A Federal Open Market Committee (FOMC) voting member for the year after next stated that the biggest question now is whether the Fed should remain patient, considering whether elevated inflation is temporary and whether rate hikes are needed to curb inflation. Mary Daly, a voting member next year, said the Fed is prepared to adjust rates in either direction and that providing more forward guidance at this point could be misleading; she added that AI could lower inflation within five to ten years, though significant productivity gains have not yet materialized, making 2027 a 'litmus test' year for the AI industry. Another FOMC voter for next year, Tom Barkin, noted that the labor market is balanced and there are no signs of tightness in labor demand.
On Thursday, June 4 (Eastern Time), Federal Reserve officials made a series of remarks, with three regional Fed presidents delivering relatively hawkish signals on inflation and the interest rate outlook. They stated that the Fed currently faces a key choice: whether to remain patient and hold rates steady or proactively raise rates to curb persistently elevated inflation. One official explicitly noted that AI is currently neither pushing inflation higher nor lower and has limited impact on near-term monetary policy decisions.
Jeffrey Schmid, President of the Kansas City Fed, bluntly stated that inflation is the top risk facing the U.S. economy and, for the first time publicly, included a rate hike in policy discussions, no longer mentioning rate cuts.
Mary Daly, President of the San Francisco Fed, indicated that monetary policy is currently in an appropriate position, but excessive economic uncertainty makes forward guidance potentially misleading to markets. The Fed stands ready to respond 'in either direction.' Market-based interest rate futures show investors now assign a significantly elevated probability to a rate hike this year.
The Federal Reserve is scheduled to hold its next Federal Open Market Committee (FOMC) meeting on monetary policy on June 16–17. This will be the first FOMC meeting chaired by new Fed Chair Kevin Warsh, and markets widely expect the policy rate to remain unchanged at that meeting.
Both Daly and Thomas Barkin, President of the Richmond Fed—who also spoke on Thursday—hold voting rights on the FOMC in 2026 and 2027, while Schmid will be a voting member in 2028. Consequently, their remarks have drawn significant market attention.
Schmid: Rate Hike Option Is Now on the Table—We Must Consider Whether High Inflation Is Temporary
Speaking directly at an economic forum in Oklahoma on Thursday, Schmid explicitly framed a rate hike as a viable option.
He stated: “The biggest question right now is whether we should continue to be patient. Our inflation data may already have risen to around 3.5%—nobody likes that number. Is this temporary… or should we act? Should we say, ‘Alright, it’s time to raise rates by 25 or 50 basis points to see if we can bring it down’?”
Schmid’s comments reflect deepening concerns within the Federal Reserve about the persistence of inflation. Previously, Fed officials generally believed that inflation driven by tariffs and oil prices would naturally subside over time, but that view is now being challenged. According to Reuters, the Fed’s policy rate has remained in the 3.5%–3.75% range since last December, while inflation has remained above the 2% target for more than five consecutive years.
Schmid made no mention whatsoever of the possibility of rate cuts—a stark contrast to the stance held by most officials earlier this year, who viewed rate cuts as the baseline scenario. He emphasized that the 2% inflation target facilitates clear communication and that the Fed should not adopt an ambiguous stance on this issue: “We should not allow this message to become unclear.”
Daly: Open to Moves in Either Direction; Forward Guidance Could Be Misleading
Speaking at the Bloomberg Technology Conference in San Francisco on Thursday, Daly said monetary policy is currently in a good place, but uncertainty surrounding the economic outlook is too high to provide clear guidance on the path of interest rates.
She said, “We are prepared to respond in either direction on rates, regardless of how the economy evolves. I believe providing more forward guidance at this point could ultimately be misleading, as we need to wait and see how economic conditions unfold.”
On inflation, Daly noted that the Federal Reserve’s preferred inflation gauge rose 3.8% year-over-year in April—the largest increase since 2023. She attributed the current inflationary pressures primarily to tariffs and rising energy and food prices following the outbreak of the Iran conflict, with persistently higher oil prices now spilling over into prices for goods such as fertilizers and equipment. On the labor market, she mentioned that the unemployment rate currently stands at 4.3%, indicating signs of stabilization.
Daly stated that as economic conditions evolve, an increasing number of officials favor the Fed clearly signaling that all options—including both rate cuts and hikes—are under consideration. According to federal funds futures contracts, investors currently see a higher likelihood of a rate hike this year.
Daly: AI Could Lower Inflation Within Five to Ten Years; No Broad Productivity Gains Yet Observed
Addressing the widespread market discussion on AI’s economic impact, Daly said AI is currently neither a driver of inflation nor evident in macroeconomic data as a source of broad-based productivity gains.
“We haven’t yet seen large-scale productivity improvements,” she said, adding that the return on corporate AI investments “remains to be realized,” though business enthusiasm for the technology is “quite high.”
According to reports, Daly believes AI could become a disinflationary force within a five- to ten-year horizon, but for monetary policy—operating on a 12-month cycle—this potential AI effect is “not an immediate concern.”
She also noted that generative AI is currently being used mainly to assist workers rather than replace them, and whether AI-driven productivity gains will ultimately lead to deflationary effects still hinges critically on timing.
Daly said she is optimistic about AI and expects 2027 to be a 'litmus test' year for the AI industry.
Barkin: Labor market is balanced, no signs of tightness in hiring
Speaking after delivering a speech in Loudoun County, Virginia on Thursday, Barkin stated that the U.S. labor market currently appears balanced, with no significant increase in overall hiring demand.
He said, 'I don’t see any changes in the labor market.' While there are signs of rising demand in skilled trades and healthcare sectors, the labor market as a whole is not tight.
Barkin noted that in conversations with employers, 'I don’t see what I would call bubble-like or tight-market concerns.' This assessment aligns with Schmid’s view that the economy is performing well overall and is consistent with Daly’s observation of a stabilizing labor market, further supporting the Federal Reserve’s current stance of holding off on policy action while awaiting more data.
Editor/Liam