Alarm bells are ringing: Fed hawks call inflation the "most pressing risk," while doves have already slipped away.
2026-05-15 09:19:32
On Thursday (May 14), several key Federal Reserve officials delivered a series of public speeches, releasing a complex and intriguing array of signals regarding key issues such as the current economic situation, inflationary pressures, interest rate policy, and central bank independence. Simultaneously, significant personnel changes occurred within the Fed, with a governor announcing his resignation and sharply criticizing the current inflation measurement methods. These developments collectively outline the current divisions and uncertainties within the US monetary policy decision-making body, and provide important clues for understanding the Fed's future policy direction.
In a public speech on Thursday, New York Federal Reserve President Williams stated unequivocally that given the high level of uncertainty stemming from the ongoing conflict in the Middle East, there is currently no need for the Fed to consider adjusting its interest rate policy. He described the current monetary policy as "good" and pointed out that there is no sufficient reason to raise or lower interest rates at this stage. Williams particularly emphasized that maintaining stable inflation expectations is a crucial policy objective. While rising inflation expectations in the short term are not surprising, the stability of long-term inflation forecasts is seen as a positive sign.
When discussing the impact of tariffs on inflation, Williams believes that most of the price pressures from tariffs have already materialized, but he also stated that he is closely monitoring the subsequent development of these price pressures. He pointed out that with inflation expectations remaining stable and the labor market not pushing up price pressures, no unusual second-round effects or persistent impacts have been observed so far, but continued monitoring is still necessary.
In addition, Williams commented on the recent strong performance of the stock market. He believes that given investors' optimistic outlook on the economy, especially their high expectations for future productivity growth driven by technological advancements such as artificial intelligence, the stock market's rise is not surprising. Currently, investors generally expect the target range for the federal funds rate to remain unchanged at 3.5% to 3.75% in the coming months.
In contrast to Williams' relatively dovish stance, Kansas City Fed President Schmid delivered a more hawkish commentary at a banking conference on Thursday. He explicitly stated that persistent inflation is the biggest risk and the most pressing challenge facing the U.S. economy. Although inflation has fallen significantly from its peak, Schmid, based on his discussions with business leaders in his district, judged that inflation remains too high.
Schmid does not have a vote on monetary policy this year and therefore did not comment directly on the interest rate outlook. However, his strong focus on inflation indicates that he will firmly stand in the hawkish camp and oppose any rate cuts as long as the inflation rate remains above the Fed's 2% target. According to the personal consumption expenditures price index used by the Fed, the inflation rate in March was 3.5%. April's inflation data suggests that the overall inflation rate may have already approached 4%, and price pressures have extended beyond energy costs, showing a more widespread diffusion.
Schmid also affirmed the resilience of the US economy. He pointed out that despite challenges such as geopolitical uncertainty, weakened household spending power due to rising oil prices, and increased business costs, the US economy has demonstrated remarkable resilience. Thanks to strong business investment, particularly in technology and artificial intelligence, and continued consumer spending, US GDP growth accelerated in the first quarter. The wealth effect from record-high stock markets has also helped many consumers, especially high-income households, increase their spending. The unemployment rate remains relatively low by historical standards, and the labor market is functioning effectively, although it is currently in a rare "low hiring, low laying off" environment.
Cleveland Federal Reserve Bank President Hamak reiterated the importance of central bank independence on Thursday. She stated that substantial evidence suggests an independent central bank is more effective at formulating policy. Independence is crucial for achieving the dual mandate of full employment and price stability, enabling policymakers to make decisions based on the latest data and evolving prospects, including assessments of the economic conditions facing businesses and communities.
Federal Reserve Governor Michael Barr delivered a more technical and outspoken speech on the same day. He strongly opposed reducing the size of the Fed's balance sheet by easing bank liquidity regulations. Barr pointed out that there has been increasing discussion recently about how to reduce the Fed's "footprint" in the financial system, but he believes that making balance sheet reduction a goal is misguided. Many proposed solutions to achieve this goal would actually weaken bank resilience, hinder the normal functioning of money markets, and ultimately threaten financial stability.
