Federal Reserve Signals Further Interest Rate Hikes Ahead as Officials Warn Inflation Remains Too High

NEW YORK — Federal Reserve policy is heading toward a more restrictive stance, with two regional Fed presidents signaling on Friday that borrowing costs will need to move higher to combat persistent inflationary pressures.

The statements from St. Louis Fed President Alberto Musalem and Dallas Fed President Lorie Logan represent the earliest insight into central bank leadership’s thinking following the Federal Open Market Committee’s decision on Wednesday to leave interest rates unchanged for the time being. Their remarks are expected to reinforce expectations among market participants that the central bank will resume raising rates at its upcoming policy meeting in December.

According to the CME FedWatch tool, federal funds futures traders are currently pricing in an approximately 76% probability that the Fed will implement a quarter-percentage-point rate hike at the conclusion of the December gathering.

"I judge that additional firming of monetary policy will be necessary, and soon," Musalem said in prepared remarks delivered to the Shadow Open Market Committee, an independent group of economists in New York that closely monitors central bank policy.

Musalem emphasized that acting earlier with smaller adjustments tends to cause less market disruption than larger, abrupt measures taken later in an economic cycle. "Moving sooner in smaller steps while inflation expectations are anchored has a better chance of succeeding without adverse impact on the labor market or economic growth," he added.

Speaking at Davidson College in North Carolina roughly an hour later, Logan outlined a specific trajectory for future policy moves. "It remains clear to me, given the current outlook, that the FOMC needs to implement at least two more 25-basis-point rate increases," she said in her prepared remarks.

At the same time, Logan noted that a tightening cycle does not necessarily require action at every single policy meeting. "Skipping a meeting does not change the monetary policy destination," she told students. "Indeed, by making the destination clear, the FOMC can better help the economy adapt and obtain the promised benefits of a skip."

Logan added that following the two anticipated rate increases, it would be appropriate to pause and evaluate economic and financial data to determine whether any further policy actions are warranted. Logan is scheduled to be a voting member of the FOMC during the December meeting, whereas Musalem will remain a non-voting participant until 2028.

Inflation Is ‘Too High’

In his address, Musalem painted a broadly optimistic picture of the broader U.S. economy, characterizing it as resilient. He highlighted recent gross domestic product data that pointed to a stronger-than-expected annualized growth rate of 3.4%.

According to Musalem, several tailwinds are supporting economic expansion, including ongoing infrastructure investments related to artificial intelligence and financial conditions that remain accommodative to growth. He also described the labor market as remarkably stable and balanced, noting that the unemployment rate of 4.2% aligns precisely with the median long-run projections of FOMC participants.

Despite this positive economic backdrop, Musalem issued a stern warning that inflation remains too high. He pointed to personal consumption expenditures price data that showed annual inflation running above 3%. During the question-and-answer session following his speech, Musalem indicated that he is monitoring core inflation measures very closely and remaining vigilant for any signs that underlying price pressures are broadening across the economy.

Federal Reserve officials have maintained a sharp focus on consumer and investor inflation expectations to prevent them from drifting significantly above the central bank’s official long-term target of 2%. Musalem warned that without further monetary policy adjustments, a scenario where inflation lingers above 2% remains a distinct possibility.

"The best that monetary policy can do now for employment and economic growth is to restore price stability in a timely manner," Musalem said. "The short-run economic costs of reducing inflation are less when the central bank acts before inflation has become entrenched and is expected to persist."

Internal divisions among central bank policymakers were evident at Wednesday’s meeting. Two of the twelve FOMC voting members dissented from the decision to hold rates steady: Federal Reserve Governor Lisa Cook and Cleveland Fed President Beth Hammack. Both officials advocated for an immediate quarter-point increase in the benchmark interest rate.

Former Fed Officials Weigh In

The policy debate has also drawn commentary from former central bank leaders. Speaking on CNBC on Friday, former Richmond Fed President Jeffrey Lacker said he would have supported a rate hike during the central bank’s most recent meeting.

"I’ve been surprised by the lack of urgency. Inflation’s been high around three, three-and-a-half percent for so long," Lacker said during an appearance on CNBC’s "The Exchange." "Maybe they’ll come around in the next couple of meetings, but I’ve been surprised at the lack of urgency."

A rate increase in December would represent only the second time the central bank has raised borrowing costs in 2026. The FOMC previously approved a quarter-point rate hike in September, which marked the first increase in the federal funds rate since 2023.

Meanwhile, other former officials have raised questions about proposed structural changes to how the central bank conducts its meetings. James Bullard, a former president of the St. Louis Fed, told CNBC that he disagreed with a plan outlined by Federal Reserve Chairman Kevin Warsh to designate certain future meetings as strategic forums focused on broad policy discussions rather than live interest rate decisions.

Warsh announced a plan on Wednesday to dedicate one meeting in 2027 and two meetings in 2028 entirely to broader policy strategy, noting that the central bank would not issue rate decisions or policy statements at those specific gatherings.

"I don’t think skipping a meeting is a good idea," Bullard said. "If you don’t have a meeting, and then it’s a pretty volatile world and you have to act, you’re going to have to call a special meeting in that circumstance."

Lacker offered an alternative perspective on managing the central bank’s meeting schedule, suggesting that increasing the frequency of gatherings could help alleviate pressure on policymakers. "If you want to take the pressure off individual meetings, have more of them," Lacker said.