The Federal Reserve's monetary policy is once again hawking! After the previous three votes against the FOMC rate hike, some local federal banks sounded the “policy is not tight enough” alarm

The Zhitong Finance App learned that Kansas City Federal Reserve Bank Chairman Jeff Schmid (Jeff Schmid) said on Tuesday that to achieve the Federal Reserve's price stability target, interest rates may need to be further raised, and once again reiterated that inflation remains its primary concern. Speaking in preparation for an event in Omaha on Tuesday local time, Schmid said, “Given that demand and investment in AI computing power infrastructure are still strong, I don't think the current monetary policy stance is austerity or restrictive. Therefore, in my opinion, to reduce inflation to the Fed's target level of 2%, more austerity policies are needed.”

It can be said that there are serious differences among senior officials within the Federal Reserve about how much action is needed to curb inflation. Inflation has been higher than the central bank's target for more than five years in a row, and price pressure has recently risen significantly due to the war in Iran and continued large-scale infrastructure investment in the field of artificial intelligence.

Federal Reserve FOMC policymakers voted last week to keep the benchmark interest rate unchanged. However, three members of the Federal Reserve voting committee voted against it, arguing that interest rate hikes by 25 basis points rather than stand still. The reason is that they are concerned that if interest rate hikes are postponed now, more aggressive action may be needed in the future.

Schmid did not have the right to vote on the Federal Reserve's FOMC monetary policy this year, but he warned that it should not be taken for granted that inflationary pressure caused by supply shocks will soon subside. He said that when demand is just as strong, such events are more likely to cause a sharp rise in inflation.

In an interview, Schmid said, “For any round of sudden rise in inflation, I don't want to assume that it is just a temporary inflationary effect. How long the surge in inflation will last will ultimately largely depend on how the Fed's policymakers respond together, or how the market expects the Fed to respond.”

Earlier on Tuesday, another Federal Reserve Chairman of the Federal Reserve, Philadelphia Federal Reserve Chairman Anna Paulson (Anna Paulson), said she would remain “open” to future interest rate paths based on how inflation develops.

The communication issues pointed out by Nick Timiraos, a journalist with the title of the “New Federal Reserve News Agency,” have substantial market implications: the FOMC statement only stated “steady growth, strong investment, high inflation” and “keeping interest rates unchanged,” but did not fully explain why these conditions were not sufficient to trigger interest rate hikes; instead, the three FOMC objection statements more clearly showed the Fed's policy response function.

As far as financial asset pricing trends are concerned, the September interest rate hike has become a real rather than a tail risk, but it has not yet formed a stable majority: if core inflation remains high and the impact on oil prices spreads to service prices and inflation expectations, Paulson and other centralists may switch to support interest rate hikes by 25 basis points; if core inflation falls for several months, energy prices cool down, and demand decelerates, the Federal Reserve may continue to wait.

There is a resurgence of internal hawks within the Federal Reserve, delaying interest rate hikes or in exchange for more aggressive action

Inflation is still significantly above 2%, the labor market is close to full employment, and consumption and AI capital expenditure remains resilient, but the current 3.50% to 3.75% policy interest rate is clearly divided as to whether the current 3.50% to 3.75% policy interest rate has formed sufficient restraint.

The Federal Reserve's FOMC meeting at the end of July had 9 votes in favor and 3 against keeping interest rates unchanged. Hamak, Kashkari, and Logan all advocated an immediate 25 basis point increase in interest rates; this meant that the focus of the debate was no longer “whether we need to continue fighting inflation,” but whether we should wait for inflation to cool down on its own, or whether stronger demand constraints must be re-established ahead of time.

Schmid and Hamak are on the clearest hawkish side: they both believe that the current policy is actually not tight enough. Schmid stressed that in an environment where demand and investment are still strong, AI infrastructure construction raises input prices, and energy shocks in the Middle East occur repeatedly, supply shocks cannot be mechanically viewed as “temporary inflation”; whether the supply shock is transformed into continuous inflation depends on whether aggregate demand is strong and whether the market believes that the Fed will act. Hamak's logic is more direct — inflation has been above target for more than five consecutive years, and the labor market is sufficient to withstand higher interest rates, so remaining on hold may solidify inflation's stickiness. Although Logan and Kashkari also voted for interest rate hikes, the policy framework is not exactly the same.

Logan focused on the lack of realistic constraints: if monetary policy does not put downward pressure on demand and prices, inflation can only fall back on unexpected shocks, and the Federal Reserve cannot base achieving the 2% target on oil prices or accidental improvements in the supply chain. Kashkari, on the other hand, places more emphasis on risk management and path dependency: it would rather continue and tighten slightly now, rather than wait for inflation to become more entrenched and be forced to adopt a larger rate hike with a stronger impact on the economy. This shows that the three negative votes are not a concerted hawkish act, but rather that the same conclusion is drawn from the three different paths of “potentially excessive inflation,” “insufficient policy restrictions,” and “preventing future loss of control.”

Paulson and New York Federal Reserve Chairman Williams, who has permanent FOMC voting rights during his term, represent a data-dependent and cautious wait-and-see position closer to the majority.

Paulson expects potential inflation to remain 2.4% to 2.8% after excluding temporary factors such as energy and tariffs, but she also sees high mortgage interest rates, weak demand from some households, and a slowdown in wage growth, so she preserves two scenarios: existing policies may be moderately restrictive, or may not be enough to reduce inflation; only if core inflation improves or continues to be stubborn for several months can confirm the next direction.

Williams is relatively more confident. The benchmark judgment is that underlying inflation will continue to cool down in the second half of the year and interest rates are currently “in a good position,” but he also made it clear that once the economy deviates from the 2% trajectory, action should be taken. The position of the two is not against interest rate hikes, but rather that they require more sufficient evidence than a single month's data.