Barr further explained that modifying the rules to lower banks' liquidity requirements in order to reduce the size of the Federal Reserve's assets could increase the risk that these institutions would have to resort to the Fed's liquidity facilities when facing difficulties. He cited lessons learned from the 2023 bank stress events, clearly stating that liquidity requirements should be increased, not decreased.
Furthermore, Barr emphasized that the size of the Federal Reserve's balance sheet is not the correct measure of its influence in financial markets; the real focus should be on the effectiveness of the Fed's monetary policy. He also stated that no decision has yet been made on what action he hopes the Fed will take at the upcoming monetary policy meeting, as officials are grappling with an energy shock of uncertain duration that is driving inflation sharply higher.
It is noteworthy that Barr's comments come at a time when the Federal Reserve is facing a leadership change. Kevin Warsh is almost certain to succeed Jerome Powell as Fed Chairman. Warsh has criticized the Fed's use of asset purchases to smooth market volatility during periods of turmoil, arguing that the Fed's balance sheet is too large and that holding a large amount of bonds distorts market pricing. Warsh has also put forward a controversial view that shrinking the balance sheet would allow the central bank to lower interest rates more significantly. However, this view faces practical challenges: in the current reserve-rich financial system, the Fed's tools for controlling interest rates limit its ability to significantly reduce its asset size while maintaining control over interest rate targets.
In terms of personnel changes, Federal Reserve Governor Stephen Milan submitted his resignation to the Board of Governors on May 14. His resignation will officially take effect upon or shortly before his successor's swearing-in. Milan will serve as a Federal Reserve Governor from September 16, 2025.
In his resignation letter, he criticized the Federal Reserve’s current method of measuring inflation, arguing that if it is not corrected, it will lead to an unnecessarily high level of unemployment and combat false rather than real inflation.
Milan also expressed his expectations for the reforms promoted by the new Federal Reserve Chairman, Warsh, including adjustments to the Fed's communication methods and balance sheet policy. A well-known dove, Milan voted for interest rate cuts at every policy meeting during his tenure, and even cast a dissenting vote, advocating for a more aggressive rate cut than most of his colleagues agreed.
His resignation was considered a necessary arrangement, as there were currently no vacancies for Walsh in the seven-member council, and Milan's term had technically expired in January of this year.
Based on the statements and actions of several senior Federal Reserve officials, it is evident that there is significant disagreement and tension within the current US monetary policy decision-making body. On the one hand, officials represented by Williams believe that the current policy interest rate is at a reasonable level and there is no need for adjustment at this time, and are relatively optimistic about the inflation outlook; on the other hand, hawkish voices represented by Schmid emphasize that inflation remains the biggest risk, implying that interest rates should not be cut lightly.
Meanwhile, Barr issued a strong warning against shrinking the balance sheet by easing liquidity rules, reflecting a technical dispute over the path to monetary policy normalization. Milan's resignation and criticism of inflation measurement methods, along with Hamak's reaffirmation of central bank independence, further increased uncertainty about the Fed's internal governance and policy direction. Against the backdrop of an impending leadership change, continued high energy prices due to the Middle East war, and persistent inflationary pressures, the Fed's future policy direction will undoubtedly remain a focus of market attention.
Question 1: Why do New York Fed President Williams and Kansas City Fed President Schmid have significantly different views on inflation?
