The President of the Federal Reserve Bank of Kansas City, Jeffrey Schmid, has raised concerns that the ongoing energy shock may not be as short-lived as expected, considering the existing high inflation rates.
During a conference in Iceland on Friday, Schmid expressed, “My primary concern is inflation, which is too hot and has been above target for too long.” He further emphasized his skepticism about the recent price surge being “transitory” within an acceptable time frame, reported Reuters.
“Now is not the time to let down our guard, given how long inflation has been above the central bank’s 2% target,” Schmid added.
The Kansas Fed President noted that despite the U.S.’s reduced susceptibility to energy shocks compared to the past, higher gasoline prices still affect consumer spending. He also highlighted that U.S. energy firms are leaning towards greater capital discipline and are reluctant to boost oil production due to price uncertainties.
At the time of writing, Brent crude oil was trading 1.64% lower at $84.40 per barrel, while the WTI crude futures were trading 1.53% lower at $87.54 per barrel.
Despite the concerns, Schmid said most economic indicators still point to steady growth and a stable labor market.
Inflation And Growth Risks Rise
The U.S. economy has been grappling with higher inflation and slower growth due to the disruption in the Strait of Hormuz. The inflation rate has hit 3.8% year-over-year, the highest since 2023, and the GDP growth has been revised down to a 1.6% annualized pace.
JPMorgan economists say the U.S. economy’s “Goldilocks scenario” of cooling inflation and steady growth is no longer realistic due to the Iran war and rising inflation pressures. The bank warned that higher energy costs could push core inflation above 3%, increase transportation and production expenses, and create a negative shock to economic growth.
Meanwhile, macro strategist Alfonso Peccatiello warned that the Federal Reserve could face a difficult policy situation as U.S. inflation quietly rises while political pressure limits its ability to raise interest rates further.
Despite this, money markets still see nearly a 70% chance of a 25-basis-point rate hike by year-end, according to CME FedWatch data.
On the other hand, earlier this month, Treasury Secretary Scott Bessent said that he expects a “substantial” disinflationary trend after “one or two” more hot inflation prints.
Bessent expressed optimism about new Fed Chair Kevin Warsh‘s open-minded approach to the current economic situation and believes that he is in “a very good position.”
Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors
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