As Rate Cut Expectations Rise... Fed Officials Say "Inflation War Not Over"

Baumann "Additional Hikes Needed for 2% Inflation"
Waller Praises Q3 Economy as 'Explosive Performance'
Wall Street Heavyweight Also Warns "Market Underestimates Tightening"
Sharp Drop in Treasury Yields Could Trigger Tightening Instead

On the 1st, as the U.S. Federal Reserve (Fed) held interest rates steady for the second consecutive time, expectations for the end of the tightening cycle quickly spread. However, Fed officials emphasized that the door to rate hikes has not been completely closed. Wall Street heavyweights also raised concerns about a rebound in inflation, diagnosing that the market is underestimating the possibility of prolonged high interest rates.

Michelle Bowman, a Fed governor, stated at an event hosted by the Ohio Bankers League on the 7th (local time), "We expect additional rate hikes will be necessary to bring inflation down to the 2% target at the appropriate time." Known as a representative hawk (favoring monetary tightening) within the Fed, she also commented on the recent sharp rise in the U.S. 10-year Treasury yield, saying, "Financial conditions have tightened since last September." However, she judged that it is too early to confirm the impact on the economy and inflation as market volatility could increase. She further emphasized that if the inflation slowdown halts or achieving the 2% target becomes difficult, she would support future rate hikes.

Other Fed officials also agreed that the response to inflation is not yet over. Although there are differences in tone, they reiterated that the possibility of additional tightening remains open and that policy decisions will be made based on future economic indicators. Austan Goolsbee, president of the Federal Reserve Bank of Chicago, appeared on CNBC that day and said, "Lowering inflation is the top priority," adding, "So far, inflation is on a good path, but the response to inflation is not over." He also noted that the possibility of a soft landing?reducing inflation without a recession?still remains.

Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said the day before, "Inflation could rebound and remain above 2%, which is very concerning," and stated that he would choose to tighten excessively rather than underreact. He particularly emphasized that discussions about rate cuts are not currently underway. Christopher Waller, a hawkish Fed governor, described the U.S.'s surprising 4.9% growth in the third quarter of this year as a "blowout" and said, "This is something to watch closely during future policy reviews."

These responses differ from the recent rapid spread of pivot (monetary policy shift) expectations in the market. On the 1st, the Fed held the benchmark interest rate steady at 5.25?5.5% for the second consecutive time, and signs of a cooling overheated labor market were confirmed. As a result, the U.S. Treasury yields, which had surged over the past three months, have been falling rapidly. The 10-year U.S. Treasury yield dropped to around 4.56% that day, significantly down from 4.92% on the 31st of last month, just before the Fed's rate hold. Although Fed officials repeatedly voiced concerns about inflation that day, yields slightly declined compared to the previous day.

Wall Street heavyweights also reiterated the inflation crisis and forecast the possibility of prolonged high interest rates. Bob Prince, Chief Investment Officer (CIO) of Bridgewater Associates, the world's largest hedge fund, said at the Global Financial Leaders Investment Summit held in Hong Kong that day, "The market is underestimating how long rate tightening will last in the U.S. and Europe," emphasizing, "The two regions at war with inflation have not yet reached equilibrium (in prices and rates)." Concerns were also raised that geopolitical risks such as U.S.-China tensions and supply chain restructuring could further drive up prices. Ken Griffin, founder and CEO of Citadel, a major U.S. hedge fund, also mentioned, "We do not clearly understand how much deglobalization will raise prices," warning of the risk of inflation reigniting.

Experts view that the rapidly easing financial conditions, such as the decline in Treasury yields following the Fed's rate hikes, could actually trigger additional tightening. According to Bloomberg News, the market expects the Fed to cut rates by 92 basis points (1bp = 0.01 percentage points) next year, significantly exceeding the Fed officials' forecast of a 0.5 percentage point cut. Henry Allen, a macroeconomic strategist at Deutsche Bank, said, "Expectations of a pivot can ease actual financial conditions," adding, "This could make the central bank feel the need to tighten again to bring down inflation."

This content was produced with the assistance of AI translation services.