Fed Officials Turn Hawkish: Daly Says Supply Shocks Should No Longer Be "Wait-and-See," Hammack Suggests More Aggressive Rate Hikes May Be Needed if Inflation Expectations Become Entrenched

After the release of the US CPI data that exceeded expectations on Wednesday, two Federal Reserve officials issued hawkish signals on Thursday, expressing deepening concerns about inflation.

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

Beth Hammack, President of the Cleveland Fed, warned that if public inflation expectations deteriorate significantly, the Federal Reserve might need to take more aggressive rate hikes.

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

In a podcast at the Hoover Institution, Mary Daly said she has abandoned the traditional "wait-and-see" approach to supply-side shocks. Six months ago, she tended to follow central banking convention, believing that supply-side driven inflation would dissipate on its own and that monetary policy tools would have limited effect.

However, the confluence and persistence of multiple supply shocks have changed her judgment. "When shocks overlap and last a long time, do traditional experiences still apply?" she said. "At what point does a factor that was supposed to be a one-off begin to erode inflation expectations against a backdrop of persistently high inflation?"

Daly noted that before the September FOMC meeting, she had already noticed worrying changes in market-based long-term inflation expectation indicators. "The compensation investors are demanding for inflation concerns has risen and continued to climb since the July meeting. In my view, this is an early warning sign."

She also mentioned that businesses in the San Francisco Fed’s jurisdiction are increasingly inclined to pass on cost increases to consumers, which is a typical characteristic of inflationary pressures shifting from the input side to the end consumer.

According to Reuters, Beth Hammack said at a Goldman Sachs event in New York that once the public forms an "inflationary mindset," the difficulty of monetary policy regulation increases sharply, and the scale of rate hikes required will exceed expectations.

"What worries me is, if this inflationary thinking spreads, if people generally expect price pressures to persist, it will make monetary policy work much harder. We might have to take even greater action than if there were no such inflationary 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 in supporting rate hikes to combat inflation. She did not provide explicit guidance on the current policy path this time, but her rhetoric aligns with the recently prevalent hawkish statements from other officials.

She also mentioned that despite increasing borrowing costs, investment in areas such as technology is advancing at full speed, and current financial conditions are generally neutral, without obvious tightening effects. "I don't feel that, at this point, financial conditions are constraining in any way," Hammack said.

Hammack’s statement is among the last public remarks from Fed officials before the "blackout period" ahead of the October meeting.

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

At its September 16 meeting, the Federal Reserve unanimously agreed to raise rates by 25 basis points. The Fed's dot plot indicates that most policymakers expect one more 25 basis point hike before the end of 2026.

This week's overly strong inflation data has led markets to reassess the probability of a rate hike at the end of this month. With multiple officials reiterating risks surrounding inflation expectations, and with financial conditions not yet evidently restrictive, the expectation for another rate hike this year is being reinforced.