Iranian conflict ignites oil prices! Federal Reserve officials sound hawkish again: Do not underestimate inflation risks.

Ask AI · Why did Schmidt join the hawkish camp at the Federal Reserve to warn about inflation?

Cailian Press, April 1 (Editor: Bian Chun) On Tuesday, Kansas City Fed President Jeff Schmid said that the impact of rising energy prices on inflation should not be assumed to be temporary, and the Fed should be prepared to act to ensure that the consequences of the Iran war do not keep inflation persistently above the central bank’s target.

Schmid stated during a speech that the U.S. economy remains fundamentally solid, and before the outbreak of the Iran conflict in late February, inflation was already close to 3%, well above the Fed’s 2% target. He said the Fed should be ready to proactively respond to high inflation to prevent the inflation rate from lingering around 3% for a long time.

So far, surveys and financial market bets indicate that consumers and investors are not worried that high inflation will become a long-term problem. But Schmid said, the Fed cannot take its eyes off the ball.

Schmid also pointed out that current inflation expectations remain stable, which is due to the credibility of the Fed and market belief that monetary policy can control inflation. The Fed’s current task is to take appropriate policy actions to confirm these expectations.

Schmid’s signal of anti-inflation policy has put him in the camp of a few hawkish officials—some Fed officials have hinted that if inflation remains stubbornly high or heats up further, the Fed may need to raise interest rates.

Chicago Fed President Goolsbee said last week that if inflation problems persist, it may be necessary to raise interest rates in the future.

At present, most Fed officials prefer to keep interest rates unchanged and watch how the Middle East conflict impacts the economy. Some policymakers believe that although oil price shocks could 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 could harm economic growth, but he said that the inflation risks brought by war are his main concern. He stated that the damage from rising oil prices to the economy might not be as severe as in the past because the U.S. now has higher energy production and better efficiency.

Schmid believes that economic momentum could help insulate it from recession. “We should not underestimate the resilience of the U.S. economy,” he said.

Earlier this year, Wall Street was betting that the Fed would continue the rate-cutting cycle that began in 2024, but the Iran conflict reversed that expectation. Currently, interest rate futures show traders generally expect the Fed to keep rates steady until the end of the year, though recent market volatility has been intense.

Since the beginning of this year, the Fed has maintained interest rates at 3.5% to 3.75%. On Monday, Fed Chair Powell said that given the uncertainty about the war’s impact on the economy, he is not in a hurry to adjust policy.

(Cailian Press, Bian Chun)