Fed and ECB Officials Back Rate Hikes as Inflation Stays High
Fed and ECB officials defended recent rate hikes and warned of upside inflation risks, while the Bank of England flagged worsening financial risks.
Rate hikes and stubborn inflation dominated central-bank news this week. Federal Reserve officials lined up behind the FOMC’s recent increase, which lifted the federal funds target range by a 1/4 percentage point to 3-3/4 to 4 percent. In Europe, ECB President Christine Lagarde and Executive Board member Isabel Schnabel defended the ECB’s own rate increases as energy prices pushed euro area inflation higher.
The Bank of England’s Financial Policy Committee said the risk outlook has worsened, noting that gilt and US Treasury yields have reached levels not seen since 2008. The U.S. Treasury also widened its pressure campaign on Iran, sanctioning industrial sectors and a Russia-linked shadow banking network. Several officials pointed to the conflict in the Middle East and the artificial intelligence (AI) investment boom as shared sources of pressure.
Rates move higher on both sides of the Atlantic
Fed Vice Chair Philip Jefferson said he supported the September decision. He called it "an important step" to keep longer-term inflation expectations anchored. He did not commit to a path for future policy. He said adjustments should depend on the data and the balance of risks, and that policymakers "will need to come to our own judgment, which may take more time."
Governor Michael Barr was more direct. He said "further policy adjustments are likely to be needed" to bring inflation back to target. Governor Lisa Cook confirmed in two speeches this week that she voted for the 25 basis point increase. She said she will consider "what policy rate may be needed," with any further moves depending on incoming data. Each official said the views were their own.
In Europe, Lagarde told EU lawmakers that the ECB raised its three key interest rates by 25 basis points this month. She described this as a "measured response" to the energy shock. Schnabel said the ECB has raised rates by 50 basis points since June, lifting the deposit facility rate from 2% to 2.5%. She called the two hikes "an appropriate policy decision."
In an interview with La Croix, Lagarde said "price stability remains the priority." She said preventing the energy shock from feeding through the economy durably "may lead us to raise rates," even at the risk of weighing on growth.
Inflation: energy, the Middle East and AI
Officials at both central banks described inflation as too high and pointed to similar causes. The figures they cited include:
- Fed (Jefferson): the 12-month change in the PCE price index was 3.4 percent in August.
- Fed (Cook): total inflation was an estimated 3.8 percent and core inflation an estimated 3.4 percent in the 12 months leading into August.
- Fed (Barr): there have been "only two months of data consistent with 2 percent core PCE inflation over the past 20 months."
- ECB (Lagarde): euro area headline inflation rose to 3.2% in August from 2.9% in July. Energy inflation climbed to 14.3%, while inflation excluding energy and food edged down to 2.4%.
Jefferson said energy prices were the main driver of the recent pickup in headline inflation. Cook expects continued pressure from higher oil prices and supply chain disruptions linked to the Middle East conflict.
AI also featured heavily. Cook said AI-fueled demand is adding economy-wide pressure and noted that companies have spent only a small fraction of the $2 trillion in announced AI investment plans. Barr said AI investment is having "a measurable effect on prices."
On the ECB side, staff projections cited by Lagarde and Schnabel see headline inflation averaging 3.0% in 2026 and falling to 2.1% in 2028. Schnabel said oil and gas prices have moved closer to the ECB’s adverse scenario since those projections were finalised. That implies a larger and more persistent overshoot of the 2% target.
On the labor market, Fed officials said U.S. unemployment stood at 4.1 percent in August.
Financial stability: yields, AI and debt
The Bank of England’s FPC said interconnected vulnerabilities are now more likely to crystallise at the same time. It said the conflict between the US and Iran had pushed Brent crude above $100 per barrel and gas prices above 175 pence per therm. It also noted that Japanese government bond yields have risen to near three-decade highs.
The FPC flagged several pressure points:
- Elevated hedge fund leverage in gilts.
- AI-related equity valuations.
