A growing number of Federal Reserve officials are sending hawkish signals, warning that if inflation fails to cool, a rate hike may be on the table. Kansas City Fed President Jeffrey Schmid reiterated on Friday that inflation remains his top concern, with current levels being too high and having exceeded the target for too long. Speaking at a conference in Reykjavik, Iceland, he said: “Inflation has been above the Fed’s 2% price stability target for more than five years now, and this is absolutely not the time to let our guard down.” Schmid emphasized that the Fed must make it clear that it is willing to take all necessary measures to achieve price stability.
Recent geopolitical tensions have intensified inflationary pressures. Following the conflict between the U.S.-Israel alliance and Iran, which has driven up fuel and other commodity prices and hurt consumer confidence, Fed policymakers have become more focused on price trends. Schmid also pointed out that due to slowing immigration and an increase in retirements, the U.S. labor market is currently in a state of balance, with fewer people seeking jobs, which also explains the phenomenon of slowing employment growth while the unemployment rate remains relatively stable.
St. Louis Fed President Alberto Musalem also expressed concern about inflation. He warned on Thursday that if no signs of cooling inflation are seen in the next one or two quarters, he would feel very worried. Musalem stated that policymakers cannot rely on the potential productivity boom from artificial intelligence to alleviate the current inflation problem, and emphasized that the possibility of a future rate hike cannot be ruled out. He said: “Our mandate is to maintain price stability and maximum employment, and the current inflation rate remains above target. Therefore, the possibility or probability of considering a rate hike in the future must be greater than zero.”
The highly influential New York Fed President John Williams also said on Thursday that while the current policy stance is appropriate, if inflation remains persistently high, a rate hike will be unavoidable. The Fed will hold its next policy meeting from June 17 to 18, which will also be the first meeting chaired by new President Kevin Warsh. Warsh has previously stated that artificial intelligence is expected to boost productivity and bring deflationary effects, thereby making rate cuts easier. However, with hawkish voices growing increasingly loud within the Fed, Warsh faces a policy dilemma as soon as he takes office.
The latest data show that the Fed’s preferred inflation gauge, the Personal Consumption Expenditures Price Index, rose 3.8% in the 12 months through April, the highest level since 2023. Pricing from federal funds rate futures indicates that the market believes the Fed will not cut rates this year, with the probability of a rate hike approaching 50%.
