Fed's Schmid: Tighter monetary policy required to bring inflation back to 2% target
Federal Reserve Bank of Kansas City President Jeff Schmid said on Wednesday that tighter monetary policy is needed to get inflation back to the 2% target. Schmid added that inflation is 'too high' and 'worrisome' and the current stance of Fed policy is not restrictive.
Key quotes
Current Fed policy stance is not tight.
AI investment is fueling inflation and Fed shouldn't overlook it.
Economy doing well overall, growth remains resilient.
Labor market seems roughly balanced.
PCE price gauge is best method to assess inflation.
Welcomes recent inflation figures, too soon to confirm easing.
Central bank should not overlook inflation even if caused by supply shock.
Recent easing of energy costs could be temporary.
Tighter monetary policy required to bring inflation back to 2% target.
Inflation remains 'too high' and 'worrisome'.
Market reaction
As of writing, the US Dollar Index (DXY) trades 0.02% lower to near 99.85.
Schmid flags AI-driven inflation risks, backing case for tighter Fed policy
Fed’s Schmid delivered a marginally more hawkish message, with a 7.3/10 FXS Speechtracker score edging above the 7/10 historical average and emphasizing that current policy is “not tight” enough. The focus on AI-related investment as an inflation driver, the warning that recent disinflation is too tentative to confirm an easing trend, and the insistence that tighter monetary policy is still required to return inflation to 2% underscore a firm anti-inflation bias. By highlighting resilient growth, a roughly balanced labor market, and the primacy of the PCE gauge while calling inflation “too high” and “worrisome,” the speech leans clearly hawkish for the Dollar.
The FXS Fed Sentiment Index slipped by 0.96 points to 145.80, signaling a modest pullback in perceived hawkishness relative to the prior reading. However, with the index still deep in hawkish territory well above the 100 neutral line, the overall policy tone remains supportive of a stronger Dollar despite the slight softening in the latest FXS Speechtracker score.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
