Federal Reserve officials delivered a series of hawkish-leaning remarks on Thursday, April 4th, with three regional bank presidents signaling a firm stance on inflation and the path for interest rates. They indicated that the central bank's core decision now is whether to remain patient and hold rates steady or to proactively raise them to combat persistently elevated inflation. One official explicitly stated that artificial intelligence is currently neither raising nor lowering inflation, having limited impact on near-term monetary policy decisions.
Kansas City Fed President Jeffrey Schmid stated directly that inflation is the number one risk facing the U.S. economy and, for the first time publicly, brought rate hikes into the policy discussion, omitting any mention of rate cuts.
San Francisco Fed President Mary Daly noted that monetary policy is currently in a good place, but economic uncertainty is too high, and providing forward guidance could mislead markets. She said the Fed is prepared to respond in "either direction." Market-based interest rate futures indicate investors now assign a high probability to a rate hike occurring within the year.
The Fed is scheduled to hold its next Federal Open Market Committee (FOMC) monetary policy meeting on June 16-17. This will be the first FOMC meeting chaired by the new Fed Chair, Kevin Warsh, and markets widely expect the policy rate to be left unchanged at that time.
Both Daly and Richmond Fed President Thomas Barkin, who also spoke on Thursday, are FOMC voting members next year and in 2027. Schmid is a voting member the following year, in 2028, making their comments highly significant for market observers.
Schmid's Stance: The Option to Hike is on the Table
Speaking at an economic forum in Oklahoma on Thursday, Schmid was direct, explicitly putting rate hikes on the table as an option.
He stated, "The big question right now is, do we continue to be patient? Our inflation data may have climbed to around 3.5%. Nobody likes that number. Is it transitory... or should we act? Should we say, okay, it's time to raise rates 25 or 50 basis points and see if we can get it down?"
Schmid's remarks reflect deepening concerns within the Fed about the persistence of inflation. Previously, officials widely believed that tariff- and oil-driven inflation would fade over time, but that view is now being challenged. The Fed's policy rate has been held in the 3.5% to 3.75% range since last December, while inflation has remained above the 2% target for over five consecutive years.
Schmid made no mention of potential rate cuts, a stark contrast to the stance of most officials earlier this year, who viewed cuts as the baseline scenario. He emphasized that the 2% inflation target facilitates clear communication and the Fed should not be ambiguous on this issue, stating it "should not let that message become muddled."
Daly's View: Prepared for Either Direction, Forward Guidance Could Mislead
Speaking at the Bloomberg Technology Summit in San Francisco on Thursday, Daly said monetary policy is currently in a good place, but the economic outlook is too uncertain to provide clear guidance on the rate path.
She said, "We are prepared to respond in either direction, depending on how the economy evolves. I think providing more forward guidance at this point could ultimately be misleading because we have to wait to see how things develop."
On inflation, Daly noted the Fed's preferred inflation gauge rose 3.8% year-over-year in April, the largest increase since 2023. She attributed the main drivers to tariffs and increases in energy and food prices since the outbreak of the war involving Iran—with rising oil prices spreading to goods like fertilizer and equipment. On the labor market, she mentioned the unemployment rate is currently 4.3%, with the job market showing signs of stabilization.
Daly indicated that as the economic situation evolves, a growing number of officials favor the Fed making clear that all options, including both rate cuts and hikes, are under consideration. Federal funds futures contracts show investors currently see a greater likelihood of a rate hike this year.
Daly on AI: Potential Deflationary Force in 5-10 Years, No Widespread Productivity Boost Yet
Addressing the widespread discussion on AI's economic impact, Daly stated that AI is currently not a factor pushing inflation higher, nor has it yet shown widespread productivity gains in macroeconomic data.
She said, "We haven't seen widespread productivity gains," and that returns on corporate investments in AI "are still to be realized," though business enthusiasm for the technology is "quite high."
Daly suggested that over a five- to ten-year window, AI has the potential to be a disinflationary force, but for monetary policy operating on a 12-month horizon, this AI effect is "not an urgent issue."
She also noted that currently, generative AI is primarily used to assist workers rather than replace them, and whether AI-driven productivity gains ultimately bring deflationary effects still depends on timing.
Daly expressed optimism about AI, predicting 2027 could be a "litmus test" for the industry.
Barkin's Assessment: Balanced Labor Market, No Signs of Tightness
Speaking after an event in Loudoun County, Virginia, on Thursday, Barkin said the U.S. labor market currently appears balanced, with no significant overall increase in hiring demand.
He said, "I don't see any change in the labor market," noting signs of increased demand in technical and healthcare fields but stating that, overall, the job market is not tight.
Barkin said that in conversations with employers, "I don't see the kind of concerns that I would call frothy or tight." This assessment aligns with Schmid's view that the overall economy is performing well and with Daly's mention of labor market stabilization, further supporting the Fed's current stance of holding steady and awaiting more data.
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