A: The differences between Williams and Schmid stem primarily from their differing assessments of the current economic situation and their varying emphases on monetary policy objectives. Williams is more focused on the stability of inflation expectations and the steady performance of long-term inflation forecasts. He believes that most of the price pressures from tariffs have been released, and the labor market has not pushed up prices, therefore there is no need to adjust interest rates immediately. Schmid, on the other hand, is more concerned about the fact that actual inflation has consistently exceeded the 2% target. Through direct communication with business leaders in his district, he judged that inflation remains too high and considers it the "most pressing risk." Furthermore, their different voting positions on monetary policy may also influence the emphasis of their public statements. Schmid has no voting rights this year, and his remarks reflect more of his personal stance, while Williams, as President of the New York Fed, is often seen as having a more policy-signaling impact.
Question 2: Why did Federal Reserve Governor Milan choose to resign at this time? What does his criticism signify?
A: Technically, Milan's resignation was to make room for incoming Federal Reserve Chairman Warsh on the Board of Governors, as there were no vacancies and Milan's term expired in January. However, his criticism of the Fed's inflation measurement methods in his resignation letter has significant substantive implications. Milan argued that the current inflation measurement methods are flawed, potentially leading the Fed to combat "false rather than real inflation," resulting in unnecessary high unemployment. This criticism suggests that current inflation data may not accurately reflect actual price pressures, and that the Fed might overtighten its policies based on this. As a well-known dove, Milan has consistently advocated for more aggressive interest rate cuts, and his departure and criticisms may also be seen as an expression of internal dissatisfaction with the current policy direction.
Question 3: Why does Federal Reserve Governor Barr strongly oppose easing bank liquidity regulations in order to shrink the balance sheet?
A: Barr's core argument is that financial stability takes precedence over balance sheet size targets. He believes that reducing the Fed's asset size by lowering bank liquidity requirements would weaken banks' ability to withstand risks. If banks encounter difficulties and their liquidity buffers are insufficient, they will turn to the Fed for help earlier or more frequently. This would not actually reduce the Fed's "footprint" in the financial markets, but could instead increase systemic risk. Barr cites the lessons of the 2023 bank stress crisis, pointing out that that crisis precisely demonstrated that liquidity requirements needed to be increased, not decreased. He emphasizes that the size of the balance sheet itself is not the correct measure; the key is whether the Fed can effectively implement monetary policy. Therefore, in his view, pursuing balance sheet reduction at the expense of bank resilience is a misguided approach that puts the cart before the horse.
Question 4: How do the Middle East wars affect the Federal Reserve's current interest rate decisions?
A: The Middle East wars primarily impact US inflation through energy prices. The outbreak of war triggered a sharp rise in global crude oil and US gasoline prices, directly pushing up the personal consumption expenditure price index. Data shows that the inflation rate was 3.5% in March and may have approached 4% in April, with pressure exceeding energy costs. This supply-side shock driven by geopolitical conflict presents the Federal Reserve with a dilemma: on the one hand, raising interest rates may help curb inflation expectations, but the economy itself may not be overheated; on the other hand, remaining inactive risks causing inflation expectations to derail. Williams explicitly pointed out that the uncertainty brought about by the Middle East wars is one of the reasons he believes there is no need to adjust interest rates, as the duration and ultimate impact of the conflict are still unclear, and the Federal Reserve needs more time to observe and assess the situation.
Question 5: What challenges does the Federal Reserve's central bank independence currently face? Why did Hamak specifically emphasize this point?
A: Hamak's emphasis on central bank independence suggests that this principle may face potential challenges. Central bank independence refers to the ability of central banks to make monetary policy decisions based on data and their legal mandate, free from short-term political pressures. Current challenges may stem from several aspects: First, the appointment of the new Federal Reserve Chairman, Warsh, and his policy proposals may lead to adjustments in policy direction; second, Milan's public criticism of inflation measurement methods and his expression of expectations for reforms in communication methods and balance sheet policy upon his resignation reflect differing opinions within the government regarding the policy framework; third, against the backdrop of high inflation and multiple economic pressures, calls for interest rate cuts from the executive or legislative branches may increase. Hamak's reiteration of the importance of independence is essentially a reminder to all parties that only by maintaining the independent judgment of policymakers can the dual mandates of full employment and price stability be better achieved.
