The Federal Reserve's decision to raise the federal funds rate target range by 25 basis points to 3.75%-4% marks a fundamental shift in how monetary policy perceives persistent supply shocks. Early this week, Fed officials delivered a series of speeches. Three regional Fed presidents unpacked the central bank's current decision-making framework from three dimensions: theoretical logic, operational path, and inflation structure. Their analyses not only explain the underlying drivers of this rate hike cycle but also signal that policy is heading toward a "higher for longer" trajectory.

Goolsbee: Normalized Supply Shocks Undermine the "Look-Through" Logic, Confronting Economic Pain

Chicago Fed President Austan Goolsbee explicitly stated that supply shocks are becoming "more frequent, more forceful, and longer-lasting," and once their impact on inflation becomes persistent, "part of the logic behind 'looking through' no longer holds." Since the 1970s, central banks have typically treated supply shocks as temporary factors and chosen to "look through" them. However, Goolsbee, citing post-pandemic supply chain disruptions, oil prices hovering near $100 per barrel, and escalating tariffs, has concluded that such shocks have become a "normal feature" of the economy. This assessment directly challenges the traditional argument from Trump administration officials that supply shocks only have a one-time impact on prices.

In terms of policy simulation, Goolsbee displayed extreme realism. He acknowledged that while responding to supply shocks does not require the same aggressiveness as addressing demand overheating, "the only way to bring down inflation is to raise rates and close the gap between supply and demand." This implies the economy must endure declines in employment, wages, and growth to adapt to "a new, less favorable equilibrium." Goolsbee views this painful trade-off under stagflationary shocks as inevitable, stating bluntly that "the only way back is the hard way."

Musalem: Current Rates Still on the "Accommodative Side," Advocating Gradual Tightening

St. Louis Fed President Alberto Musalem focused on the operational path of "how to execute tightening." He put forward a key judgment: even after last week's rate hike, the current 3.75%-4% federal funds rate target range remains on the "accommodative side," meaning monetary policy may still be stimulating the economy to some extent. Based on this assessment, Musalem conducted a probabilistic evaluation of future inflation risks. He argued that without further policy tightening, the probability of inflation remaining significantly above the 2% target over the next 18 months is higher than the probability of it returning to target levels. This quantitative risk assessment provides direct justification for additional rate hikes within the year.

On operational strategy, Musalem clearly leans toward "raising rates earlier through gradual increments." His logic is that taking smaller, incremental tightening steps in advance causes less disruption to the economy, thereby reducing the likelihood of having to implement larger hikes later. This "early and small" strategy reflects the Fed's attempt to find an optimal balance between controlling inflation and avoiding a hard landing, while also implying that this rate hike cycle is not a one-off adjustment but an ongoing calibration process.

Kashkari: Inflation Pressures Spread Across Sectors, Economic Resilience Provides Tightening Room

Minneapolis Fed President Neel Kashkari pointed out that inflation pressures have extended beyond the oil price shock triggered by the Middle East conflict and have "spread to every aspect of the economy," with particularly notable inflation pressures in the services sector. If inflation were confined to specific areas like energy or tariffs, the central bank could still hope for the shock to fade; however, when price pressures spread to broad areas such as services, it suggests that inflation expectations may be becoming unanchored and price pressures have developed endogenous persistence. As one of the officials who opposed holding rates steady in July, Kashkari's core concern is that "waiting too long to hike could risk inflation becoming entrenched."

At the same time, Kashkari assessed the macroeconomy's capacity to absorb tightening. He believes that despite geopolitical conflicts and trade issues, the U.S. economy and labor market remain strong. This economic resilience provides ample room for the Fed to suppress price pressures through higher rates, allowing the central bank to proceed with tightening without excessive fear of immediately triggering a deep recession.

Internal Picture: Regional Hawks' Consensus vs. the Chair's Moderate Tone

From the speeches of the three regional Fed presidents, a complete hawkish logic chain emerges: Goolsbee establishes the theoretical premise that persistent supply shocks must be addressed, Kashkari provides the empirical evidence that inflation has spread broadly, and Musalem outlines the operational path of gradual rate hikes. However, this logic chain shows subtle differences from the tone of Fed Chair Warsh. At the press conference, Warsh characterized the rate hike as "removing accommodation" and explicitly stated that "I don't see the two parts of our mandate—price stability and maximum employment—as being in conflict in the medium term," denying the need to damage the labor market to achieve the 2% inflation target.

The three regional presidents focused on revealing the potential costs and structural risks of fighting inflation to manage market expectations, while the Fed Chair focused more on reassuring market sentiment and emphasizing the smoothness of policy adjustments. However, the latest dot plot shows that 16 of the 18 officials who submitted projections expect at least one more rate hike this year, with the median rate projection for end-2026 rising to 4.1%, and the return of inflation to the 2% target pushed back to 2029. The dot plot indicates that the "hard path" depicted by the three regional Fed presidents has effectively become the mainstream consensus among Fed officials.