The Zhitong Finance App learned that a number of senior Federal Reserve officials have released signals one after another this week, suggesting that even though US inflation is still high and further interest rate hikes may be needed in the future, the Federal Reserve is in no hurry to take action in October. New York Federal Reserve Chairman Williams and Federal Reserve Vice Chairman Jefferson both emphasized that they should wait for more economic data before deciding on the next policy path to push the market to postpone the expected time for the next rate hike from October to December. Meanwhile, Federal Reserve Governor Cook warned that artificial intelligence (AI) infrastructure construction may bring continued inflationary pressure and become one of the main risks facing monetary policy in 2027.
Minneapolis Federal Reserve Chairman Kashkari said that he still expects the Federal Reserve to raise interest rates once each this year and next year, but he is open to the exact timing of the next move. At the same time, he pointed out that the performance of the US economy is stronger than previously expected, and the current monetary policy may not have clearly restricted the economy.
Williams and Jefferson have successively stated that the market postponed interest rate hike expectations until December
The Federal Reserve raised the benchmark interest rate by 25 basis points to 3.75%-4.00% with a unanimous vote in September. Interest rate forecasts announced by policy makers at the time also showed that interest rates may be raised again before the end of this year. As US inflation continues to be higher than the target, the financial market previously anticipated that the Federal Reserve would raise interest rates again at the October 27-28 meeting, and even bet that the intensity of future policy tightening may exceed official predictions.
However, the speeches of two senior Federal Reserve officials this week changed that expectation. Williams, an important figure in the Federal Reserve's monetary policy decision-making system and vice chairman of the Federal Open Market Committee (FOMC), said on Tuesday that there is currently no need to rush to adjust interest rates again after the interest rate hike was taken in September.
He believes that the Federal Reserve can use the next period to observe economic data to more clearly judge changes in economic growth and inflation, and then decide on the next policy action. Williams still anticipates that if the economic trend is generally in line with his predictions, it may be appropriate to raise interest rates later this year, but he does not suggest that immediate action must be taken in October.
Federal Reserve Vice Chairman Jefferson further strengthened this signal on Thursday. In a speech prepared for the University of Virginia's Dutton School of Business event, Jefferson said that any future monetary policy adjustments should be based on a careful evaluation of economic data trends, outlook changes, and risk balance.
He pointed out that as bond yields rise, financial markets are re-evaluating interest rate prospects, but Federal Reserve officials still need to form their own judgments, and this process may take more time.
Jefferson said that once more data is obtained, economic trends and appropriate monetary policy positions may become more clear. Affected by the above remarks, the market drastically lowered its bet on the October rate hike. Currently, investors generally expect the Federal Reserve to keep interest rates unchanged at the October meeting and raise interest rates by another 25 basis points at the last meeting of the year from December 8 to 9. A number of global brokerage firms have also adjusted their expectations for the next rate hike to December.
Analyst: Two senior officials sent a clear signal that the Federal Reserve wants to slow down the pace of interest rate hikes
Evercore ISI analysts believe that Jefferson's speech actually confirmed the information previously released by Williams that the Federal Reserve is not expected to raise interest rates for the second time in a row in October, but rather wants more time to assess the economic situation.
The agency pointed out that in a situation where Federal Reserve Chairman Walsh rarely provides clear guidance on future interest rate paths, the joint statement of Williams and Jefferson is significant as a policy signal.
Tim Duy, the US chief economist at SGH Macro, believes that the reason Williams needed to express his position so clearly was because the market's previous bets on interest rate hikes had clearly exceeded the Federal Reserve's own policy expectations. He pointed out that to a certain extent, this reflects the impact of the current lack of clear forward-looking guidance from the Federal Reserve.
Although the market has readjusted expectations for interest rate hikes, this does not mean that the Federal Reserve has changed the overall direction of further tightening monetary policy. Officials are now more emphasizing that the timing of action should be determined based on future data, rather than continuously raising interest rates at the pace previously anticipated by the market.