New York Fed President Williams: Current interest rate policy is "good" and there is no need to adjust it at this time.
In a public speech on Thursday, New York Federal Reserve President Williams stated unequivocally that given the high level of uncertainty stemming from the ongoing conflict in the Middle East, there is currently no need for the Fed to consider adjusting its interest rate policy. He described the current monetary policy as "good" and pointed out that there is no sufficient reason to raise or lower interest rates at this stage. Williams particularly emphasized that maintaining stable inflation expectations is a crucial policy objective. While rising inflation expectations in the short term are not surprising, the stability of long-term inflation forecasts is seen as a positive sign.
When discussing the impact of tariffs on inflation, Williams believes that most of the price pressures from tariffs have already materialized, but he also stated that he is closely monitoring the subsequent development of these price pressures. He pointed out that with inflation expectations remaining stable and the labor market not pushing up price pressures, no unusual second-round effects or persistent impacts have been observed so far, but continued monitoring is still necessary.
In addition, Williams commented on the recent strong performance of the stock market. He believes that given investors' optimistic outlook on the economy, especially their high expectations for future productivity growth driven by technological advancements such as artificial intelligence, the stock market's rise is not surprising. Currently, investors generally expect the target range for the federal funds rate to remain unchanged at 3.5% to 3.75% in the coming months.
Kansas City Fed President Schmid: Inflation remains the "most pressing risk"
In contrast to Williams' relatively dovish stance, Kansas City Fed President Schmid delivered a more hawkish commentary at a banking conference on Thursday. He explicitly stated that persistent inflation is the biggest risk and the most pressing challenge facing the U.S. economy. Although inflation has fallen significantly from its peak, Schmid, based on his discussions with business leaders in his district, judged that inflation remains too high.
Schmid does not have a vote on monetary policy this year and therefore did not comment directly on the interest rate outlook. However, his strong focus on inflation indicates that he will firmly stand in the hawkish camp and oppose any rate cuts as long as the inflation rate remains above the Fed's 2% target. According to the personal consumption expenditures price index used by the Fed, the inflation rate in March was 3.5%. April's inflation data suggests that the overall inflation rate may have already approached 4%, and price pressures have extended beyond energy costs, showing a more widespread diffusion.
Schmid also affirmed the resilience of the US economy. He pointed out that despite challenges such as geopolitical uncertainty, weakened household spending power due to rising oil prices, and increased business costs, the US economy has demonstrated remarkable resilience. Thanks to strong business investment, particularly in technology and artificial intelligence, and continued consumer spending, US GDP growth accelerated in the first quarter. The wealth effect from record-high stock markets has also helped many consumers, especially high-income households, increase their spending. The unemployment rate remains relatively low by historical standards, and the labor market is functioning effectively, although it is currently in a rare "low hiring, low laying off" environment.
Cleveland Fed President Hammarck: Central Bank Independence is Crucial
Cleveland Federal Reserve Bank President Hamak reiterated the importance of central bank independence on Thursday. She stated that substantial evidence suggests an independent central bank is more effective at formulating policy. Independence is crucial for achieving the dual mandate of full employment and price stability, enabling policymakers to make decisions based on the latest data and evolving prospects, including assessments of the economic conditions facing businesses and communities.
Federal Reserve Governor Barr: Opposes easing liquidity rules to shrink balance sheet
Federal Reserve Governor Michael Barr delivered a more technical and outspoken speech on the same day. He strongly opposed reducing the size of the Fed's balance sheet by easing bank liquidity regulations. Barr pointed out that there has been increasing discussion recently about how to reduce the Fed's "footprint" in the financial system, but he believes that making balance sheet reduction a goal is misguided. Many proposed solutions to achieve this goal would actually weaken bank resilience, hinder the normal functioning of money markets, and ultimately threaten financial stability.
