Fed Rate Hike Expectations for October Cool Down! Officials Suggest No Urgent Action Needed, AI Investment Boom May Become Major Inflation Risk Next Year

According to Investing Intelligence APP, several senior Federal Reserve officials have continuously sent signals this week, indicating that although U.S. inflation remains elevated and further rate hikes may be needed in the future, the Fed is not in a hurry to take action in October. Both New York Fed President Williams and Fed Vice Chair Jefferson emphasized that more economic data should be awaited before deciding on the next policy path, prompting the market to postpone expectations for the next rate hike from October to December. Meanwhile, Fed Governor Cook warned that artificial intelligence (AI) infrastructure development may bring sustained inflationary pressures, potentially becoming one of the main risks facing monetary policy in 2027.

Minneapolis Fed President Kashkari stated that he still expects the Federal Reserve to hike rates once each in both this year and next year, but remains open on the precise timing of the next move. He also pointed out that the U.S. economy is performing stronger than previously expected and current monetary policy may not be imposing a clear restriction on the economy.

Williams and Jefferson's consecutive remarks push market rate hike expectations to December

At its September meeting, the Fed unanimously voted to raise the benchmark rate by 25 basis points to 3.75%-4.00%. The policymakers’ rate projections at that time also indicated a further hike was likely before the end of the year. Due to persistently high U.S. inflation, financial markets previously expected the Fed to raise rates again at the October 27-28 meeting, even betting that future policy tightening could be more aggressive than officials predicted.

However, speeches by two senior Fed officials this week changed that expectation. As a key figure in the Fed’s monetary policy decision-making and the FOMC Vice Chair, Williams said Tuesday that after the rate hike in September, there was currently no need to rush into further adjustments.

He believes the Fed can use the coming period to observe economic data, to better assess changes in economic growth and inflation before deciding the next policy action. Williams still expects that if the economy broadly matches his projections, another rate hike later this year may be appropriate, but did not indicate that October action was necessary.

Fed Vice Chair Jefferson further reinforced this message on Thursday. In a speech prepared for an event at the University of Virginia Darden School of Business, Jefferson stated that any future monetary policy adjustments should be based on careful evaluation of economic data trends, changes in outlook, and the balance of risks.

He noted that as bond yields rise, financial markets are reassessing the interest rate outlook, but Fed officials still need to form their own judgment, and this process may require more time.

Jefferson said that after receiving more data, economic trends as well as the appropriate stance of monetary policy may become clearer. Affected by these remarks, markets have significantly lowered bets on an October rate hike. Currently, investors widely expect the Fed to hold rates steady at the October meeting and raise rates again by 25 basis points at the final meeting of the year on December 8-9. Multiple global brokerages have also adjusted their next rate hike forecast to December.

Analysts: Two senior officials give clear signals, Fed hopes to slow pace of rate hikes

Evercore ISI analysts believe that Jefferson's speech essentially confirmed Williams’ previous message: the Fed does not expect to raise rates for a second consecutive time in October but prefers more time to evaluate the economic situation.

The institution pointed out that in the context of Fed Chair Powell rarely providing explicit guidance on the future rate path, the joint statements by Williams and Jefferson carry strong policy signaling importance.

SGH Macro’s Chief U.S. Economist Tim Duy believes that Williams was so explicit because market bets on rate hikes had previously gotten well ahead of the Fed's own policy expectations. He noted that this in part reflects the impact of the Fed’s current lack of clear forward guidance.

Although markets have adjusted their expectations for the timing of hikes, this does not mean the Fed has changed the overall direction toward further tightening. Officials are now emphasizing more the need to decide the timing based on future data, rather than following the market’s previously expected rapid pace of consecutive hikes.

Kashkari: One hike each in this year and next, current policy not restrictive enough

Minneapolis Fed President Kashkari said in an interview Thursday that he has no particular preference for whether the next rate hike should come in October or December. In his projections submitted at the September meeting, he expected a further 25 basis point hike in 2026 and another in 2027.

However, Kashkari also pointed out that since the September meeting, published economic data show that the U.S. economy has performed even stronger than he previously expected, while inflation remains too high. He warned that if the U.S. economy continues to show above-expected resilience, making inflation even more persistent, the Fed may ultimately need to raise rates above his current forecasts.

Kashkari believes that judging from the labor market and overall output, current monetary policy may not be imposing a particularly significant restriction on the economy. He said the U.S. job market remains quite healthy and economic activity is solid, indicating that the current rate level’s dampening effect on demand may be relatively limited.

Meanwhile, Kashkari argued that the recent marked rise in long-term borrowing costs partially reflects a market reassessment of the U.S. economic fundamentals and shows that investors are confident the Powell-led Fed will take inflation seriously.

As for recent volatility in the bond market, he said he does not see signs of systemic financial risks at present, and the U.S. Treasury market can still operate normally and absorb price adjustments. However, he stressed that given the rapid changes in borrowing costs, the Fed still needs to closely monitor the banking sector.

Cook: AI investment boom may become key inflation risk in 2027

While the market focuses on the timing of the next rate hike, Fed Governor Cook has her sights set on the 2027 inflation outlook. Cook said Thursday at a New York Fed event that AI infrastructure development is generating new inflationary pressures, and these pressures may not ease quickly. She noted that the inflation impact of AI investment is one of her top economic concerns for 2027.

Like many other Fed officials, Cook believes AI technology could, in the long run, boost productivity and help the economy achieve stronger growth. But she worries about when the productivity gains from AI investment will actually materialize, and which sectors might face new supply bottlenecks—areas where considerable uncertainty remains.

This means that, before AI-driven productivity gains help alleviate inflation, large-scale data center construction and related infrastructure investment could first push up demand for certain goods, equipment, and resources, thus adding price pressures.

Cook also specifically mentioned that supply shocks have become more frequent in recent years, with effects lasting longer than previously expected; this is changing the Fed’s approach to assessing monetary policy. She said the conventional view is that central banks can ignore supply shocks because rate hikes cannot directly lower oil prices or end wars, and may instead suppress employment and output.

However, with supply shocks becoming more frequent and persistent, the Fed may need to rethink the optimal policy response, depending on which sectors are affected and how the impacts propagate through the broader economy.

Geopolitical risks and supply chain disruptions stemming from Middle East conflicts also further complicate the issue.

Inflation risks remain tilted upward; September jobs report the next key focus

Despite several officials supporting a pause on the next rate hike, internal Fed concerns about the inflation outlook have not significantly eased. Data show the Fed’s key inflation gauge rose 3.4% year-on-year in August, not only higher than the 2% target, but also marking more than five and a half consecutive years above this target.

Jefferson expects U.S. inflation to stay elevated for some time, then return to the 2% target as the impact of energy and other price shocks fades.

However, he also noted that recent geopolitical changes and stronger-than-expected overall demand tilt his inflation forecast risks to the upside.

Kashkari similarly said he remains somewhat confident inflation will gradually return to the 2% goal over the next few years, but the series of economic shocks continues to add new uncertainties.

Next, Fed officials will focus on the U.S. September nonfarm payrolls report to be released Friday.

Given the recent generally stable hiring data, many officials believe the Fed currently has some policy space, allowing them to devote more attention to controlling inflation. Therefore, unless the employment report presents a significant surprise, a single jobs report may not be enough to change market expectations about the overall rate path again.