Three Federal Reserve officials turn hawkish on the same day, market expects probability of rate hike in October to rise to 69%

Several Federal Reserve officials have recently made intensive statements, warning that inflation remains stubbornly high and that the current policy stance may still be insufficient to bring prices back to the 2% target. As a result, market expectations for a rate hike in October have risen sharply.

On Thursday, Philadelphia Fed President Anna Paulson made it clear that if economic conditions evolve as expected, "some further tightening of policy may be necessary." New York Fed President John Williams also said on the same day that another rate hike before the end of the year is “reasonable,” and that more effort is still needed to bring inflation down.

Their remarks are highly consistent with the Federal Reserve’s tone from last week’s decision—the Federal Open Market Committee (FOMC) unanimously agreed at the last meeting to raise rates by 25 basis points and released projections showing at least one more hike this year.

Driven by the statements from these officials and the recent robust economic data, the probability of a rate hike in October anticipated by investors has risen from 53% at the end of last week to around 69%. The next Fed policy meeting will end on October 28, just six days before the midterm elections in Congress.

Paulson said at an event in Philadelphia that the core inflation indicators, which exclude energy and food, remain “stubbornly elevated,” currently running in the range of 2.5% to 3%, with almost no evidence of converging toward the 2% target.

“The best I can say about core inflation this year is that it hasn’t continued to worsen,” Paulson said, “Against this backdrop, the risk of persistently high inflation has risen.”

She also noted that the U.S. economy has shown strong resilience, with robust output growth and the labor market nearing full employment, even showing “signs of strengthening momentum.” Nevertheless, this favorable situation also means that monetary policy has enough room to focus on controlling inflation targets without having to overly weigh downside risks to the economy.

Cleveland Fed President Beth Hammack also emphasized on the same day that in a long-term high-inflation environment, the consecutive external shocks would significantly increase the risk of “de-anchoring” inflation expectations.

Fed Governor Michael Barr stated on Wednesday, "Further policy adjustments are likely to be necessary" to ensure inflation returns to target in a timely manner.

Richmond Fed President Tom Barkin said on Tuesday that cooling inflation will not happen overnight, supply-side shocks have shifted from being “temporary” to sustained pressures, and the high level of inflation poses a risk of becoming entrenched in future expectations.

Fed Chair Walsh used brief and firm language at last week’s press conference, stating, “Our main focus is on the price stability mandate, and the fact that inflation has been too high for too long is indisputable.”

Looking at inflation drivers, as measured by the Personal Consumption Expenditures (PCE) price index, the U.S. inflation rate in July was 3.7% year-on-year.

Hammack pointed out that current inflation is largely driven by lingering effects of trade tariffs and surging energy prices. At the same time, price pressures related to Middle East conflicts and demand buoyed by AI data center construction are also emerging as new sources of inflation.

Paulson added that although the direct impact of tariffs on consumer prices has eased, overall wage growth remains moderate and does not yet constitute additional labor cost-driven inflationary pressure.

The intensive rate hike signals have begun to trigger public discontent from the White House. United States National Economic Council Director Hassett said Wednesday that the Federal Reserve was “unusually partisan”, noting that “in recent days, many officials not appointed by President Trump have been making speeches suggesting the need for more rate hikes.”

This remark marks a further public manifestation of the tension between the White House and the Federal Reserve.

Paulson is a voting member of the FOMC this year, and the collective statements from these officials demonstrate a fairly broad consensus within the Fed’s policy committee on further tightening.