President of the Kansas City Federal Reserve: Inflation is overheated and has stayed above target for too long.

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Several Federal Reserve officials issued intensive warnings this week, stating that inflation remains the primary threat and the policy path is still unclear.

On July 16, Jeff Schmid, President of the Kansas City Federal Reserve, said, inflation is currently his biggest concern, and the risk of further acceleration in inflation remains in the coming months.

He made it clear that June's inflation data was better than expected, but it is "too early" to view it as the start of a new trend.

Schmid's remarks resonate with the stance of several Federal Reserve officials this week.

Dallas Fed President Lorie Logan has previously called for a rate hike, and new Fed Chair Walsh, while testifying in Congress, stated policymakers have "zero tolerance" for high inflation and vowed to restore price stability, but did not give a clear signal on his stance on rate hikes.

These statements have raised market expectations of a rate hike in the near term, although this week's unexpected cooling in inflation data briefly reduced investor bets on a rate increase this month.

Broad Inflation Pressures, Non-Energy Sectors Also Under Strain

Schmid emphasized that current inflation pressures have gone beyond energy prices, extending into a broad basket of goods and services, with food prices particularly outstanding, having risen above pre-pandemic average levels.

He said:

On inflation, we still haven't reached the target.

He also questioned the economic theory that "policymakers can ignore one-time price shocks," arguing that such theory fails to fully consider the role of demand factors. Schmid said:

One lasting lesson from the pandemic is that inflation is never just a supply problem. Strong demand is almost always one of the drivers.

Economic Fundamentals Remain Resilient

Despite a cautious attitude toward inflation, Schmid made a relatively optimistic assessment of the overall trajectory of the US economy. He said:

The labor market is in balance and growth remains resilient.

Minutes from the Federal Reserve policy meeting held June 16–17 show that as concerns about the labor market eased slightly, officials' worries about inflation were increasing.

At the first meeting chaired by Walsh, officials unanimously voted to keep the benchmark interest rate in the 3.5%–3.75% range, marking the fourth consecutive time rates were unchanged.

Two reports released this week show both producer and consumer price increases in June were lower than expected, prompting investors to reduce their expectations for a rate hike this month.

However, several officials including Schmid have issued consecutive warnings, indicating that the decision-makers are still closely evaluating whether further action is needed.

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