Fed's Schmid: Inflation Exceeds Limits for Five Years, It's Not a Time to Let Go

Schmidt said in a speech at a conference in Reykjavik, Iceland, "Inflation has exceeded the Federal Reserve's 2% target for more than five years in a row, and now is not the time to let up." He emphasized that the Fed must continue to send signals of its commitment to price stability and show a willingness to take necessary actions to fulfill its mission.

These remarks have a clear data backdrop. The Fed's preferred inflation indicator, PCE, rose by 3.8% in the year through April, reaching its highest level since 2023. After the resumption of the US-Iran war, rising prices for fuel and other commodities have accelerated inflationary pressures, while consumer confidence has declined in tandem. Schmidt had already characterized inflation as the "most pressing" risk facing the economy earlier this month, and his wording is consistent with this.

On the job market front, Schmidt assessed that the current labor market has become balanced. He noted that the slowdown in immigration and the acceleration of retirement have collectively compressed the labor supply, "fewer workers requiring fewer jobs," which also explains the phenomenon of slower job growth and relatively stable unemployment rates.

Within the Federal Reserve, more and more officials are beginning to publicly express that the probabilities of the next rate hike and cut should be given equal weight. Schmidt's speech further reinforces this direction. For the market, the uncertainty surrounding the Federal Reserve's policy path is increasing, and as PCE data continues to rise, it is systematically compressing the rationale for keeping interest rates unchanged.