Barr further explained that modifying the rules to lower banks' liquidity requirements in order to reduce the size of the Federal Reserve's assets could increase the risk that these institutions would have to resort to the Fed's liquidity facilities when facing difficulties. He cited lessons learned from the 2023 bank stress events, clearly stating that liquidity requirements should be increased, not decreased.
Furthermore, Barr emphasized that the size of the Federal Reserve's balance sheet is not the correct measure of its influence in financial markets; the real focus should be on the effectiveness of the Fed's monetary policy. He also stated that no decision has yet been made on what action he hopes the Fed will take at the upcoming monetary policy meeting, as officials are grappling with an energy shock of uncertain duration that is driving inflation sharply higher.
It is noteworthy that Barr's comments come at a time when the Federal Reserve is facing a leadership change. Kevin Warsh is almost certain to succeed Jerome Powell as Fed Chairman. Warsh has criticized the Fed's use of asset purchases to smooth market volatility during periods of turmoil, arguing that the Fed's balance sheet is too large and that holding a large amount of bonds distorts market pricing. Warsh has also put forward a controversial view that shrinking the balance sheet would allow the central bank to lower interest rates more significantly. However, this view faces practical challenges: in the current reserve-rich financial system, the Fed's tools for controlling interest rates limit its ability to significantly reduce its asset size while maintaining control over interest rate targets.
Federal Reserve Governor Milan announced her resignation and criticized the way inflation is measured.
In terms of personnel changes, Federal Reserve Governor Stephen Milan submitted his resignation to the Board of Governors on May 14. His resignation will officially take effect upon or shortly before his successor's swearing-in. Milan will serve as a Federal Reserve Governor from September 16, 2025.
In his resignation letter, he criticized the Federal Reserve’s current method of measuring inflation, arguing that if it is not corrected, it will lead to an unnecessarily high level of unemployment and combat false rather than real inflation.
Milan also expressed his expectations for the reforms promoted by the new Federal Reserve Chairman, Warsh, including adjustments to the Fed's communication methods and balance sheet policy. A well-known dove, Milan voted for interest rate cuts at every policy meeting during his tenure, and even cast a dissenting vote, advocating for a more aggressive rate cut than most of his colleagues agreed.
His resignation was considered a necessary arrangement, as there were currently no vacancies for Walsh in the seven-member council, and Milan's term had technically expired in January of this year.
Summary: Internal divisions have intensified, and the policy outlook has become more complex.
Based on the statements and actions of several senior Federal Reserve officials, it is evident that there is significant disagreement and tension within the current US monetary policy decision-making body. On the one hand, officials represented by Williams believe that the current policy interest rate is at a reasonable level and there is no need for adjustment at this time, and are relatively optimistic about the inflation outlook; on the other hand, hawkish voices represented by Schmid emphasize that inflation remains the biggest risk, implying that interest rates should not be cut lightly.
Meanwhile, Barr issued a strong warning against shrinking the balance sheet by easing liquidity rules, reflecting a technical dispute over the path to monetary policy normalization. Milan's resignation and criticism of inflation measurement methods, along with Hamak's reaffirmation of central bank independence, further increased uncertainty about the Fed's internal governance and policy direction. Against the backdrop of an impending leadership change, continued high energy prices due to the Middle East war, and persistent inflationary pressures, the Fed's future policy direction will undoubtedly remain a focus of market attention.
Frequently Asked Questions
Question 1: Why do New York Fed President Williams and Kansas City Fed President Schmid have significantly different views on inflation?
A: The differences between Williams and Schmid stem primarily from their differing assessments of the current economic situation and their varying emphases on monetary policy objectives. Williams is more focused on the stability of inflation expectations and the steady performance of long-term inflation forecasts. He believes that most of the price pressures from tariffs have been released, and the labor market has not pushed up prices, therefore there is no need to adjust interest rates immediately. Schmid, on the other hand, is more concerned about the fact that actual inflation has consistently exceeded the 2% target. Through direct communication with business leaders in his district, he judged that inflation remains too high and considers it the "most pressing risk." Furthermore, their different voting positions on monetary policy may also influence the emphasis of their public statements. Schmid has no voting rights this year, and his remarks reflect more of his personal stance, while Williams, as President of the New York Fed, is often seen as having a more policy-signaling impact.
