Fed's Hawks Take Flight: Inflation War Rages On, Rate Hikes Loom

Consecutive stern statements from Federal Reserve officials are strengthening market expectations that the battle against inflation is far from over and interest rates could move higher soon. Minneapolis Fed President Neel Kashkari and Fed Governor Lisa Cook's latest assessments clearly demonstrate that policymakers have little tolerance for the risk of high inflation becoming entrenched in the economy.

Kashkari Calls for Gradual Rate Hikes

Neel Kashkari, one of the key voices opposing the decision to hold rates steady, argued in an interview with CNBC that it is time for the central bank to start raising rates gradually.

■Kashkari was one of the three officials who favored a quarter-point hike at the last meeting.

■He reinforced his hawkish stance, stating, "It looks like it is time to start raising rates slowly as we get more data."

■He emphasized that monetary tightening needs to continue to rein in inflation.

Lisa Cook: It Could Be Too Late if Inflation Sets In

Fed Governor Lisa Cook warned during a speech in Alaska that they do not have the luxury of waiting for inflation to return to the 2% target. Cook stated that if price and wage-setting behaviors become accustomed to high inflation, the struggle would become much more difficult.

■Cook sent the message, "I am ready to act if I do not see signs that inflation continues to fall in the near term."

■She highlighted the risk of "persistence" as inflation has been running above target for five years.

■Despite supporting the hold decision in July, she noted they are on standby if data worsens.

Daly Warns of Aggressive Measures

While San Francisco Fed President Mary Daly supported the decision to hold rates steady at the last meeting, she warned that high inflation could turn into a broader, structural problem.

■Daly implied that policymakers might be forced to take more aggressive measures depending on inflation's trajectory.

■She argued that current data necessitates keeping the policy stance flexible.

Gökhan Erez Analysis: Markets are struggling to digest this hawkish tone. The rhetoric from Kashkari and Cook keeps the possibility of one or two rate hikes by the end of the year on the table. In this scenario, upward pressure on US 10-year Treasury yields will persist, and valuation compression in equity markets, especially in tech stocks, will be inevitable. Investors should consider increasing their allocation to cash or short-term bonds to hedge against interest rate volatility.