- AI-related debt issuance of around $450 billion.
- Parts of private credit.
The committee kept the UK countercyclical capital buffer at 2%.
The ECB raised similar concerns. Lagarde warned that a "sharp reassessment" of heavily indebted AI-related firms could trigger market corrections. Speaking as chair of the European Systemic Risk Board, she said AI risks in trading, cyber security and geopolitics "can interact and compound across the financial system."
Public debt also drew attention. Lagarde called France’s debt level "close to 120% of GDP" "a serious matter," though she stressed "it’s not 2008 or 2011." Schnabel pointed to elevated fiscal deficits across many countries.
At the Fed, Governor Michelle Bowman said loosened bank leverage rules have let large banks hold more Treasuries, improving liquidity in that market.
Treasury tightens the squeeze on Iran
The U.S. Treasury expanded Operation Economic Outcast with sanctions on Iran’s automotive, rail, manufacturing and steel networks. The Treasury referred to a U.S. military maritime blockade and said Iran’s oil revenues are falling to zero.
Separately, the Treasury sanctioned the Russia-linked A7 shadow banking network, which it said Iran used to evade sanctions. The Treasury said the network claimed total volume of more than 7.5 trillion rubles ($91.5 billion), or approximately 13 percent of Russia’s 2025 foreign trade transactions. Secretary Scott Bessent warned that facilitators "will lose access to the U.S. financial system."
What it means for gold and silver holders
This week’s news contains forces that have historically pulled precious metals in different directions.
Gold and silver pay no interest. When central banks raise rates and bond yields climb, the opportunity cost of holding non-yielding metal rises, and that has historically been a headwind. Tighter Fed policy can also support the dollar. ECB decisions influence the euro-dollar exchange rate, which feeds into dollar-denominated metal prices.
On the other side, persistent above-target inflation, energy shocks and geopolitical conflict are conditions under which investors have often looked to metals as a store of value. The same is true of warnings about market corrections and concerns about government debt. Sanctions that restrict access to the dollar-based financial system have also been cited as one reason some central banks give weight to gold as a reserve asset that does not depend on any single country’s payment network.
How these forces balance out has tended to depend on the path of real interest rates and the dollar.
Key figures this week
| Figure | Value |
|---|---|
| Fed federal funds target range | 3-3/4 to 4 percent |
| ECB deposit facility rate | 2% to 2.5% |
| Fed-cited PCE inflation (12-month, August) | 3.4 percent |
| ECB-cited euro area headline inflation, August | 3.2% |
| Bank of England countercyclical capital buffer | 2% (unchanged) |
| Brent crude cited by Bank of England FPC | above $100 per barrel |
Sources
The official releases covered this week:
- Christine Lagarde: Hearing of the Committee on Economic and Monetary Affairs of the European Parliament (European Central Bank, September 28, 2026)
- Cook, An Update on AI and the Economy (Federal Reserve, September 28, 2026)
- Barr, Economic Conditions and Monetary Policy (Federal Reserve, September 29, 2026)
- Financial Policy Committee Record – September 2026 (Bank of England, September 30, 2026)
- Isabel Schnabel: Monetary policy in a world of overlapping shocks (European Central Bank, September 30, 2026)
- Christine Lagarde: Interview with La Croix (European Central Bank, September 30, 2026)
- Cook, The Dual Mandate in Rural America (Federal Reserve, September 30, 2026)
- Christine Lagarde: Where AI risks meet (European Central Bank, October 1, 2026)
- Operation Economic Outcast Targets Iran’s Remaining Industrial Lifelines (U.S. Department of the Treasury, October 1, 2026)
- Operation Economic Outcast Takes Unprecedented Action Against Sanctions Evasion Network Used by Iran (U.S. Department of the Treasury, October 1, 2026)
- Jefferson, The U.S. Economy and Monetary Policy (Federal Reserve, October 1, 2026)
- Bowman, Modernizing Financial Regulation: Initial Observations from eSLR (Federal Reserve, October 1, 2026)
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