Federal Reserve officials intensively send hawkish signals! The "number three" says there may be one more rate hike this year; Goolsbee warns that inflation remaining above target is "playing with fire."

On Tuesday, several Federal Reserve officials spoke about the inflation and interest rate outlook. New York Fed President Williams, the Fed's "number three," said that after the September rate hike, the Fed does not need to rush its next move and can wait for more economic data before deciding, but if the economy broadly matches his expectations, one more rate hike later this year may be appropriate. At the same time, Fed Governor Barr said that rising energy prices and the artificial intelligence (AI) investment boom have pushed the disinflation process "off track," and his baseline scenario still expects further adjustments to monetary policy. Chicago Fed President Goolsbee also warned that U.S. inflation has been above the Fed's target for five and a half consecutive years, a situation tantamount to "playing with fire," while huge fiscal deficits could further overheat the economy. This means that although Fed officials still differ in their emphasis on the exact timing of the next rate hike, hawkish voices are clearly strengthening around the judgment 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 may come this year In remarks prepared for an event at the University at Buffalo, part of the State University of New York, Williams said on Tuesday that after the Fed's September rate hike, 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 its next policy move. He said that if economic developments broadly match his forecast, raising the federal funds target rate range once more later this year could help bring inflation back to target in a more timely manner. He stressed, however, that this is only his current personal forecast and will ultimately depend on time and all economic data. This message is noteworthy because financial markets are currently heavily betting that the Fed may continue raising rates at its next meeting on October 27-28. Previously, in September, the Fed raised its benchmark rate by 25 basis points to 3.75%-4.00%. Compared with the market's aggressive pricing of an October hike, Williams' language appears more patient. He did not deny the possibility of further rate increases, but suggested the Fed has room to wait for more data and that the next move need not happen immediately. Economy and employment remain resilient, shifting the Fed's policy focus to inflation Williams believes the U.S. economy is still growing strongly and the job market remains fairly solid, which means the Fed can focus more attention on controlling prices. He stressed that it is "critical" to bring inflation sustainably back to the 2% target. The Fed must ensure that adverse inflation shocks do not become entrenched, while also preventing cost increases such as energy and tariffs from generating broader "second-round effects." U.S. inflation has exceeded the Fed's 2% target for more than five consecutive years. This year, trade tariffs and higher energy prices caused by conflict in the Middle East have further increased inflation pressure, and Fed officials are increasingly worried that if inflation does not return to target for a prolonged period, the public and businesses may gradually come to view higher inflation as normal, making inflation expectations even harder to control. It is worth noting that Williams also mentioned that the AI investment boom is adding to price pressures. At the same time, he believes that as long as there is no new round of import tariff increases, inflation pressure related to previous 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 in 2028. On the economy, he estimates U.S. economic growth of about 2.25% this year. However, factors such as immigration, an aging labor force, and relatively moderate productivity growth will limit the pace of growth the economy can sustain over the long term. He also expects the unemployment rate to be about 4% next year. Barr: Disinflation has gone "off track"; further rate hikes may still be necessary Compared with Williams' emphasis that there is "no need to rush," Barr expressed more clearly the need for further policy tightening. 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 its 2% inflation goal. He said there is not yet a clear trend showing inflation returning to 2% in a timely manner. Inflation is still too high and related risks have risen; at the same time, the job market remains solid and downside risks to employment are declining. Barr believes the Fed needs to recalibrate monetary policy so that it can respond more evenly to the risks facing 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." On the economy, Barr expects U.S. GDP growth over the remainder of 2026 may accelerate from the roughly 2% pace in the first half, with business investment and consumer spending still supporting the job market. AI investment becomes a new inflation variable: boosting demand in the short term, possibly raising productivity in the long term Barr specifically mentioned the dual impact of AI investment on the U.S. economy and inflation. He noted that conflict in the Middle East has pushed up global oil prices, while the AI infrastructure construction boom 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 will raise productivity. If productivity improves significantly, the U.S. economy may be able to grow faster in the future without generating additional inflation. The problem is that there is still considerable uncertainty about when these productivity gains will appear. Before productivity improvements are fully reflected, AI investment may first bring rapid growth in capital expenditure and demand for related goods, thereby adding to short-term inflation pressure. Barr also cautioned that AI may cause significant disruption in the labor market in the short term, which must be managed properly before the technology's long-term economic benefits can ultimately be realized. He said it is still difficult 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 straight years is "playing with fire" Chicago Fed President Goolsbee also warned about persistently high inflation. He said U.S. inflation has been above the Fed's target for five and a half consecutive years, "which is tantamount to playing with fire." Goolsbee noted that in 2023 and 2024, U.S. inflation was once falling toward the Fed's 2% target, but the process has since stalled. Therefore, the Fed now needs to see clearer evidence that inflation is back on a downward path. He also warned that huge fiscal deficits could overheat the economy, further increasing the difficulty of controlling inflation. Musalem warns the Fed cannot be "silent"; too little communication may push rates higher At the same time, St. Louis Fed President Musalem focused on the Fed's policy communication issue on Tuesday. After taking office in May, Fed Chair Warsh established 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 although the Fed does not need to make specific commitments about future rates, it also cannot completely withdraw from communicating with the public. He believes that if the central bank does not explain the logic behind policy decisions and does not let households and businesses understand how the Fed will respond to different economic changes, markets can only guess the future policy path on their own. This increases the uncertainty premium and may 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.