Federal Reserve Officials Signal Hawkish Stance: Daly Says Supply Shocks Should No Longer Be Ignored, Hammack Warns of Need for More Aggressive Rate Hikes as Inflation Expectations Solidify

Hawkish signals are being released intensively as the market awaits Waller's speech.

Written by: Yang Chen, Wall Street Insights

After the unexpected CPI data release in the U.S. on Wednesday, two Federal Reserve officials sent hawkish signals on Thursday, indicating deepening concerns over inflation.

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

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

These statements came after this week's inflation data exceeded expectations. Following the data release, some market participants have raised the probability of a rate hike at the Fed's meeting from October 27 to 28.

Daly's Shift: Supply Shocks Should No Longer Be "Ignored"

In a podcast at the Hoover Institution, Mary Daly stated that she has abandoned the traditional response of "waiting and seeing" regarding supply-side shocks. Six months ago, she leaned towards following central bank conventions, believing that inflation caused by supply-side factors would dissipate on its own, and that monetary policy tools had limited effectiveness.

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

Daly noted that before the September 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, continuing to climb since the July meeting, which I see as a warning early signal."

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

Hammack Warns: Solidified 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 adjustment will significantly increase, and the required rate hikes will exceed expected scenarios.

"What I worry about is if this inflation thinking spreads, if everyone generally expects price pressures to become more persistent, it will make the work of monetary policy much more difficult, and we may have to take more significant 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 to support rate hikes to combat inflation. She did not provide clear guidance on the current monetary policy path, but her wording aligns with the generally hawkish statements from officials recently.

She also mentioned that despite rising borrowing costs, investments in sectors like technology continue to progress at full speed, and current financial conditions are generally at a neutral level, not feeling any significant tightening effects. "I do not feel that financial conditions are imposing any constraints at this point," Hammack said.

Hawkish Signals Intensively Released, Market Awaits Waller's Speech

Hammack's statements are among the last public remarks by officials before the "quiet period" ahead of the Fed's October meeting.

The market is closely watching Fed Chair Waller's planned speech on Thursday evening for further clues on the direction of monetary policy.

At the Fed's meeting on September 16, officials unanimously agreed to raise rates by 25 basis points, and the dot plot of officials' rate forecasts shows that most decision-makers expect one more 25 basis point hike before the end of 2026.

This week's unexpected inflation data has led 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 forming significant constraints, expectations for another rate hike this year are strengthening.

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