Fed officials sound hawkish in droves! Waller calls for a 50 basis point rate hike in December; Bowman warns that AI investment returns falling short of expectations could trigger a major correction in US stocks.

Multiple Federal Reserve officials issued a barrage of hawkish signals on Tuesday, arguing that US inflationary pressures remain stubborn and monetary policy still needs further tightening. Fed Governor Bowman said that persistently elevated inflation and a firming labor market mean the Fed still needs to keep raising rates, and warned that if returns on artificial intelligence (AI) investment fall short of market expectations, US stocks could face a major correction that would hit consumer spending and the broader economy. Meanwhile, Fed Governor Waller proposed that the December meeting should consider a one-time 50 basis point rate hike; Dallas Fed President Logan argued that at least two more 25 basis point hikes are needed. Kansas City Fed President Schmid also said monetary policy remains relatively accommodative and backed further tightening to counter inflation. Speaking at a Council on Foreign Relations event in Washington on Tuesday, Bowman said the US economy faces multiple potential risks from financial markets, including a sharp repricing of equity valuations triggered by AI investment returns falling short of expectations, as well as a sharp rise in long-term market interest rates. "A decline in stock prices could weaken the resilience of consumer spending, while rising interest rates could further weigh on rate-sensitive sectors of the economy such as housing and small business investment," she said. Bowman was particularly focused on the financing risks behind the AI infrastructure buildout. She said AI-related debt is growing rapidly, with corporate bonds, private credit and project finance all expanding significantly, and related financing this year could exceed US$800 billion. Bowman noted that large cloud computing companies and tech firms, with their high credit ratings, have taken on some off-balance-sheet liabilities, enabling smaller, riskier companies to use that credit support to obtain asset-backed financing for data center construction and accelerated computing equipment purchases. Large cloud computing companies and chip design firms have also used equity investments to support small and medium-sized AI companies that buy their products, creating complex financial and commercial relationships. Bowman said these arrangements exhibit features of "circular financing" that could deepen risk linkages within the AI supply chain. On monetary policy, Bowman said she currently sees persistent inflationary pressures while labor market conditions appear to be improving, suggesting the Fed still has work to do in bringing inflation back to its 2% target. She said that while some factors driving current inflation are expected to fade next year, actual inflation has proven more stubborn than previously expected, and recent data have come in above her earlier forecasts. The Fed raised its benchmark rate by 25 basis points in September, its first hike since 2023, and then decided to hold rates steady at its October 27-28 meeting. Bowman said she supported the October pause to give the Fed more time to assess changes in the economy and the impact of the September hike on underlying economic trends. However, with recent inflation data continuing to run strong, Bowman hinted she may support another hike at the final policy meeting of the year in December. On the same day, Fed Governor Waller sent a more aggressive policy signal, saying the Fed should consider a one-time 50 basis point hike in December rather than the usual 25 basis points. After Waller's remarks, Labor Department data showed October consumer prices rose more than market expectations, with core CPI excluding food and energy up 0.3% month-on-month, reaching the inflation threshold Waller had previously cited as possibly supporting a larger hike. Dallas Fed President Logan also reiterated that the current economic outlook still requires the Fed to raise rates further. "Given the current economic outlook, I still clearly believe the FOMC needs at least two more 25 basis point hikes," Logan said at a conference in Houston. However, Logan did not explicitly back a one-time 50 basis point hike, suggesting that while some officials share a consensus on further tightening, views still differ on the specific size of hikes. Kansas City Fed President Schmid said Tuesday at an energy conference co-hosted by the Dallas and Kansas City Feds that inflation remains the Fed's top problem and that the current level of rates is not clearly restraining the economy. "I didn't think our rates were restrictive last year, and I believe policy is still quite accommodative now," Schmid said. He said his focus is on where Fed policy decisions can most effectively influence current inflation trends in the economy. Schmid also said that beyond energy price increases, other areas of the US economy are showing worrisome price changes. He specifically noted complex dynamics in the housing market but said he has not yet found clear policy restraint in other economic sectors. Previously, the Fed's September rate projections showed most officials expected at least one more hike this year to bring inflation back to the long-run 2% target. Recent remarks by several officials have reinforced that policy bias, though differences remain on the pace and size of hikes.