Three Federal Reserve officials adopted hawkish stances on the same day, raising market expectations for a 69% probability of an October rate hike.

Several Federal Reserve officials have recently made statements warning that with inflation remaining high, the current policy stance may not be sufficient to bring prices back to the 2% target, leading to a significant increase in market expectations for an October rate hike.

On Thursday, Philadelphia Fed President Anna Paulson stated explicitly that if the economic situation develops as expected, "a moderate tightening of policy may be necessary." New York Fed President John Williams also stated on the same day that another rate hike before the end of the year is "reasonable," and that more effort is needed to reduce inflation.

The two men's statements were highly consistent with the tone of the Federal Reserve's decision last week—the Federal Open Market Committee (FOMC) unanimously agreed to raise interest rates by 25 basis points at its last meeting and released forecasts indicating at least one more rate hike this year.

Driven by the aforementioned officials' statements and recent strong economic data, investors' expectations for a rate hike in October have risen from 53% at the end of last week to about 69%. The Federal Reserve's next policy meeting will conclude on October 28, just six days before the midterm elections.

The market is currently pricing in terminal interest rates significantly higher than the latest dot plot from the Federal Reserve.

With inflation remaining high, officials are adopting a more hawkish tone.

Speaking at an event in Philadelphia, Paulson said that core inflation, excluding energy and food, remains "stubbornly high," currently trading between 2.5% and 3%, with little sign 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. "In that context, the risk of persistently high inflation has increased."

She also pointed out that the US economy has shown strong resilience, with robust output growth, a labor market nearing full employment, and even signs of "increasing momentum." However, this favorable situation also means that monetary policy has sufficient room to focus on controlling inflation without having to overly weigh downside risks to the economy.

On the same day, Cleveland Federal Reserve President Beth Hammack also emphasized that in an environment where inflation has been high for a long time, the successive arrival of external shocks will significantly increase the risk of "inflation expectations decoupling".

Federal Reserve Governor Michael Barr said on Wednesday that "further policy adjustments are likely to be necessary" to ensure that inflation returns to the target in a timely manner.

Richmond Fed President Tom Barkin said on Tuesday that the cooling of inflation will not happen overnight, and the supply-side shock has evolved from "temporary" to persistent pressure. There is a risk that the high inflation level will be transmitted to future expectations.

Multiple supply shocks combined, leading to complex sources of inflationary pressure.

Federal Reserve Chairman Warsh made brief and hawkish remarks at last week's press conference, stating, "Our primary focus is on our mission of price stability, and there is no denying that inflation has been too high for too long."

In terms of inflation drivers, the U.S. inflation rate, measured by the personal consumption expenditures (PCE) price index, was 3.7% year-on-year in July.

Hammack points out that current inflation is largely driven by the lingering effects of trade tariffs and soaring energy prices. Meanwhile, price pressures related to conflicts in the Middle East and demand driven by the construction of artificial intelligence data centers are also contributing new sources of inflation.

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

Disagreements emerge between the White House and the Federal Reserve

The flurry of interest rate hike signals has begun to draw public discontent from the White House. National Economic Council Director Hassett called the Federal Reserve "unusually partisan" on Wednesday , stating, "In the past few days, many officials not appointed by President Trump have spoken out, indicating the need for more rate hikes."

This statement marks a further escalation of tensions between the White House and the Federal Reserve.

Paulson is a voting member of this year's FOMC. The collective statement from these officials indicates a broad consensus within the Federal Reserve's policy committee on continuing to tighten monetary policy.

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