Question 2: Why did Federal Reserve Governor Milan choose to resign at this time? What does his criticism signify?
A: Technically, Milan's resignation was to make room for incoming Federal Reserve Chairman Warsh on the Board of Governors, as there were no vacancies and Milan's term expired in January. However, his criticism of the Fed's inflation measurement methods in his resignation letter has significant substantive implications. Milan argued that the current inflation measurement methods are flawed, potentially leading the Fed to combat "false rather than real inflation," resulting in unnecessary high unemployment. This criticism suggests that current inflation data may not accurately reflect actual price pressures, and that the Fed might overtighten its policies based on this. As a well-known dove, Milan has consistently advocated for more aggressive interest rate cuts, and his departure and criticisms may also be seen as an expression of internal dissatisfaction with the current policy direction.
Question 3: Why does Federal Reserve Governor Barr strongly oppose easing bank liquidity regulations in order to shrink the balance sheet?
A: Barr's core argument is that financial stability takes precedence over balance sheet size targets. He believes that reducing the Fed's asset size by lowering bank liquidity requirements would weaken banks' ability to withstand risks. If banks encounter difficulties and their liquidity buffers are insufficient, they will turn to the Fed for help earlier or more frequently. This would not actually reduce the Fed's "footprint" in the financial markets, but could instead increase systemic risk. Barr cites the lessons of the 2023 bank stress crisis, pointing out that that crisis precisely demonstrated that liquidity requirements needed to be increased, not decreased. He emphasizes that the size of the balance sheet itself is not the correct measure; the key is whether the Fed can effectively implement monetary policy. Therefore, in his view, pursuing balance sheet reduction at the expense of bank resilience is a misguided approach that puts the cart before the horse.
Question 4: How do the Middle East wars affect the Federal Reserve's current interest rate decisions?
A: The Middle East wars primarily impact US inflation through energy prices. The outbreak of war triggered a sharp rise in global crude oil and US gasoline prices, directly pushing up the personal consumption expenditure price index. Data shows that the inflation rate was 3.5% in March and may have approached 4% in April, with pressure exceeding energy costs. This supply-side shock driven by geopolitical conflict presents the Federal Reserve with a dilemma: on the one hand, raising interest rates may help curb inflation expectations, but the economy itself may not be overheated; on the other hand, remaining inactive risks causing inflation expectations to derail. Williams explicitly pointed out that the uncertainty brought about by the Middle East wars is one of the reasons he believes there is no need to adjust interest rates, as the duration and ultimate impact of the conflict are still unclear, and the Federal Reserve needs more time to observe and assess the situation.
Question 5: What challenges does the Federal Reserve's central bank independence currently face? Why did Hamak specifically emphasize this point?
A: Hamak's emphasis on central bank independence suggests that this principle may face potential challenges. Central bank independence refers to the ability of central banks to make monetary policy decisions based on data and their legal mandate, free from short-term political pressures. Current challenges may stem from several aspects: First, the appointment of the new Federal Reserve Chairman, Warsh, and his policy proposals may lead to adjustments in policy direction; second, Milan's public criticism of inflation measurement methods and his expression of expectations for reforms in communication methods and balance sheet policy upon his resignation reflect differing opinions within the government regarding the policy framework; third, against the backdrop of high inflation and multiple economic pressures, calls for interest rate cuts from the executive or legislative branches may increase. Hamak's reiteration of the importance of independence is essentially a reminder to all parties that only by maintaining the independent judgment of policymakers can the dual mandates of full employment and price stability be better achieved.
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