Kansas City Federal Reserve President Jeff Schmid signaled on Friday that the central bank may need to raise interest rates again, reinforcing a hawkish stance following the Federal Open Market Committee's recent decision to increase the benchmark rate. Schmid explicitly stated that the Fed has "work to do on inflation," supporting the unanimous vote earlier this week to lift rates to a range of 3.75% to 4% from 3.5% to 3.75%. This move marks the first rate hike since July 2023 and aligns with comments from Fed Chairman Kevin Warsh, who emphasized that current financial conditions are not yet restrictive enough to curb persistent price pressures.

Market Context

The recent rate hike comes amid a backdrop of sticky inflation that has exceeded the Fed's 2% target for over five years. Recent data indicates inflation is trending above 3%, driven significantly by higher oil and energy prices linked to geopolitical conflicts, including tensions with Iran. However, Schmid noted that the inflation problem extends beyond energy, with core inflation also remaining elevated. The Fed's decision to remove a "dose of accommodation" reflects a broader consensus that current monetary policy is still too loose given the underlying economic conditions.

Analysis

Schmid's comments in Vail, Colorado, buttress the narrative set by Chairman Warsh, who argued that this summer's inflation readings do not show meaningful improvement in underlying trends. The Fed's focus has shifted from viewing inflation solely as a result of supply shocks to acknowledging a potential risk of demand-led overheating. JPMorgan Chief Economist Michael Feroli noted that while Fed speakers previously highlighted pass-through from adverse supply shocks, recent revisions suggest the Committee sees a growing risk that policy may need to lean into this demand-side pressure. The median projection from 18 of 19 Fed members indicates an expectation of at least one more rate hike this year before holding steady in the subsequent year.

Key Numbers

- Benchmark interest rate raised to 3.75% - 4.00% from 3.50% - 3.75%.

- Inflation has run above the 2% target for over five years.

- Recent price readings suggest inflation is trending above 3%.

- 12 of 18 Fed members projecting one more rate hike this year.

- 4 of 18 Fed members projecting two more rate hikes this year.

- 2 of 18 Fed members projecting no further changes this year.

- 14 members expect rates to remain at current levels or rise in 2027.

What to Watch

Traders should monitor upcoming inflation data releases for signs of whether the "work to do" cited by Schmid is progressing. Key focus will be on whether the median projection of one additional hike this year holds firm or if the minority view of two more hikes gains traction. Additionally, watch for further commentary from Fed officials on the distinction between supply-driven and demand-driven inflation, as this will likely dictate the pace of future tightening. The market will also be sensitive to any shifts in the financial conditions index, given Warsh's assertion that conditions are not yet restrictive.