①Jeff Schmid, President of the Federal Reserve Bank of Kansas City, stated on Tuesday that it should not be assumed that the impact of rising energy prices on inflation is only temporary. The Federal Reserve should be prepared to take action to ensure that the consequences of the Iran war do not lead to inflation persistently exceeding the central bank's target; ②Schmid acknowledged that rising oil prices could harm economic growth, but he expressed that the inflation risks brought by the war are his primary concern.
On Tuesday local time, Jeff Schmid, President of the Federal Reserve Bank of Kansas City, stated that it should not be assumed that the impact of rising energy prices on inflation is only temporary. The Federal Reserve should be prepared to take action to ensure that the consequences of the Iran war do not lead to inflation persistently exceeding the central bank's target.
In a speech, Schmid stated that the fundamentals of the U.S. economy remain solid. Before the outbreak of the Iranian conflict at the end of February, inflation was already close to 3%, far above the Federal Reserve’s 2% target. He said that the Federal Reserve should be ready to proactively address high inflation to prevent the inflation rate from lingering around 3% for an extended period.
So far, relevant surveys and financial market bets show that consumers and investors are not worried that high inflation will become a long-term issue. However, Schmid emphasized that the Federal Reserve cannot afford to be complacent.
Schmid also pointed out that current inflation expectations remain stable, which stems from the credibility of the Federal Reserve and the belief that monetary policy can control inflation. The task now for the Federal Reserve is to take corresponding policy actions to validate these expectations.
Schmid’s recent signals about anti-inflation policies place him among the minority of hawkish officials—some senior Fed officials have hinted that if inflation remains stubbornly high or rises further, the Federal Reserve may need to raise interest rates.
Aubhik Goolsbee, President of the Federal Reserve Bank of Chicago, stated last week that it might be necessary to raise interest rates in the future if inflation persists.
At this stage, most Federal Reserve officials prefer to keep interest rates unchanged while observing the actual impact of the Middle Eastern conflict on the economy. Some policymakers believe that although oil price shocks increase inflation risks, they could also squeeze consumer and business spending, thereby dragging down rather than stimulating the economy.
Schmid acknowledged that rising oil prices might harm economic growth, but he emphasized that the inflation risks posed by the war are his main concern. He noted that the damage from rising oil prices to the economy may not be as significant as in the past because the United States now produces more energy and uses it more efficiently.
Schmid believes that the momentum of the economy could help shield it from recessionary impacts. “The resilience of the U.S. economy should not be underestimated,” he said.
At the beginning of this year, Wall Street was originally betting that the Federal Reserve would continue the interest rate cut cycle initiated in 2024, but the conflict in Iran reversed this expectation. Current interest rate futures indicate that traders generally predict the Federal Reserve will keep rates unchanged by the end of the year, although related market volatility has been significant in recent weeks.
Since the beginning of this year, the Federal Reserve has maintained interest rates at a level between 3.5% and 3.75%. On Monday, Federal Reserve Chair Powell stated that he is not in a hurry to adjust policies given the uncertain economic impact of the war.
Editor/Doris