Fed Officials Break Silence: Hawks Push for More Hikes, Doves Soften Stance

The U.S. Federal Reserve last week raised interest rates by 25 basis points and removed from its policy statement the phrase that "recent inflation is partly due to supply shocks," retaining only the language that "inflation remains elevated." The shift in wording reflects growing internal skepticism at the Fed that current price pressures will dissipate on their own without action. Tariffs and rising oil prices—once viewed as one-off, temporary disruptions to price levels—have proven more persistent than expected, and inflation is now also being driven by demand-side factors.

With the blackout period ending, Fed officials will be able to publicly share their views on the economy and monetary policy. According to the schedule, at least 10 Fed and regional bank presidents are expected to speak this week, which could subtly influence the outlook for the current rate-hiking cycle.

Better to Hike Sooner Rather Than Later?

Alberto Musalem, the hawkish voting member of the Federal Open Market Committee (FOMC) and President of the St. Louis Fed, said Monday that the Fed will likely need to continue raising rates due to strong demand and commodity price shocks that have spread beyond crude oil. He added that acting sooner rather than later would be more appropriate.

"Persistently strong demand, combined with recurring supply-side factors, is driving up inflation risks. My assessment is that without further policy tightening to curb inflation, the probability of inflation remaining significantly above the 2% target 18 months from now is higher than the probability of it falling back to target," he said. "Monetary policy must impose a meaningful constraint on inflation. This is critical so that the Fed can achieve its inflation target in about a year and a half, allowing time for tightening to transmit to the real economy."

Progress on bringing inflation back to the 2% target has recently stalled. The Fed's preferred core inflation gauge—the Personal Consumption Expenditures (PCE) price index—stood at 3.7% year-over-year in July, compared to a recent low of 2.3% in April 2025. After the Trump administration's global tariff plan disrupted import prices, the U.S.-Iran conflict this year pushed up global fuel costs, with diesel prices recently hitting record highs.

Musalem noted that commodity prices such as copper have also risen, a spillover effect from the AI investment boom. Against this backdrop, U.S. consumer spending and economic growth remain resilient. While this is positive in some respects, it further complicates the Fed's inflation fight. "Strong demand and supply-side factors are jointly affecting the economy," he said. Even excluding crude oil and other supply-side effects, core inflation remains about one percentage point above the Fed's target and is "moving in the wrong direction." Early, gradual tightening would be less disruptive and more effective than larger, more abrupt policy actions later. "Inflation is not a potential risk—inflation already exists."

The St. Louis Fed president believes the current policy rate of 3.75%–4.00% remains accommodative, meaning it is not yet high enough to restrain economic activity. "The market is gradually recognizing that consumption and investment growth remain very strong, while various factors—including geopolitical conflicts—are raising inflation risks."

Even dovish committee members have softened their stance. Chicago Fed President Austan Goolsbee said Monday that strong demand may be a driver of inflation, and further rate hikes may be needed to bring price growth back to the 2% target. However, he noted that rate hikes could negatively impact employment and economic growth.

Policy Outlook

Investors remain cautious about the rate outlook after the Fed voted unanimously to raise rates for the first time in three years to combat inflation. According to the CME FedWatch Tool, traders are pricing in a 50% probability of another rate hike next month.

Notably, markets now expect the Fed to deliver three additional 25-basis-point rate hikes across the five FOMC meetings between now and April next year. The median projection from officials after last week's meeting indicated only one more rate hike this year. Views on whether further hikes will be needed in 2027 were nearly evenly split, with the overall policy path less aggressive than investors anticipate.

A review by Yicai reporters found that while Wall Street broadly agrees the Fed will raise rates again this year, there is significant divergence on the ultimate direction of the current tightening cycle.

• Goldman Sachs and Mizuho expect the Fed to pause after a rate hike in December. Goldman said inflation is not a one-off supply shock, but domestic demand is a key driver, and the Fed will not hike rates consecutively multiple times.
• Societe Generale and Danske Bank forecast rate hikes of 25 basis points in December and March 2027, bringing the terminal rate to 4.5%. Societe Generale cited broad-based inflation, resilient labor markets, and recurring supply shocks as reasons for needing higher policy rates to suppress aggregate demand.
• Bank of America, by contrast, believes investors should begin preparing for the risk that the Fed will raise its benchmark rate above 5%. The bank argues that interest rate markets still underestimate the eventual peak of the Fed's rate-hiking cycle. Overnight borrowing costs could revisit the highs of the 2022–2023 tightening cycle, when the federal funds rate target peaked at 5.5%. BofA expects the two-year U.S. Treasury yield to rise to 5% from its current level of around 4.7% this year.