Fed Officials Send Hawkish Signals as Energy Supply Risks and Global Inflation Pressures Rise

Daily News

Summary:

Trump: The U.S. may intensify strikes on Iran after the midterm elections; Logan: Policy rates need to be raised by at least another 50 basis points......

【Highlights】

1. Tokyo core inflation accelerates sharply, reinforcing expectations for further Bank of Japan rate hikes

2. Trump: U.S. may intensify strikes on Iran after the midterm elections

3. U.S. Republicans consider rapidly raising the debt ceiling

4. Logan: Policy rates need to be raised by at least another 50 basis points

5. Cook: Supply shocks are proving persistent, challenging the Fed’s traditional response approach

6. U.S. Navy blocks the Strait of Hormuz; Iran must either reach an agreement or face mounting pressure

7. Kashkari: Fed likely needs further rate hikes, but October action remains uncertain

8. Jefferson: Central bank may need more time to decide its next move

9. U.S. September ISM Manufacturing PMI expands for the ninth consecutive month

【Details】

Tokyo Core Inflation Accelerates Sharply, Reinforcing Expectations for Further Bank of Japan Rate Hikes

Data released by Japan’s Ministry of Internal Affairs and Communications on Friday showed that Tokyo’s September consumer price index (CPI), excluding fresh food, rose 2.7% year over year, exceeding market expectations of 2.3% and accelerating significantly from August’s 1.8% increase. Rising food processing costs were the main driver of overall price growth, climbing 3.6% year over year. Major Japanese food and beverage companies raised prices on 4,965 products last month, more than double the number seen in the same period last year. Other factors contributing to faster inflation included water charges, which surged about 66% year over year, and accommodation prices, which rebounded from a 1.4% decline in the previous month to a 4.6% increase.

The sharp rise in Tokyo CPI further confirms the Bank of Japan’s concerns over upside inflation risks, suggesting that underlying inflation trends could exceed its 2% target. The data provides additional support for the Bank of Japan’s stance of continuing rate hikes.

Trump: U.S. May Intensify Strikes on Iran After Midterm Elections

U.S. media reported on October 1 that President Donald Trump said the United States may increase its strikes on Iran after the midterm elections. An interview with Trump was published on the website of Time magazine that day. When asked whether he planned to increase bombing operations against Iran after the midterm elections, Trump responded that it was “possible.” Trump also said he had rejected Iran’s proposal to reopen the Strait of Hormuz.

U.S. Republicans Consider Rapid Increase in Debt Ceiling

Republican lawmakers in the United States are considering a plan to quickly raise the debt ceiling during the final weeks before the end of the current congressional term. The move would prevent Democrats, even if they gain control of Congress, from using the debt ceiling as a key tool to pressure the Donald Trump administration. A successful implementation would also remove a low-probability but potentially highly disruptive risk facing global financial markets, as the U.S. government’s borrowing authority is expected to be exhausted in the second half of 2027.

If Republicans lose control of either the House or the Senate in the November 3 elections, a confrontation between Trump and Democrats could intensify, potentially raising the risk of a U.S. government payment default. According to estimates from the Bipartisan Policy Center, this risk is expected to increase in the second half of 2027.

Logan: Policy Rates Need to Rise by at Least Another 50 Basis Points

Dallas Fed President Lorie Logan said in a speech on Thursday that economic growth is currently strengthening and the labor market remains well balanced. She said that raising interest rates several more times would be enough to offset the impact of last autumn’s tax cuts.

Without higher interest rates, inflation would not return to the Federal Reserve’s 2% target. To restore price stability, the policy rate needs to be raised by at least 50 basis points. Fed policy is not restrictive enough at present but needs to become moderately restrictive. However, it remains uncertain how high rates must rise to bring inflation back to 2%.

The increase in long-term yields suggests that market participants expect interest rates to move higher. Rising yields may also reflect an increase in term premiums, which could reduce the need for further monetary tightening. The Fed will closely monitor Treasury yield movements and assess their impact.

Cook: Persistent Supply Shocks Challenge the Fed’s Traditional Response Approach

Federal Reserve Governor Lisa Cook said on Thursday that supply shocks are becoming increasingly significant and their effects have lasted longer than expected, challenging the Fed’s previous approach of looking through such shocks.

The Fed needs to ensure that inflation expectations remain anchored. Artificial intelligence infrastructure development is adding to inflation pressures, while the timing of productivity gains from the technology remains uncertain.

Cook said she is concerned about when productivity improvements capable of easing inflation pressures will emerge and where the next supply bottleneck may appear.

U.S. Navy Blocks Strait of Hormuz; Iran Must Either Reach Deal or Face Mounting Pressure

U.S. President Donald Trump said on Thursday that the U.S. Navy is enforcing a blockade, and no Iranian vessels have been able to pass through the Strait of Hormuz for months. Trump said Iran must either take “the right and smart action” or it may not be able to continue for long, adding that Iran’s military production capabilities have collapsed, most of its leaders are gone, and the conflict will end in some way.

Kashkari: Fed Expected to Raise Rates Further, but October Move Remains Uncertain

Minneapolis Fed President Neel Kashkari said on Thursday that the U.S. economy has performed better than expected since the September meeting, while inflation remains too high. If economic growth remains unusually strong and inflation proves more persistent than anticipated, interest rates may need to rise to a higher level than currently expected. Kashkari said the Fed is likely to need further rate hikes to curb economic overheating and inflation, but it remains uncertain whether action will be taken in October.

A healthy labor market and solid economic performance suggest that monetary policy may not be particularly restrictive. Recent market volatility has not shown signs of systemic risk, and the Treasury market has been able to absorb the repricing of interest rates.

Jefferson: Central Bank May Need More Time to Decide Next Steps

Federal Reserve Vice Chair Philip Jefferson said on Thursday that inflation has remained too high for too long, creating the risk that it could persist at elevated levels. He said future policy adjustments should be determined by carefully evaluating data trends, the evolving outlook, and the balance of risks. Jefferson added that he and his colleagues need to make their own judgments, which may require more time.

U.S. September ISM Manufacturing PMI Expands for Ninth Consecutive Month

Data released by the Institute for Supply Management (ISM) on Thursday showed that the U.S. September ISM Manufacturing PMI fell 0.1 percentage point from August to 54.5, indicating that manufacturing expansion slowed slightly. However, the index remained above the 50-point threshold for the ninth consecutive month, marking the longest period of continuous expansion since 2022.

Looking at individual components, U.S. manufacturing demand remained solid in September. The new orders index increased further, while the backlog of orders index climbed to its highest level since February, indicating that manufacturers continue to accumulate order backlogs, providing support for future production activity. Meanwhile, manufacturing output continued to expand, although at a slower pace than before.

Overall, U.S. manufacturing growth accelerated again in September. A surge in new orders encouraged factories to significantly increase production and add workers. Rising backlogs and increasingly busy suppliers suggest that capacity is becoming tighter as companies work to meet demand from consumers and businesses.

Although further growth in manufacturing capacity is an encouraging sign, signs that demand is outpacing supply mean inflation pressures remain a key concern, especially with oil prices elevated. Faster economic growth, increased hiring, and rising price indicators could intensify market speculation that the Federal Reserve may raise interest rates further.

【Today’s Focus】

17:00 (UTC+8) Eurozone September HICP

19:30 (UTC+8) ECB Vice President Vujčić delivers a speech

20:30 (UTC+8) U.S. September Nonfarm Payrolls

22:00 (UTC+8) U.S. August Factory Orders MoM

22:00 (UTC+8) Dallas Fed President Lorie Logan delivers a speech

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