Federal Reserve officials delivered a largely hawkish set of remarks on Tuesday, September 29, warning that inflation remains too high while differing over the timing of any further interest-rate increase. Governor Michael Barr and Chicago Fed President Austan Goolsbee emphasized the risks of persistent inflation, while New York Fed President John Williams said there was no need to rush after the central bank’s September rate increase.

The Federal Reserve’s September hike raised its target range for the federal funds rate, the benchmark that anchors borrowing costs across the economy, by a quarter percentage point to 3.75%–4%. The October 27–28 gathering is the next scheduled meeting of the rate-setting Federal Open Market Committee, and markets were pricing roughly a two-in-three probability of another increase there, a step that would lift the range to 4.00%–4.25%, with an even higher probability assigned to a December move as the officials spoke. Because each decision is made by committee, remarks from individual officials in the run-up to a meeting are watched for shifts in the balance of views behind the vote.

The remarks initially pushed the US dollar index modestly lower after Williams emphasized that there was “no urgency” for another increase, although the currency remained firm on the day. Rising expectations for additional rate hikes and concerns about oil-driven inflation have also pushed US bond yields to multi-year highs.

Barr points to energy prices and AI investment

Speaking to the Detroit Economic Club, Barr said high energy prices and a surge in artificial-intelligence investment had disrupted progress toward the Federal Reserve’s 2% inflation objective. He said he did not yet see a clear trend pointing to a timely return to the target.

Barr said his base case was that further policy adjustments would likely be needed. He also expects economic growth to pick up somewhat from the roughly 2% pace recorded in the first half of the year, supported by business investment and consumer spending, with those factors helping sustain the labour market.

Barr’s reference to energy prices kept crude oil at the centre of the inflation discussion. A rise in oil prices would reinforce the argument of policymakers seeking tighter policy, while a pullback could give officials who favour waiting more room to assess incoming data.

Goolsbee warns of prolonged above-target inflation

Goolsbee expressed a similar concern about inflation but did not identify a specific policy move. He said inflation remaining above target for 5.5 years amounted to “playing with fire” and that the Fed might need to respond to supply shocks that have lasting effects.

He added that he would want to see evidence that inflation was falling before supporting interest-rate cuts. At the same time, Goolsbee described himself as one of the more optimistic policymakers regarding the rate path.

Williams urges patience on timing

Williams adopted a more patient tone on the timing of further action, although he did not rule out another increase. In prepared remarks in Buffalo, he said one additional rate increase could be appropriate late this year if the economy develops broadly in line with his forecast.

Reuters reported that Williams appeared to push back against market pricing for an October move. He described the economy as growing robustly and said investment related to artificial intelligence was adding to price pressures. He also said tariff-related pressures had largely abated unless new import taxes were imposed.

Williams’s comments suggested that another increase remained possible, but that policymakers did not need to act immediately following the September decision.

Musalem discusses Federal Reserve communications

St. Louis Fed President Alberto Musalem addressed a separate issue in a speech in London. He argued that the Federal Reserve should explain how and why it sets policy without promising a specific path for interest rates.

Musalem warned that an excessive pullback in central-bank communications could lead to higher and more volatile interest rates and inflation. His remarks came as Chairman Kevin Warsh had established a task force on the Federal Reserve’s communications. Coverage of Musalem’s speech did not include a fresh signal on the outlook for interest rates.

The officials’ comments left the October decision open. Barr’s remarks supported the case for another rate increase, Williams appeared less concerned about the timing, and Goolsbee said he wanted evidence that inflation was easing. Traders will monitor upcoming inflation data and energy prices for indications of how the debate develops ahead of the October meeting.

Related reports: Barr expects GDP growth to pick up in the second half of the year; Goolsbee: 5.5 years above target is “playing with fire”; Williams says one more hike this year may be enough; Musalem discusses a framework as the backbone of the communications strategy

Source: InvestingLive