NEW YORK — Federal Reserve officials are stepping up calls for aggressive action against inflation even after this month's interest rate increase, the first in three years and two months. Their comments effectively reinforce the case for one more hike already signaled for this year.
Boston Federal Reserve Bank President Susan Collins said in a LinkedIn post on the 22nd that inflation is now more likely to stay well above 2%. "Considering all the information currently available, I see an increased likelihood that inflation will persist at levels considerably above 2%," she said, adding that while price pressures have built, labor market conditions remain broadly solid and the unemployment rate is holding at a low level. Collins said that with the labor market on more stable footing, "monetary policy can appropriately focus on bringing down inflation that has been too high for the past five and a half years," and stressed that "a somewhat more restrictive policy rate will help return inflation to target."
Richmond Fed President Tom Barkin, speaking at an event in Baltimore the same day, said the U.S. economy has if anything grown more resilient on the back of steady consumption and solid growth. "The recent rise in prices is not simply a matter of temporary supply-chain factors such as energy or tariffs," he warned. Barkin added that inflation risks still outweigh those tied to maximum employment, calling that "the reason we raised the policy rate at last week's Federal Open Market Committee meeting." He was more guarded on the need for further increases or how many might follow, saying only that policymakers would have to wait and see.
Collins and Barkin are not the only Fed officials making the case for more tightening since the FOMC met on the 15th and 16th. Chicago Fed President Austan Goolsbee told an Official Monetary and Financial Institutions Forum event in London on the 21st that a building boom in artificial intelligence data centers is overheating demand across the economy and adding to inflation pressure. If that demand overheating persists, he said, the Fed may have to move beyond a single additional rate increase and tighten more boldly.
The Fed raised its benchmark rate by 0.25 percentage point to a range of 3.75% to 4.00% at this month's FOMC meeting. It was the central bank's first increase since July 2023, a gap of three years and two months. Policymakers also put the median year-end rate at 4.125% in the dot plot of the Summary of Economic Projections, a quarterly chart mapping officials' rate forecasts, signaling room for one more hike at the two remaining meetings in October and December.
With the odds of another increase rising, the gap between short- and long-term U.S. Treasury yields is narrowing quickly in global bond markets. On the 22nd, the spread between 10-year and two-year yields briefly tightened to 0.179 percentage point. As recently as the 18th of last month, the gap stood at 0.555 percentage point. According to CME FedWatch, the federal funds futures market priced in a 54.2% chance that the Fed raises rates by 0.25 percentage point at next month's FOMC meeting. The probability of an increase of at least 0.25 percentage point by year-end reached 89.2%.
