Federal Reserve official: The current choice is between remaining patient or raising interest rates; inflation is the top economic risk, and AI has not had an impact yet.

Federal Reserve officials spoke intensively on Thursday, June 4, Eastern Time, with three regional Fed presidents sending relatively hawkish signals on issues of inflation and interest rate direction. They stated that the Fed’s main decision now is to exercise patience and keep rates unchanged, or to proactively raise rates to suppress persistently high inflation. One official made it clear that AI has neither pushed up nor lowered inflation at present, and its short-term impact on monetary policy decisions is limited.

Kansas City Fed President Jeffrey Schmid directly said that inflation is the number one risk facing the U.S. economy, and for the first time publicly included rate hikes in policy discussion, no longer mentioning rate cuts.

San Francisco Fed President Mary Daly said monetary policy is currently at a reasonable position, but economic uncertainty is too high and providing forward guidance may mislead the market; the Fed is prepared for "two-way responses." Market rate futures indicate investors now see a high probability of a rate hike this year.

The Fed is expected to hold its next FOMC monetary policy meeting from June 16 to 17, which will be the first FOMC meeting chaired by new Fed Chair Kevin Warsh. The market generally expects the policy rate to remain unchanged.

Daly and Richmond Fed President Thomas Barkin, who also spoke on Thursday, have FOMC voting rights in the meetings for next year and 2027, while Schmid is a voting member for 2026 and 2028. Thus, their comments were closely watched by the market.

Schmid: Rate hike option is now on the table, need to consider if inflation is temporary

Schmid spoke directly at an economic forum in Oklahoma on Thursday, clearly presenting rate hikes as an option.

He said: "The biggest question now is, do we continue to exercise patience? Our inflation data may have climbed to about 3.5%, nobody likes that number. Is it temporary... or should we take action? Should we say, okay, it's time to raise rates by 25 or 50 basis points and see if we can suppress it?"

Schmid’s remarks reflect deepening concerns within the Fed about the persistence of inflation. Previously, Fed officials generally believed inflation driven by tariffs and oil prices would naturally dissipate over time, but this view is now being challenged. According to Reuters, the Fed’s policy rate has been held at the 3.5% to 3.75% range since last December, while inflation has been above the 2% policy target for more than five consecutive years.

Schmid did not mention the possibility of rate cuts throughout. This contrasts sharply with most officials earlier this year who treated rate cuts as the base scenario. He emphasized that the 2% inflation target allows for clear communication, and the Fed should not take a vague stance on this point. "This message should not be ambiguous."

Daly: Two-way response, forward guidance may mislead

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

She said: "We are prepared for a two-way response (regarding rates), regardless of how the economy develops. I believe that offering more forward guidance right now may ultimately prove misleading, because we must wait for economic conditions to unfold."

On inflation, Daly pointed out that the Fed's preferred inflation indicator rose 3.8% year-over-year in April, the largest increase since 2023. She attributed the main drivers of current inflation to tariffs, as well as the rise in energy and food prices since the outbreak of the Iran war — persistently rising oil prices have spilled over into the prices of fertilizers, equipment, and other goods. On the labor market, she noted the current unemployment rate is 4.3%, with the labor market showing signs of stabilization.

Daly stated that as economic conditions evolve, more officials are inclined for the Fed to clarify that all options, including rate cuts and hikes, are under consideration. According to federal funds futures contracts, investors currently believe a rate hike this year is likely.

Daly: AI may lower inflation in five to ten years, currently no large-scale productivity gains

Addressing widespread market discussion about AI's impact on the economy, Daly said that AI is not currently a factor driving inflation up, nor has it yet led to broad productivity gains at the macro level.

She said, "We have not yet seen large-scale productivity gains," and that businesses' return on investment in AI is "yet to materialize," though enthusiasm among firms for the technology is "quite high."

According to reports, Daly believes AI could become a force lowering inflation over a five-to-ten-year window, but for monetary policy cycles operating on 12-month horizons, this AI effect is "not an urgent issue."

She also noted that generative AI currently mainly serves to assist rather than replace workers, and whether AI-driven productivity gains will ultimately bring a deflationary effect is still a matter of timing.

Daly stated that she is optimistic about AI and expects 2027 will be a "touchstone year" for the AI industry.

Barkin: Balanced labor market, no signs of hiring tightness

Barkin said after speaking at an event in Loudoun County, Virginia, on Thursday that the U.S. labor market currently shows a balanced state, with overall hiring demand not showing evident growth.

He said, "I do not see any changes in the job market," with technical and healthcare roles showing signs of rising demand, but overall, the labor market is not tight.

Barkin stated that in communications with employers, "I do not see what I would call the kind of bubble or tightness worries." This assessment mutually corroborates Schmid's judgment that the overall economy is performing well, and aligns with Daly's point about labor market stabilization, further supporting the Fed’s current stance of holding action and waiting for more data.

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