Sunday Fed talk: Schmid says inflation would still be near 3% without energy, Fed has work to do

Schmid’s remarks add weight to hike pricing that is already in place for December. His attack on the “supply shock” argument also makes it harder to make the dovish case for looking through energy-driven inflation. That supports the US dollar and front-end Treasury yields, and it keeps the small tail risk of a half-point move alive. A Fed seen as committed to further tightening has been a headwind for gold throughout this cycle. His view that AI-driven demand will respond to higher rates is also a reminder to rate-sensitive tech valuations that the sector is not exempt from policy.--- Schmid stopped short of calling for a hike, but he took apart both main arguments that inflation is beyond the Fed’s control, leaving little room for the doves ahead of December.Summary:Kansas City Fed President Jeff Schmid said inflation is running too hot, uncomfortably above the 2% target and moving in the wrong direction.He said inflation would still be around 3% with energy prices excluded.He rejected views that supply shocks, or AI-driven demand that is resistant to rates, put inflation beyond the Fed’s reach.He said the labour market is broadly in balance, with little evidence that wages are adding to inflation.He did not specifically call for more hikes. Markets are fully priced for a quarter-point rise in December.Schmid is not a voting member of the FOMC this year. Kansas City Federal Reserve President Jeff Schmid said on Sunday that US inflation is running too hot and that the Fed still has work to do to bring it under control. He pushed back against arguments that current price pressures are beyond the central bank’s reach.Speaking to a credit union conference in Hawaii, Schmid said inflation is uncomfortably above the Fed’s 2% target and moving in the wrong direction, Reuters reported. He noted that inflation would still be running at about 3% even with energy prices stripped out, which suggests the problem is broader than the oil shock. He did not specifically call for further rate increases.The core of his remarks was a rebuttal of two narratives that have gained ground recently. The first holds that high inflation reflects a run of supply shocks the Fed cannot fix. Schmid’s view is that inflation always comes from an imbalance between supply and demand, and that supply disruptions push prices higher precisely because demand is strong. Because the Fed influences demand, he argued, it always has both the tools and the responsibility to respond.The second narrative holds that the current sources of demand, such as the artificial intelligence buildout, are resistant to higher interest rates. Schmid disagreed. He also rejected the idea that meeting the inflation goal requires prices in any single category, such as AI-related technology goods, to respond. In his view, it is not the Fed’s role to target the price of any one good or service.Schmid described the labour market as broadly in balance, with little sign that jobs or wages are adding to inflation. He also echoed Chair Kevin Warsh, saying the work of containing inflation has only become harder since Warsh’s Jackson Hole speech.Schmid is not a voting member of the policy-setting committee this year. The Fed raised rates by a quarter point in September to a 3.75% to 4.00% range, then held at its October meeting. Inflation data has since come in hotter than expected, and other officials, including Governor Christopher Waller, have also spoken. Futures markets are now fully priced for a quarter-point increase in December, with a small chance of a half-point move. Schmid’s comments add to the chorus arguing that the hiking cycle is not yet finished. This article was written by Eamonn Sheridan at investinglive.com.