Hawkish Signals from Fed: Schmid Calls for Tighter Policy to Combat Inflation

Kansas City Federal Reserve President Jeff Schmid has warned that inflation remains too high, asserting that a tighter monetary policy stance will be necessary to bring price pressures back down to the Fed's 2% target.

Fragile Deceleration in PCE Data

While recent inflation data showed an encouraging slowdown, Schmid cautioned against placing excessive weight on a single data point. The latest Personal Consumption Expenditures (PCE) figures highlight a complex landscape:

■Core PCE index clocked in at 3.3% in June, down slightly from 3.4% in May.

■On a month-over-month basis, Core PCE rose by 0.1%.

■Headline PCE fell to 3.7%, compared to 4.1% in the previous month.

The Tug-of-War Between Demand and Energy Volatility

Schmid argued that the current monetary policy stance is not yet sufficiently restrictive, given the robust levels of investment and consumer demand. He emphasized that inflation is a product of the balance between supply and demand.

■Demand Resilience: Given the strength of investment, Schmid stated that achieving the 2% objective will require a more restrictive policy.

■Energy Uncertainty: The volatility in oil prices remains a significant wildcard that could disrupt disinflationary trends.

■Supply vs. Demand: Schmid noted that while supply shocks (pandemic, geopolitical conflicts, tariffs) play a role, strong demand is what ultimately amplifies the impact of these shocks on price increases.

Schmid's rhetoric underscores a persistent hawkishness within the Federal Reserve. The emphasis on demand-driven inflation suggests that the 'last mile' of the inflation fight may be more arduous than markets currently price in. For Emerging Markets (EM), this implies a potential resurgence in US Treasury yields and sustained USD strength, complicating the path for carry trades and local currency stability.