Federal Reserve officials delivered a series of hawkish statements on Thursday, April 4th, Eastern Time, with three regional Fed presidents signaling a more restrictive stance on inflation and interest rate trajectory. They emphasized that the central bank’s core dilemma lies in whether to maintain patience and hold rates steady, or proactively hike rates to rein in persistently elevated inflation. One official explicitly stated that AI has neither fueled nor suppressed inflation to date, and thus holds limited near-term implications for monetary policy decisions.

Jeffrey Schmid, President of the Kansas City Fed, directly asserted that inflation remains the primary risk facing the U.S. economy today and, for the first time publicly, included rate hikes within the policy discussion—no longer referencing rate cuts.

Mary Daly, President of the San Francisco Fed, stated that current monetary policy is appropriately positioned but cautioned that economic uncertainty remains high. She warned that forward guidance could mislead markets, and the Fed is prepared for "two-way responses." Market interest rate futures indicate that investors now perceive a significantly elevated probability of rate hikes this year.

The Federal Reserve is expected to convene its next FOMC meeting on June 16–17, marking Kevin Warsh’s first appearance as Chair of the FOMC. The market broadly anticipates no change in policy rates at that gathering.

Daly and Thomas Barkin, President of the Richmond Fed, who also spoke on Thursday, both hold voting rights at the FOMC for 2027. Schmid is a voting member for 2028. Their remarks have therefore drawn intense market scrutiny.

Schmid: Rate Hike Option Now on the Table — Consider Whether Temporary Inflation Is Transitory

Speaking directly at an economic forum in Oklahoma on Thursday, Schmid made his position unequivocal by explicitly listing a rate hike as a viable option.

He stated: “The central question now is whether we should continue to be patient. Our inflation data may have already risen to around 3.5%, and nobody likes that number. Is this temporary… or should we take action? Should we say, okay, now is the time to raise rates by 25 or 50 basis points, just to see if we can bring it down?”

Schmid’s remarks reflect deepening internal concerns within the Fed about the persistence of inflation. Previously, Fed officials generally believed that inflation driven by tariffs and oil prices would naturally subside over time—but this assessment is now under strain. According to Reuters, the Fed’s policy rate has remained in the 3.5%–3.75% range since December last year, while inflation has exceeded the 2% target for over five consecutive years.

Schmid made no mention of rate cuts throughout his remarks—an explicit contrast to the earlier consensus among most officials who had treated rate cuts as the baseline scenario. He stressed that the 2% inflation target enables clear communication and urged the Fed not to blur its stance on this issue: “We should not make this message ambiguous.”

Daly: Prepared for Two-Way Response — Forward Guidance May Mislead

Speaking at the Bloomberg Technology Conference in San Francisco, Daly said monetary policy is currently in good shape, but economic uncertainty is too high to offer clear guidance on future rate movements.

She noted: “We are prepared for two-way responses in interest rates regardless of economic direction. I believe providing more forward guidance at this stage could ultimately mislead, because we must wait for the evolution of economic conditions.”

On inflation, Daly pointed out that the Fed’s preferred inflation gauge rose 3.8% year-over-year in April—the largest increase since 2023. She attributed current inflation primarily to tariffs, as well as rising energy and food prices following the outbreak of conflict in Iran. Persistently high oil prices have already begun spilling over into fertilizer and equipment prices. On labor markets, she noted the unemployment rate stands at 4.3%, indicating stabilization.

Daly added that as economic conditions evolve, an increasing number of officials are inclined toward explicitly stating that all options—including both rate hikes and cuts—are under consideration. Federal funds futures suggest investors now assign a higher probability to a rate hike this year.

Daly: AI May Lower Inflation in Five to Ten Years, But No Broad Productivity Gains Yet

Regarding the widespread market discussion on AI’s macroeconomic impact, Daly stated that AI is currently neither a driver of inflation nor showing broad-based productivity gains in aggregate data.

She said: “We haven’t seen large-scale productivity improvements yet,” and that corporate returns on AI investments “remain unrealized,” although enthusiasm for the technology among firms is “quite high.”

According to reports, Daly believes AI could become a disinflationary force within a five- to ten-year window. However, for monetary policy operating on a 12-month cycle, this potential AI effect “is not an urgent matter.”

She also noted that current generative AI is primarily used to assist workers rather than replace them. Whether AI-driven productivity gains will ultimately generate deflationary effects hinges critically on timing.

Daly expressed optimism about AI, forecasting 2027 as a “litmus test” for the AI industry.

Barkin: Labor Market Balanced — No Signs of Tightness

Following a speech event in Loudoun County, Virginia, Barkin stated that the U.S. labor market currently exhibits balance, with no significant increase in overall hiring demand.

He remarked, “I don’t see any changes in the labor market,” noting upward trends in demand for skilled trades and healthcare roles. However, overall labor market conditions remain stable, not tight.

Barkin added that during conversations with employers, “I don’t see the kind of anxiety or tension I’d describe as a bubble.” This assessment aligns with Schmid’s view of strong economic fundamentals and corroborates Daly’s observation of labor market stabilization—further reinforcing the Fed’s current posture of inaction, waiting for additional data before acting.

By: Li Dan | Source: Wall Street Insights