Federal Reserve officials intensively deliver hawkish remarks! Waller calls for a 50 basis point rate hike in December, Bowman warns that AI investment returns may fall short of expectations, potentially triggering a sharp correction in US stocks

According to Zhitong Finance APP, several Federal Reserve officials sent out consecutive hawkish signals on Tuesday, believing that inflationary pressure in the United States remains stubborn and monetary policy needs further tightening. Among them, Federal Reserve Governor Bowman stated that persistent high inflation and a resilient labor market mean the Fed still needs to continue raising interest rates. She also warned that if the return on investment from artificial intelligence (AI) fails to meet market expectations, the US stock market could face a significant correction, impacting consumer spending and the overall economy.

Meanwhile, Fed Governor Waller suggested considering a one-time 50 basis point rate hike at the December meeting; Dallas Fed President Logan argued that at least two additional 25 basis point hikes are needed. Kansas City Fed President Schmid also stated that current monetary policy remains relatively loose and supported further tightening to combat inflation.

On Tuesday, Bowman, attending a Council on Foreign Relations event in Washington, said the US economy is facing multiple potential risks from financial markets, including a sharp market revaluation due to disappointing AI investment returns and a rapid increase in long-term market interest rates. She noted, "A decline in equity prices may weaken the resilience of consumer spending, while rising rates may further stress interest rate-sensitive sectors of the economy, such as housing and small business investment."

Bowman is particularly concerned about the financing risks behind the current boom in AI infrastructure construction. She explained that the amount of debt related to AI is growing rapidly, with significant expansion in corporate bonds, private credit, and project financing. This year the related financing volume is expected to exceed $800 billion.

Bowman pointed out that with their relatively high credit ratings, large cloud computing enterprises and technology companies have assumed part of the off-balance-sheet debt, allowing smaller and riskier firms to use these credit supports to obtain asset-backed financing for data center construction and accelerated computing equipment purchases.

Large cloud computing enterprises and chip design firms also back small and medium-sized AI companies which purchase their products through equity investments, forming complex financial and business relationships. Bowman believes these transaction arrangements exhibit the characteristics of "circular financing," which may deepen risk linkages within the AI industry chain.

Regarding monetary policy, Bowman said that she still sees persistent inflationary pressure and that the labor market appears to be improving, suggesting the Fed still has work to do to bring inflation back to its 2% target. She noted that although some factors currently driving inflation are expected to fade next year, actual inflation has proven more stubborn than previously anticipated and recent data have come in higher than she forecasted.

In September, the Federal Reserve raised its benchmark interest rate by 25 basis points, the first hike since 2023, and then decided to keep rates unchanged at the meeting on October 27-28. Bowman said she supported pausing rate hikes in October to allow the Fed more time to assess economic developments and the impact of the September move on underlying trends. However, with inflation data remaining strong, Bowman hinted she may support another rate hike at the year's final FOMC meeting in December.

On the same day, Fed Governor Waller released an even more aggressive policy signal, suggesting the Fed should consider a one-time 50 basis point hike in December instead of the usual 25 basis points. After Waller's remarks, data from the US Labor Department showed October's consumer price increase exceeded market expectations, with the core Consumer Price Index (CPI) excluding food and energy rising 0.3% month-on-month—reaching the inflation threshold that Waller had previously indicated might support a larger rate hike.

Dallas Fed President Logan also reiterated that the current economic outlook still requires the Fed to further raise rates. At a meeting in Houston, Logan said: "Given the current economic outlook, I continue to make it clear that the Federal Open Market Committee still needs to implement at least two additional 25 basis point hikes."

However, Logan did not explicitly support a one-time 50 basis point hike, indicating that while some officials agree on the need for continued tightening, there are still differing views on the extent of further increases.

Kansas City Fed President Schmid said at an energy conference co-hosted by the Dallas Fed and Kansas City Fed on Tuesday that inflation remains the Fed's top priority, and the current level of interest rates does not obviously restrict the economy. Schmid stated, "I did not believe our rates were restrictive last year, and I believe current policy is still quite accommodative."

He noted that his focus is on where the Fed's policy decisions can most effectively influence current inflation trends in the economy.

Schmid also said that apart from rising energy prices, other areas of the US economy are also seeing price changes that deserve attention. He specifically mentioned that the housing market is displaying complex dynamics but has not found other economic areas to be obviously constrained by policy.

Previously, the Fed's rate forecasts released in September indicated that most officials expected at least one more rate hike this year to drive inflation back to the long-term 2% target. Recent comments by many officials have further reinforced this policy stance, but there are still differences regarding the pace and magnitude of rate hikes.