Three regional Federal Reserve presidents have sent relatively hawkish signals regarding inflation and interest rate trends.

Written by: Li Dan

Source: Wall Street Journal

On Thursday, April 4, Eastern Time, Federal Reserve officials spoke intensively, with three regional Fed presidents releasing relatively hawkish signals on inflation and interest rate direction. They stated that the core choice facing the Federal Reserve is whether to remain patient and keep interest rates unchanged, or proactively raise rates to curb persistently high inflation. One official clearly pointed out that AI is currently neither pushing inflation up nor down, and has limited influence on short-term monetary policy decisions.

Jeffrey Schmid, president of the Kansas City Fed, bluntly stated that inflation is the number one risk facing the current U.S. economy and publicly introduced interest rate hikes into policy discussions for the first time, no longer mentioning rate cuts.

Mary Daly, president of the San Francisco Fed, stated that monetary policy is currently in a reasonable position, but economic uncertainty is too high, and providing forward guidance may mislead the market. The Federal Reserve is prepared for a "two-way response." Market interest rate futures show that investors currently believe the probability of a rate hike within the year has risen to a high level.

The Federal Reserve is expected to hold its next monetary policy committee FOMC meeting from June 16 to 17, which will also be the first FOMC meeting chaired by the new Fed chairman, Kevin Warsh. The market generally expects that the policy interest rate will remain unchanged at that time.

Daly and Thomas Barkin, president of the Richmond Fed, who also spoke on Thursday, both have voting rights for the FOMC meetings next year and in 2027, while Schmid has voting rights for the 2028 FOMC meetings. Therefore, the statements made by the three have garnered significant attention from the market.

Schmid: The option of raising rates is on the table; we need to consider whether inflation is temporarily high

On Thursday, Schmid directly addressed an economic forum in Oklahoma and clearly proposed interest rate hikes as an option.

He stated, "The biggest question right now is whether we continue to be patient. Our inflation data may have climbed to around 3.5%, and nobody likes that number. Is it temporary... or should we take action? Should we say, well, now is the time to raise rates by 25 or 50 basis points and see if we can push it down?"

Schmid's statement reflects the deepening concerns within the Federal Reserve about the persistence of inflation. Previously, Fed officials generally believed that inflation driven by tariffs and oil prices would naturally decline over time, but currently, this judgment is facing challenges. According to Reuters, the Fed's policy rate has been maintained in the range of 3.5% to 3.75% since December last year, while inflation has been above the 2% policy target for over five consecutive years.

Schmid did not mention the possibility of rate cuts at any point. This starkly contrasts with the position of most officials earlier this year, where rate cuts were regarded as the baseline scenario. He emphasized that the 2% inflation target facilitates clear communication, and the Fed should not be ambiguous on this issue, "We should not let this message become unclear."

Daly: Two-way response; forward guidance may mislead

Daly stated on Thursday at the Bloomberg Technology Conference in San Francisco that monetary policy is currently in a good state, but the uncertainty of the economic outlook is too great, making it difficult to provide clear guidance on the direction of interest rates.

She said, "We are prepared for a two-way response (regarding interest rates), regardless of the economic trajectory. I think providing more forward guidance at this time may ultimately mislead, because we have to wait for the evolution of the economic situation."

Regarding inflation, Daly pointed out that the Fed's preferred inflation measure rose 3.8% year-on-year in April, marking the largest increase since 2023. She attributed the main drivers of current inflation to tariffs and the rise in energy and food prices since the outbreak of the war in Iran—persistently rising oil prices have spread to the prices of fertilizers, equipment, and other goods. In terms of the labor market, she mentioned that the unemployment rate is currently at 4.3%, and the labor market is showing signs of stabilization.

Daly stated that as the economic situation develops, more and more officials are inclined for the Federal Reserve to clearly state that all options, including rate cuts and hikes, are under consideration. According to federal funds futures contracts, investors currently believe that the likelihood of a rate hike within the year is high.

Daly: AI may lower inflation within five to ten years; currently no significant productivity enhancement

In response to the widespread discussions in the market about the impact of AI on the economy, Daly stated that AI is currently neither a factor driving up inflation nor has it shown widespread productivity improvements at the macro data level.

She said, "We have not seen widespread productivity enhancements"; the return on investment for businesses in AI "is yet to be realized," but enthusiasm for the technology among businesses is "quite high."

According to reports, Daly believes that within a time frame of five to ten years, AI may become a force for lowering inflation, but for monetary policy operating on a 12-month cycle, this AI effect "is not an urgent issue."

She also pointed out that currently, generative AI is mainly used to assist workers rather than replace them, and whether AI-driven productivity improvements will ultimately lead to deflationary effects remains a key variable.

Daly expressed optimism about AI, predicting that 2027 will be a "touchstone" year for the AI industry.

Barkin: The labor market is balanced, with no signs of tight labor

Barkin stated after speaking at an event in Loudoun County, Virginia, that the U.S. labor market is currently in a balanced state, with overall labor demand showing no significant growth.

He said, "I have not seen any changes in the labor market"; technical and healthcare sectors show signs of increased demand, but overall, the labor market is not tight.

Barkin noted that in communication with employers, "I did not see what I would call bubble or tight concerns." This judgment corroborates Schmid's assessment of the overall strong economic performance and aligns with Daly's mention of the stabilization of the labor market, further supporting the Federal Reserve's current policy stance of not taking action and waiting for more data.