Schmid warns inflation at double the Fed's 2% target ahead of July meeting

Kansas City Fed President Jeff Schmid said inflation is still running at about double the central bank's 2% target, warning that price pressures have broadened beyond energy into food and services.

"Inflation is still running well above our 2% objective, and we need to see sustained progress before we can be confident it's returning to target," Schmid said at an economics forum in Nebraska, according to Reuters.

The May core PCE index — the Fed's preferred inflation gauge — rose 3.4% from a year earlier, well above the central bank's goal. The consumer price index climbed 4.2% year-over-year in May, with food prices accelerating faster than their pre-pandemic average. Schmid cautioned against viewing the better-than-expected June CPI print as the start of a sustained downtrend, noting that lower energy prices may have temporarily flattered the data.

The comments come as the Federal Reserve prepares for its July 28-29 meeting, with the federal funds rate currently at 3.50% to 3.75% — unchanged for four consecutive meetings. Futures markets assign a 74.9% probability of a hold this month and a 25.1% chance of a quarter-point hike, according to CME FedWatch data. New Chair Kevin Warsh has taken a hawkish stance since taking office in May, removing traditional forward guidance in favor of pure data dependence.

The broadening of inflationary pressures Schmid described poses a particular challenge for policymakers. While energy prices have retreated from their peaks after the reopening of the Strait of Hormuz in late June, food costs continue to climb faster than historical averages, and services inflation has proven stubbornly persistent. The shelter component of CPI, which accounts for roughly one-third of the index, has continued to rise despite elevated mortgage rates, reflecting lagged measurement effects and supply-demand imbalances in the rental market.

The last time a Fed official used language this emphatic about inflation persistence was in early 2024, when then-Chair Jerome Powell warned that progress had stalled. The S&P 500 fell 1.2% that day while two-year Treasury yields climbed 10 basis points as markets repriced the rate outlook.

Schmid's remarks also highlight a shift in how the Fed communicates under Warsh. The new chair has removed forward guidance from post-meeting statements, arguing that previewing future policy commits the central bank to positions that may become inappropriate as conditions evolve. Instead, Warsh has established five task forces to review Fed operations, including communications strategy and the inflation framework.

Rate Differentials Widen as Hawkish Rhetoric Intensifies

The hawkish tone from regional Fed presidents has already begun to reshape market pricing. Bank of America now forecasts three quarter-point rate hikes in September, October and December, while Deutsche Bank expects two additional increases before year-end. The yield curve has flattened as short-term rates rise relative to longer maturities, showing bond market concerns about growth prospects even as the Fed maintains its inflation-fighting posture.

For investors, the implications cut across asset classes. Financial stocks stand to benefit from wider net interest margins in a higher-rate environment, while rate-sensitive sectors such as technology, real estate and utilities face renewed headwinds. The U.S. dollar has strengthened against most major currencies as interest rate differentials widen in favor of dollar-denominated assets, providing a tailwind for import prices that could help dampen inflation over time.

The next key data point will be the June personal consumption expenditures report, due July 31, which will provide the Fed's preferred inflation reading ahead of the September 17-18 meeting. If core PCE remains above 3%, the case for a September hike will strengthen considerably.

This article is for informational purposes only and does not constitute investment advice.