Fed Hawkish Officials Take Turns Hawkish: Schmidt Says Rates Still Not High Enough, Paulson Warns Inflation Risk Not Yet Averted

August 5th, internal concerns about inflation risk at the Federal Reserve escalated. Kansas City Fed President Jeffrey Schmidt and Philadelphia Fed President Anna Paulson successively released hawkish signals, implying that if inflation remains high, further monetary policy tightening may be needed in the future.

Schmidt stated that the current monetary policy stance is "not restrictive." Against the backdrop of strong demand and expanding corporate investment, the Fed may need to adopt a more contractionary policy to bring inflation back down to the 2% target.

Schmidt warned that the market should not simply assume that the price pressure from supply shocks will quickly dissipate. He expressed concern about the assumption that "soaring inflation is just a temporary phenomenon," emphasizing that the duration of inflation will depend on the Fed's policy response and the market's expectations for future policy.

Philadelphia Fed President Paulson similarly stated that the future interest rate path will depend on the trend of core inflation, and she said she maintains an "open-minded stance" on the direction of policy adjustments.

Paulson pointed out that if core inflation continues to improve and long-term inflation expectations remain stable, the current level of interest rates may already be sufficient to restrain economic growth. However, if core inflation remains high, it would signal the need for a more contractionary policy.

She mentioned that recent U.S. core inflation has only moderately declined and is currently in the range of about 2.4% to 2.8%. "Long-term elevated core inflation" remains a key factor in policy assessment.

Last week, the Federal Reserve maintained interest rates for the fifth consecutive meeting, but three policymakers voted to support a 25-basis-point hike, believing that preemptive action would help avoid future more aggressive tightening. Recent data shows that U.S. June core PCE inflation was below expectations, with strong consumer spending. Paulson said that the improvement in inflation data is "a step in the right direction," but it is still only modest progress.

In addition, officials are also monitoring potential inflation pressures from the Middle East conflict and AI infrastructure investments. Paulson stated that while AI infrastructure construction is driving economic growth, it could also push prices higher in some areas.