The probability of a rate hike in October has dropped to 50%. The Federal Reserve's "third in command" stated: another rate hike is needed this year, but there is no need to rush.

Several Federal Reserve officials spoke intensively on Tuesday, reinforcing expectations that monetary policy will need further tightening within the year, but market bets on a near-term rate hike have cooled.

New York Fed President John Williams said in a speech in Buffalo, New York, that if the economy develops largely as he expects, it may be appropriate to raise rates one more time later this year to help return inflation to target in a timely manner.

Meanwhile, he emphasized that the Fed's rate hike in September has given policymakers more time to observe, and "there is no need to act in a hurry."

Following Williams’ remarks, market expectations for a rate hike at the Federal Reserve's October 27–28 meeting quickly fell from around 70% to about 50%.

On Tuesday, multiple Federal Reserve officials sent similar signals in different settings, reinforcing market judgments that policy still needs to be tightened.

Chicago Fed President Austan Goolsbee reiterated that if supply shocks prove persistent, the Federal Reserve may need to respond by raising rates. He stated: "If we continue to face permanent or highly persistent supply shocks, for the credibility of the 2% inflation target, the Federal Reserve must consider responding to such shocks."

Fed Governor Michael Barr also warned in a speech in Detroit on the same day that bringing inflation under control may require further rate hikes. "In my baseline scenario, to ensure inflation returns to target in a timely manner, policy adjustments may still be needed," he said. "I have not yet seen a clear trend of inflation returning promptly to 2%."

At its September meeting, the Federal Reserve raised rates by 25 basis points, marking the first hike in 2023. According to economic forecasts released after the meeting, most officials expect one more rate hike within the year, and eight officials foresee another similar increase in 2027.

AI and Middle East Tensions Drive Inflation, 2% Target Expected by 2028

In his speech, Williams identified two core factors currently driving up inflation: Middle East geopolitical conflict and rising demand related to artificial intelligence.

"The inflationary impact of AI-related demand shocks is becoming increasingly evident, and I currently expect that energy prices will have a greater and more prolonged effect on inflation," he said. However, he also pointed out that there is no evidence yet that these pressures have spread to broader or more persistent price increases.

On tariffs, Williams stated that their effect in pushing up goods price inflation has largely dissipated. He emphasized that although monetary policy cannot directly unblock supply chains or restart infrastructure, it can reduce the risk of supply shocks turning into widespread, persistent inflation.

Regarding inflation forecasts, Williams expects the inflation rate to reach 3.5% this year, to decline slightly to just above 2% in 2027, and that the Federal Reserve is likely to achieve its 2% policy target in 2028.

The current economy is relatively resilient, with the labor market holding steady. Williams believes that this backdrop has increased inflation risks. He stated that such a macroeconomic environment requires policymakers to remain vigilant to prevent supply-side disruptions from becoming entrenched, more stubborn inflationary pressures.