Federal Reserve Chair Jerome Powell and Dallas Fed President Lorie Logan signaled the central bank may raise interest rates if necessary to combat persistent inflation, even as the Fed's balance sheet contracted by $11.081 billion in a single week. The hawkish rhetoric underscores deepening concerns that broad-based price pressures remain entrenched across the economy, particularly in services.
Powell stated that inflation remains "too high" with widespread pressures extending beyond energy prices alone, while core inflation—especially in the services sector—continues to run elevated. He cautioned that while rate increases could prove necessary to return inflation to the Fed's 2% target, higher borrowing costs risk dampening broader economic activity. San Francisco Fed President Mary Daly reinforced this cautious stance, noting the U.S. economy remains resilient but emphasizing it remains premature to determine the future policy trajectory pending additional incoming data.
Daly also flagged the investment boom in artificial intelligence as a potential wildcard that could amplify inflationary pressures, adding a new variable to the Fed's calculus. Market expectations now price in a pause at the Fed's July 29 decision, followed by a 25 basis point rate increase to 3.75%-4.00% at the September 16 meeting, reflecting investor consensus that policymakers will ultimately resume tightening.