Eagle signals are being released intensively, and the market is waiting for Walsh's speech.

Written by: Yang Chen, Wall Street Journal

After the unexpectedly high CPI data release in the U.S. on Wednesday, two Federal Reserve officials sent out hawkish signals on Thursday, indicating that concerns about inflation are deepening.

San Francisco Fed President Mary Daly stated that her view on the persistence of inflation has fundamentally changed compared to six months ago and now believes that the current inflation risks are "broadly tilted to the upside."

Cleveland Fed President Beth Hammack warned that if public inflation expectations worsen significantly, the Federal Reserve may need to take more aggressive rate hike actions.

The above statements came after the unexpectedly high inflation data this week. Following the data release, some market participants have raised the probability of a rate hike by the Fed during the monetary policy meeting scheduled for October 27 to 28.

Daly's shift in stance: Supply shocks no longer to be "wait and see"

Mary Daly stated in the Hoover Institution's podcast that she has abandoned the traditional response of "wait and see" regarding supply-side shocks. Six months ago, she tended to follow the central bank's convention, believing that inflation caused by supply-side factors would dissipate on its own and that monetary policy tools would have limited effects.

However, the accumulation and persistence of multiple supply shocks have altered her judgment. "When shocks overlap and last for a long time, does traditional experience still apply?" she said. "At what point might a factor originally considered a one-time event start to erode inflation expectations in the context of persistently high inflation?"

Daly noted that prior to the September monetary policy meeting, she had begun to notice concerning changes in market-based long-term inflation expectation indicators. "The compensation demanded by investors due to inflation concerns has risen and continuously climbed since the July meeting, which, in my view, is a warning sign," she said.

She also mentioned that businesses within the San Francisco Fed district are increasingly inclined to pass rising costs onto consumers, which is a typical feature of inflation pressure spreading from the input side to the end consumer.

Hammack warns: Solidification of inflation expectations will force more aggressive rate hikes

According to Reuters, Beth Hammack stated at an event hosted by Goldman Sachs in New York that once the public forms an "inflation mindset," the difficulty of monetary policy regulation will significantly increase, and the required rate hikes will exceed expected scenarios.

"What I worry about is if this inflation thinking spreads, and if everyone generally expects price pressures to become more persistent, it will make the work of monetary policy more difficult, and we may have to take more substantial actions than we would without this mindset," Hammack said.

Hammack is a member of the Federal Open Market Committee (FOMC) and one of the earlier and more steadfast officials within the Fed supporting rate hikes to address inflation. She did not provide explicit guidance on the current monetary policy path this time, but her wording aligns with the recent broadly hawkish statements from officials.

She also mentioned that despite rising borrowing costs, investments in fields such as technology are still progressing at full speed, and current financial conditions are generally at neutral levels, without feeling significant tightening effects. "I do not feel that financial conditions are imposing any constraints at this point," Hammack said.

Eagle signals are being released intensively, and the market is waiting for Walsh's speech

Hammack's statements above are among the last few public speeches by officials before the Federal Reserve's "blackout period" begins ahead of the October meeting.

The market is closely monitoring the speech that Fed Chairman Walsh is scheduled to give on Thursday evening for further clues about the direction of monetary policy.

At the Federal Reserve meeting on September 16, a unanimous decision was made to raise rates by 25 basis points, with the officials' dot plot indicating that most decision-makers anticipate another 25 basis points hike before the end of 2026.

This week's unexpectedly high inflation data has caused the market to reassess the probability of a rate hike at the end of the month. Several officials have emphasized the risks of inflation expectations, and with financial conditions not yet showing significant constraints, expectations for another rate hike this year are strengthening.

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