The central bank chorus grew louder on Tuesday. Federal Reserve Governor Michael Barr told the Detroit Economic Club that further interest rate hikes are probably needed to bring inflation back to target, while on the other side of the world Australia’s central bank raised its key rate to a 15-year high. The message from both is the same: the fight against inflation is not over.
“We have been knocked off course” on progress toward the Fed’s 2% inflation goal, Barr said in prepared remarks, pointing to high energy prices and a surge in AI-related investment. “I don’t yet see a clear trend toward a timely return to 2%,” he added. In his base case, he said, “further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion,” Reuters reported.
Barr’s most striking point was about technology. The surge of investment and demand from the AI buildout is having a “measurable effect on prices,” he said, citing strong fixed investment by businesses and surging prices for computer chips and related equipment, the Wall Street Journal reported. He remains optimistic that AI will eventually lift productivity and allow faster non-inflationary growth, but he warned about “the possibility that there might be serious short-term disruptions in the labor market.”
Barr is not alone. Tuesday is one of the heaviest Fedspeak days of the month, with Governors Christopher Waller and Michelle Bowman and New York Fed President John Williams all scheduled to speak. Deutsche Bank’s economists noted that officials are “singing from the same hawkish hymnal,” and expect two more 25-basis-point hikes in December and March, with an October move possible if the labor market tightens further or inflation stays stubborn, Dow Jones reported. Markets are betting heavily on another quarter-point hike at the Fed’s October 27-28 meeting, with the probability near 70% per the WSJ.
Across the Pacific, Australia joined the tightening wave. The Reserve Bank of Australia raised its cash rate by 25 basis points to 4.60%, a 15-year high, in its fourth hike this year, saying inflation was too high and it was prepared to hike further if needed, Reuters reported. Core inflation there is running at 3.6%, well above the RBA’s 2% to 3% target, with energy costs high and domestic productivity weak.
What to watch next: Waller’s, Bowman’s, and Williams’s remarks this afternoon for any daylight between them, and whether markets keep pricing that October hike above 70%. The deeper signal is global. With the U.S., and now Australia, pressing rates higher while long-term bond yields sit at multi-decade highs, the world is moving back into synchronized tightening, and borrowers everywhere will feel it before long.
