Fed's Schmid: Tighter monetary policy required to bring inflation back to 2% target

Federal Reserve Bank of Kansas City President Jeff Schmid emphasized on Wednesday that tighter monetary policy is necessary to bring inflation back to the 2% target. He warned that current inflation levels are "too high" and "worrisome," and the existing Fed policy stance is not sufficiently restrictive. Schmid pointed out that AI investment is driving inflation and urged the Fed not to overlook this factor.

Despite the overall economic resilience and a roughly balanced labor market, Schmid maintains that a stronger monetary policy is still required to return inflation to the target rate. He welcomes recent inflation figures but cautioned that it is too soon to confirm any easing. The US Dollar Index (DXY) was marginally lower at 0.02%, trading near 99.85 as of the time of writing.

Schmid's speech conveyed a more hawkish tone, with an FXS Speechtracker score of 7.3/10, slightly above the historical 7/10 average. The focus on AI-related investment as an inflation driver, the warning against premature easing, and the insistence on tighter monetary policy underscore a strong anti-inflation stance. The speech emphasized resilient growth, a balanced labor market, and the primacy of the Personal Consumption Expenditures (PCE) price gauge in assessing inflation.

These points reinforce a hawkish tone for the US Dollar. The Federal Open Market Committee (FOMC), meeting eight times a year, is responsible for shaping monetary policy in the US. Comprising twelve officials, including seven members of the Board of Governors, the New York Fed president, and four regional Reserve Bank presidents, the FOMC deliberates on economic conditions and makes monetary policy decisions.

In extreme cases, the Fed may use Quantitative Easing (QE) to bolster credit flows in a struggling financial system, typically weakening the US Dollar. Conversely, Quantitative Tightening (QT) strengthens the Dollar. Lallalit Srijandorn, a Parisian digital entrepreneur, noted that the British pound faced selling pressure against the US Dollar during the European session, while the US Dollar benefitted from hopes of a Middle East crisis resolution.

Bitcoin on-chain activity surged to its highest level of the year due to attacks on Coldcard hardware wallets. The Reserve Bank of India is scheduled to announce its bi-monthly monetary policy decision on Wednesday, amid ongoing uncertainty over the economic impact of the Middle East conflict.