Kashkari: The current policy is not restrictive enough to raise interest rates once this year or next
Minneapolis Federal Reserve Chairman Kashkari said in an interview on Thursday that he is not particularly strong about whether the Fed's next rate hike should take place in October or December. He said that in his forecast submitted at the September policy meeting, it is estimated that interest rates will need to be raised by 25 basis points in 2026, and a further 25 basis points in 2027.
However, Kashkari also pointed out that economic data released since the September meeting showed that the US economic performance was even stronger than he had previously anticipated, and inflation is still too high. He warned that if the US economy continues to show resilience beyond expectations, causing inflation to be more stubborn than currently judged, then the Federal Reserve may eventually need to raise interest rates to a level that exceeds his current forecast.
Kashkari believes that judging from the performance of the job market and overall economic output, the current monetary policy may not have placed particularly obvious restrictions on the economy. He said that the US job market is still quite healthy, and economic activity remains strong. These signs suggest that the current interest rate level may have a relatively limited effect on demand.
At the same time, Kashkari believes that the recent marked rise in long-term borrowing costs partly reflects the market's reassessment of the fundamentals of the US economy, and also shows that investors believe that the Federal Reserve under Walsh's leadership will seriously address the inflation problem.
Regarding the recent sharp fluctuations in the bond market, he said that there are currently no signs of systemic financial risk, and the US Treasury bond market is still able to operate normally and absorb price adjustments. However, he stressed that considering the rapid changes in borrowing costs in a short period of time, the Federal Reserve still needs to pay close attention to the state of the banking industry.
Cook: AI investment boom could be a major inflation risk in 2027
While the market is watching the timing of the next rate hike, Federal Reserve Governor Cook has his sights set on the 2027 inflation outlook. Cook said at an event held by the New York Federal Reserve on Thursday that AI infrastructure construction is forming new inflationary pressures, and these pressures may not subside quickly. She pointed out that the inflationary impact of AI investment is currently one of her biggest concerns about the 2027 economic risks.
Cook, like many other Federal Reserve officials, believes that AI technology can increase productivity in the long run and help the economy achieve faster growth. However, she is concerned that there is still great uncertainty about when the productivity benefits brought about by AI investment will actually be reflected, and in which fields new supply bottlenecks may occur in the future.
This means that before AI technology boosts productivity and thereby mitigates inflation, large-scale data center construction and related infrastructure investments may first boost demand for some products, equipment, and resources, thereby increasing price pressure.
Cook also specifically mentioned that supply shocks have occurred more and more frequently in recent years, and their effects have lasted longer than previously anticipated. This is changing the way the Federal Reserve evaluates monetary policy. She said that the traditional view is that the central bank can ignore supply shocks for the time being, because interest rate hikes cannot directly lower oil prices, nor can they end the war; on the contrary, they may curb employment and economic output.
However, as supply shocks become more frequent and enduring, the Federal Reserve may need to reconsider the most appropriate policy response, depending on which industries will be impacted and how the associated impact will be transmitted to the overall economy.
The geopolitical risks and supply chain disruptions brought about by the Middle East conflict have further complicated this issue.
The risk of inflation is still biased towards the upward trend, and the September employment report is the next focus of observation
Despite support from many officials for suspending the next rate hike, concerns within the Federal Reserve about the outlook for inflation have not abated significantly. According to the data, the inflation index that the Federal Reserve is focusing on rose 3.4% year on year in August. Not only is it higher than the 2% policy target, but US inflation has been above this target level for more than five and a half years in a row.
Jefferson predicts that US inflation will remain at a high level for some time to come, then fall back to the 2% target as the impact of energy and other price shocks weakens.
However, at the same time, he pointed out that recent changes in the geopolitical situation and stronger than expected aggregate demand have biased the risks faced by their inflation forecasts.
Kashkari also said that he still has some confidence that inflation will gradually return to the 2% target in the next few years, but successive economic shocks continue to bring new uncertainties.
Next, Federal Reserve officials will focus on the US non-farm payrolls report for September released on Friday.
Due to the overall stability of recent recruitment data, many officials believe that the Federal Reserve currently has some policy space and can focus more attention on controlling inflation. Therefore, unless there is an obvious surprise in employment data, a single employment report may not be enough to once again change the market's overall judgment on the interest rate path.