Federal Reserve hawkish board members hint at continuing rate hikes, possibly more than once, with more officials supporting higher rates for a longer period.

On Friday, September 22nd, at least four Federal Reserve officials delivered speeches, including two voting members this year and one voting member next year. The unanimous signal they gave was that interest rates will remain at higher levels for a longer period of time, and the possibility of further rate hikes cannot be easily ruled out.

The latest data shows that the turnover rate of contracts for U.S. federal funds rate futures, which measure the market's expectation of a pause in rate hikes in November 2023 and a rate hike in December, exceeded 80,000 on Thursday. This indicates a historical high in trading volume for federal funds futures betting on a rate hike in December.

However, Goldman Sachs strategists Korapaty and Pereira pointed out that based on the weak U.S. economic data in the fourth quarter and the latest dot plot, the market's expectation of a 75 basis point rate cut in 2024 may persist firmly in the short term.

Hawkish Director Bowman: Further Rate Hikes May Be Needed More Than Once, Rising Energy Costs Pose Risks to Achieving Inflation Target

During her tenure as a permanent voting member, Federal Reserve Governor Bowman seems to be trending towards replacing "hawk king" Bullard and becoming the most hawkish member of the Federal Reserve. She even stated today that in order to effectively combat inflation, further rate hikes may be needed more than once.

This is mainly because "progress in reducing the inflation rate to the Fed's 2% target is not enough."

As stated in the latest FOMC economic projections, most officials believe that inflation will remain above the target at least until 2025. Bowman also expects the battle against inflation to progress slowly, thus requiring further policy tightening.

Furthermore, she believes that the Fed's most aggressive monetary policy action since the 1980s seems to have had a smaller impact on lending than expected: "Although bank lending standards have tightened, we have not seen signs of a significant contraction in credit leading to a substantial slowdown in economic activity."

Bowman stated that while good progress has been made in reducing inflation, rising energy costs pose risks to achieving the inflation target:

"I believe there is a persistent risk that energy prices could rise further and reverse the progress made in recent months in terms of inflation.

If inflation is too high, it may be appropriate for the FOMC to continue raising rates. It is important to reiterate that monetary policy is not in a preset mode."

Some analysts have pointed out that the latest dot plot of officials' rate expectations shows that one policymaker expects rates to peak at over 6% next year. Bowman's latest comments suggest that she may have made the highest forecast for next year's rates.

2025 Voting Member Collins: Rates May Stay at Higher Levels for Longer Than Previously Expected, Patience Needed at the Current Stage

Another official who explicitly stated that further rate hikes cannot be ruled out is 2025 voting member and Boston Fed President Collins. However, her remarks are much more moderate than Director Bowman's, and she, like Fed Chair Powell, emphasizes the need for considerable patience at the current stage of policy. Collins said, "I expect that interest rates may need to be maintained at higher levels for longer than previously predicted, and further tightening of policy is certainly not ruled out. Policymakers will stick to their guns to fulfill the mission of the Federal Reserve."

She also stated that inflation has slowed down, but progress is uneven and more time is needed to ensure price stability. The recent inflation data is encouraging, but declaring victory "prematurely" is still too early, as core inflation excluding housing costs remains high.

She reiterated her earlier remarks this month that there is uncertainty in the economic outlook, and Federal Reserve officials need to exercise patience in evaluating economic data to determine the next course of action, but further policy tightening may still be necessary:

"We must weigh the risks of persistently high inflation and the risks of a greater-than-expected slowdown in economic activity. Maintaining patience at this stage will enable policymakers to extract the correct signals from the latest data."

She believes that American households and businesses will be more sensitive to changes in interest rates. Previously, they were able to avoid the excessive impact of Fed rate hikes because they had accumulated savings or locked in lower loan rates during the pandemic. However, as these savings are gradually consumed and debt market activity rebounds, demand may cool down, meaning that monetary policy may take longer to impact the economy.

However, Collins still has confidence in the Fed's ability to achieve a soft landing, stating that "the path to a soft landing has widened" and that the Fed's policy is in a favorable position to achieve a decrease in inflation without causing an economic recession.

Next year, voting member Daly also emphasizes the need for patience, and AI helps improve productivity

Next year's voting member and President of the San Francisco Fed, Daly, emphasized the policy path of "maintaining patience" even more. Some analysts believe that this indicates her uncertainty about the direction of interest rates and emphasizes the need for more data to determine whether further monetary tightening is necessary.

Daly stated that the Fed's decision to hold steady this week is because "we recognize that we are closer to our destination and now want to gather information to determine if further tightening measures are necessary. Patience is a prudent strategy that aims to reduce US inflation as gently as possible."

She also mentioned that she is not yet ready to declare victory in the fight against inflation, and this week's decision to hold rates steady does not predict what the Fed will do next. She only knows that "we need to slow down" and "we won't be satisfied unless we are confident that inflation has returned to stability."

When evaluating the economy, she acknowledged that the US economy still has a lot of momentum. The decline in inflation over the past few months and the gradual adjustment of the labor market are all positive news. Demand is also slowing down, and banks are tightening credit, which creates significant opportunities for easing inflation.

She reiterated that the Federal Reserve is committed to reducing inflation. Rising energy prices are causing difficulties for households, and it is expected that inflation will not reach its target next year. Additionally, attention should be paid to sticky inflation in non-housing services. However, there are currently no signs that inflation expectations are rising, and wage growth expectations among businesses are showing signs of slowing down. Some analysts believe that she is more confident in achieving a soft landing for the economy.

"Risks should not be ruled out, but the economy is proving that the risk of stagflation is no longer so important. Even if the federal government temporarily shuts down, we are prepared to continue working towards our goals. We will focus on whether the rise in energy prices will push up short-term inflation expectations."

During her tenure, permanent voting member of the Fed, Lisa Cook, did not directly comment on monetary policy, but indirectly hinted at the possible impact on policy prospects by commenting, "Artificial intelligence can improve labor productivity in the United States."

Cook stated that the impact of artificial intelligence on the economy and monetary policy will depend on whether it is just another application or something more profound:

"Empirical evidence is still incomplete, but studies have shown that generative AI can improve productivity in various environments."

She also acknowledged that the use of artificial intelligence in the economy has raised many unresolved questions for policymakers and may pose significant disruptions and challenges for some workers. This requires diverse skills and retraining to help people adapt to new work environments and address issues related to privacy and training data biases associated with AI.

Analysts have suggested that Cook has consistently supported Fed rate hikes to combat inflation and stated during the June confirmation hearing that she will continue to work towards achieving the goals. In addition, Daly also mentioned AI today, stating that generative AI currently has limited overall scale and impact:

"Generative artificial intelligence can improve productivity and may also be disruptive, but it is still in its early stages."