more difficult to control inflation.

Mussalem warns the Federal Reserve cannot “silence” communication to reduce or push up interest rates

Meanwhile, St. Louis Federal Reserve Chairman Mussalem on Tuesday focused on the Federal Reserve's policy communication issues.

Since Federal Reserve Chairman Walsh took office in May, a working group has been set up to re-examine the central bank's communication methods. Walsh believes that the Federal Reserve's open communication in recent years is due to frequent and liberalization, and suggests that a “quieter, more purposeful Federal Reserve” may help improve monetary policy.

Mussalem, on the other hand, warned that although there is no need for the Federal Reserve to make specific promises about future interest rates, it cannot completely withdraw from communicating with the public. He believes that if the central bank doesn't explain the logic behind policy decisions and doesn't let households and businesses understand how the Federal Reserve will respond to different economic changes, the market can only guess the future policy path on its own. This will increase the uncertainty premium, and may eventually cause businesses and households to face higher and more volatile interest rates.

In more extreme cases, poor policy communication may also increase the risk that inflation or deflation expectations will reinforce themselves. Mussalem said that a predictable and clearly explained policy framework does not bind the central bank; on the contrary, central banks managed by unelected officials are an important part of maintaining democratic legitimacy.