Federal Reserve officials turned more openly hawkish on Aug. 5 as concern over inflation risks picked up inside the central bank. Jeffrey Schmid, president of the Federal Reserve Bank of Kansas City, and Anna Paulson, president of the Federal Reserve Bank of Philadelphia, both indicated that further monetary tightening could still be needed if inflation remains elevated.
Schmid says policy is still not restrictive
Schmid said the current stance of monetary policy is "not restrictive." In his view, with demand holding firm and business investment expanding, the Fed may need a tighter policy setting to push inflation back to its 2% target.
He also warned markets against assuming that price pressure tied to supply shocks will disappear quickly. Schmid said he is concerned about the assumption that the surge in inflation was only temporary. How long inflation lasts, he said, will depend on the Fed’s policy response and on how markets view the future path of policy.
Paulson ties rate path to core inflation
Paulson delivered a similar message. She said the future path of interest rates will depend on core inflation and added that she remains "open-minded" about the direction of policy adjustments.
According to Paulson, current rates may already be restrictive enough to slow economic growth if core inflation continues to improve and long-term inflation expectations remain stable. If core inflation stays high, though, that would point to a need for tighter policy.
She said US core inflation has only eased modestly and is still running at roughly 2.4% to 2.8%. In her view, "persistently high core inflation" remains an important factor in judging policy. Paulson also said the improvement in inflation data is "a step in the right direction," but only limited progress so far.
Fed held rates steady again, but dissent remains
Last week, the Federal Reserve left rates unchanged for a fifth straight meeting. At the same time, three policymakers voted in favor of a 25-basis-point rate increase, arguing that acting earlier could help avoid more aggressive tightening later.
Recent data showed that US core PCE inflation for June came in below expectations, while consumer spending stayed strong. That mix has kept attention on whether the slowdown in inflation will prove durable.
Middle East conflict and AI investment are also being watched
Officials are also monitoring other possible sources of inflation pressure, including the conflict in the Middle East and investment tied to AI infrastructure.
Paulson said AI infrastructure buildout can support economic growth, but it may also lift prices in some areas.