By Matt Grossman
The Fed should be ready to act to make sure that fallout from the war in Iran doesn't keep inflation stuck above the central bank's target, Kansas City Fed President Jeff Schmid said.
The economy's fundamentals remain solid and inflation--at nearly 3%--was too far above the Fed's 2% target even before the war began at the end of February, Schmid said in a speech to the Oklahoma City Rotary Club on Tuesday. He said the Fed should be prepared to address elevated inflation proactively so it doesn't get stuck near 3% in the long run.
So far, surveys and financial-market bets have shown little concern from consumers and investors that high inflation will become a long-term problem. But the Fed can't be complacent, Schmid said.
"The observed stability in inflation expectations reflects the earned credibility of the Fed and the belief that monetary policy will keep inflation in check," Schmid said, according to a published text of his remarks. "It is now our job to follow through with policy actions that validate those expectations."
Schmid's reference to inflation-fighting policy actions adds him to a short list of Fed officials who have hinted that an interest-rate increase could be called for if inflation remains stubborn or rises. In an interview last week, Chicago Fed President Austan Goolsbee said an interest-rate boost could be necessary in the future if inflation remains problematic.
For now, most Fed officials have signaled that they want to hold rates steady as they wait to see how the war affects the economy. Some policymakers have noted that while the shock to oil markets raises the risk of higher inflation, it also threatens to stretch consumers' and businesses' budgets, which could weigh on the economy, not stoke it.
Schmid acknowledged that higher oil prices could hurt economic growth, but said that the inflation risks of the war are his primary concern. He said rising oil prices may hurt the economy less than in the past, because the U.S. now produces more energy and uses it more efficiently. The economy's momentum could help insulate it from a downturn, Schmid argued.
"The resiliency of the U.S. economy should not be underestimated," he said.
At the start of the year, Wall Street expected the Fed to continue a rate-cutting cycle that began in 2024, but the Iran war has shifted those bets. Futures markets indicate traders are now lined up behind wagers that the Fed's rate target will end the year flat, although these trades have been volatile in recent weeks.
So far this year, the Fed has held rates steady at 3.5% to 3.75%. On Monday, Fed Chair Jerome Powell signaled he isn't in a hurry to adjust policy, given uncertainty about how the war will affect the economy.
Write to Matt Grossman at matt.grossman@wsj.com
(END) Dow Jones Newswires
03-31-26 1328ET
