Fed Officials Warn of Persistent Inflation Risks, Signal Possible Further Rate Hikes

"Acting early is better than acting late," Fed officials warn, as hawkish sentiment intensifies.

For the first time in over three years, the Federal Reserve has raised interest rates. In the wake of this decision, three regional Fed presidents—Tom Barkin of Richmond, Alberto Musalem of St. Louis, and Austan Goolsbee of Chicago—have publicly stated that inflation continues to pose persistent risks. Citing energy prices, tariffs, strong demand, and "other supply shocks," they indicated that further rate increases may be necessary to bring inflation down, with additional hikes described as "the only way out."

Rate Hikes Should Come Early

Richmond Fed President Tom Barkin stated on Tuesday that recent increases in oil prices and tariff-driven inflation were key factors behind the Fed's decision to raise rates last week. He did not rule out the possibility of further hikes.

Speaking in Baltimore, Barkin said: "There is a view that inflation will fall back to target on its own, without the Fed needing to take additional action. But that view has a problem. These kinds of 'temporary' shocks are neither short-lived nor one-off events."

He added: "These issues may ease over time, but the process could take a considerable period. In the meantime, persistently high inflation could influence future inflation expectations... Current inflation is more than one percentage point above target—that is a significant concern."

St. Louis Fed President Alberto Musalem, a hawkish FOMC voter, said on Monday that due to strong demand and commodity price shocks that have spread beyond crude oil, the Fed may need to raise rates further to curb inflation. He emphasized: "Acting early is better than acting late."

On the topic of AI investment—a major focus of this month's FOMC meeting—Musalem noted that commodity prices such as copper have also risen, a spillover effect from the AI investment boom. He observed that U.S. consumer spending and economic growth remain resilient. "From one perspective, that's positive. But for the Fed, it adds to the difficulty of managing inflation. Strong demand and supply-side factors are both at work in the economy."

Even excluding oil and other supply-side factors, Musalem said core inflation remains about one percentage point above the Fed's target and is "moving in the wrong direction."

He argued that early, gradual tightening would have a smaller market impact and be more effective than larger, more abrupt actions later. "Inflation is not a potential risk—it is already here." He added that the current policy rate of 3.75%–4.00% remains accommodative, meaning it is not yet high enough to restrain economic activity.

Chicago Fed President Austan Goolsbee also warned in a Monday speech that inflation faces ongoing risks from energy prices, tariffs, strong demand, and "other supply shocks." He said that if demand "overheats," the Fed will have to act, and further rate hikes would be "the only way out."

Market and Global Context

Last week, the Fed voted unanimously to raise rates for the first time in three years. Investors remain cautious about the rate outlook, and market bets on further rate hikes this year remain elevated.

Beyond the U.S., several central bank officials have recently signaled that inflation is higher and more persistent than expected, paving the way for further policy tightening.

European Central Bank Chief Economist Philip Lane said that新一轮 high energy prices mean inflation in the eurozone will remain elevated longer than the ECB initially expected. "We are seeing a second wave of price increases, not just in oil but also in natural gas," he said in an interview on Tuesday. "We believe this energy price surge will keep inflation higher and more persistent, before it begins to fall back toward our target from mid-2027."

AI Infrastructure Spending Continues to Surge

U.S. investment in artificial intelligence infrastructure continues to accelerate. JPMorgan Chase CEO Jamie Dimon, speaking at the bank's India conference, said that the "hyperscaler cloud ecosystem"—including major cloud computing companies and their supply chains—will spend approximately $700 billion this year, more than double last year's $300 billion, and could rise to $1 trillion by 2027.

Dimon noted that this wave of investment is building data centers, factories, and power infrastructure, while boosting demand for equipment, materials, and labor. He estimated that such investment adds roughly 1% to U.S. GDP annually, though it may also put short-term upward pressure on inflation.

Over the past two years, markets have repeatedly debated when AI capital expenditure would peak. However, actual investment plans from major tech companies continue to point toward expansion. JPMorgan estimated in late June that five major U.S. tech firms would spend around $730 billion on capex this year. By September, Bank of America's estimate had risen to approximately $795 billion. The upward revision within months suggests AI infrastructure investment remains in an expansion phase, not the slowdown markets have repeatedly anticipated.

According to Reuters, SoftBank Group launched a senior unsecured bond issuance on the 21st to fund its investment in OpenAI. The bond, worth over $11 billion, attracted more than $20 billion in initial subscription interest. Despite strong investor demand, financing costs remain high. The longest 7.5-year USD tranche tested yields as high as 10%, while the 6-year EUR tranche was in the mid-8% range. If finalized near these levels, it would be among the highest yields on record for bonds of these currencies and maturities.

AI Trading Remains Volatile

Rising expectations of another Fed rate hike this year, combined with persistently high global bond yields, are putting pressure on precious metals such as gold. However, the AI infrastructure sector continues to attract strong interest.

In contrast to gold market volatility, global AI trading has seen a notable recovery. On the 22nd, Samsung Electronics and SK Hynix both rose about 3.5% in early trading, though they closed significantly lower. On Monday, the Philadelphia Semiconductor Index rose 4.3%, its largest single-day gain since August 4. AMD's market cap surpassed $1 trillion, while Arm, Qualcomm, and Intel all posted strong gains.

Morgan Stanley strategist Michael Wilson warned that if financial conditions tighten further or energy prices spike again, the S&P 500 could fall to 7,100 points—about 7% below last Friday's close. He also expects market volatility to increase after the November midterm elections. However, he predicted that strong corporate earnings prospects would drive a year-end rebound to a target of 8,000 points, representing a nearly 5% gain from current levels.