Kansas City Federal Reserve President Stephen Schmidt issued a clear warning on Tuesday (March 31). He stated that policymakers should not simply assume that the current rise in energy prices is only temporary in its impact on inflation. Even before the Iran war caused a sharp surge in oil prices, the U.S. inflation rate was already close to 3%, and its progress toward the Fed's 2% target had clearly stalled.

Schmid warns: The risk of inflation expectations should not be underestimated.

"I don't think we can afford to be complacent about the risks to inflation expectations," Schmidt noted in his prepared remarks for the Rotary Club of Oklahoma City. He added that while most indicators of medium- to long-term inflation expectations currently appear fairly stable, he is not reassured by this.



Schmid stated, "Now, our task is to take policy action to validate these expectations." Although he did not specify what policy action he was referring to, it is widely believed that this statement suggests he may be inclined to maintain higher interest rates, and may even not rule out the possibility of tightening policy in the future.

The process of inflation falling has stalled, and the energy shock has exacerbated the situation.

Schmid emphasized that before the outbreak of the Iran war, the US inflation rate was already close to 3%, and the process of falling back to the 2% target had already slowed down or even stopped.

The current sharp rise in energy prices has further exacerbated inflationary pressures, which will not only directly push up the overall inflation rate, but may also push up the core inflation level excluding energy and food. Core inflation is regarded by the Federal Reserve as a key indicator that better reflects future inflation trends.

Schmid has repeatedly opposed interest rate cuts and emphasized the risks of inflation.

Schmid voted against the Federal Reserve's interest rate cuts twice last year to support the labor market. In his view, the U.S. labor market was already in a relatively balanced state, and there was no need to provide additional support through interest rate cuts.

He believes that higher oil prices will only have a "minor drag" on economic growth, noting that higher tax rebates this year may offset some of the impact of rising gasoline prices on consumer spending. He stated, "The resilience of the U.S. economy should not be underestimated."

However, he also emphasized that the impact of rising oil prices on inflation is obvious and must be taken very seriously.

There are policy disagreements within the Federal Reserve.

Schmid's remarks contrasted with the views of other officials within the Federal Reserve.

While many of his colleagues, including Federal Reserve Chairman Jerome Powell, have expressed concern that rising oil prices could cause inflation expectations to decouple, they generally prefer to wait and see how things develop, while also warning that if consumers drastically cut other spending due to high oil prices, it would pose a risk to economic growth and the labor market.

Schmidt made it clear that when weighing the threats to the goals of price stability and full employment, he is currently "more focused on the risks of inflation."

Summary: The Federal Reserve's policy direction faces new challenges.

Overall, Kansas City Fed President Schmid's latest remarks sent a relatively hawkish signal. He reminded Fed policymakers not to underestimate the inflation risks from rising energy prices and that they must verify and anchor inflation expectations through actual policy actions. This view creates some tension with the market's current expectation that the Fed will keep interest rates unchanged, and also highlights the differing judgments within the Fed regarding policy orientation in the current complex environment.

The Federal Reserve's future decisions will seek a balance between inflationary pressures and economic growth risks, and Schmid's remarks undoubtedly add an important voice to this discussion.