Jeffrey Schmid, President of the Federal Reserve Bank of Kansas City, said inflation is the more salient risk for the Federal Reserve. Speaking to the Rotary Club of Oklahoma City on Tuesday, he said there is a real risk inflation could get stuck closer to 3%.
He said the Fed cannot be complacent about inflation expectations. He added the Fed must follow through with policy actions to support stable medium- and long-term inflation expectations.
Inflation Seen As The Key Risk
Schmid cited solid demand momentum, productivity gains, and relatively low unemployment as tailwinds for the US economy. He also said US economic resilience should not be underestimated.
He said the Fed cannot assume inflation linked to higher oil prices will be transitory. He expects a modest drag on economic growth from sustained higher oil prices.
He said higher energy prices will raise inflation, including core inflation.
The primary risk is now inflation remaining stuck near 3%, which means we cannot be complacent about where prices are headed. The most recent March CPI reading of 3.4% year-over-year reinforces this concern, showing price pressures are not easing as quickly as hoped. This suggests the central bank must follow through with policy actions that validate stable inflation expectations.
Markets Reprice The Rate Cut Outlook
We should reconsider bets on imminent rate cuts, as the path forward looks higher for longer. We remember how markets in late 2025 had confidently priced in multiple cuts for this year, but that view is being rapidly unwound. Options on SOFR futures are seeing increased demand for positions that pay off if the Fed holds rates steady through the summer months.
The resilience of the US economy should not be underestimated, with solid consumer demand and low unemployment providing significant tailwinds. The latest jobs report showed another strong gain of 250,000 positions, keeping the unemployment rate at a low 3.7%. This economic strength gives the Fed cover to focus exclusively on inflation without fearing an immediate downturn.
We cannot assume that inflation from higher oil prices will be a temporary issue that simply passes through the system. With WTI crude now trading above $92 per barrel, up 15% in the last six weeks, these higher energy prices will likely bleed into core inflation numbers. This will create a modest drag on economic growth but a more direct impact on headline inflation.
This policy uncertainty creates a favorable environment for higher market volatility in the weeks ahead. The CBOE Volatility Index (VIX) has already ticked up toward 16, reflecting growing nervousness about the Fed’s next move. A hawkish stance also implies a stronger US dollar, making calls on the DXY index an increasingly popular position.
