"It's Not Just Oil Prices: Fed Faces Calls for Further Tightening as U.S. Inflation Spreads Broadly"

Warnings Within the Fed From Kashkari and Schmid

With a surge in energy prices originating from the Middle East causing renewed inflationary pressures, central banks in major economies, including the United States, have responded with a series of hawkish decisions. In particular, officials within the U.S. Federal Reserve (Fed) have issued repeated warnings that rising prices are not limited to the energy sector but are spreading broadly to goods and services across the economy.

Neel Kashkari, President of the Federal Reserve Bank of Minneapolis. Photo by Reuters Yonhap News

Appearing on Fox News on September 20 (local time), Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, stated, "Even excluding the highly volatile energy and food prices, inflation remains too high, considering where the economy is heading." He diagnosed that the upward pressure is increasing not only in the energy sector but throughout the broader U.S. economy.

He explained, "The inflation Americans feel each day is not simply an issue of oil prices; it is evident across the overall economy. For example, we are seeing it in the entire service sector as well," adding, "We have the means to bring it down." Jeff Schmid, President of the Federal Reserve Bank of Kansas City, made a similar assessment recently. On September 18, Schmid noted that inflation, even when excluding energy, “remains hot,” pointing out that price increases inconsistent with the Fed’s price stability mandate are appearing “across a wide array of goods and services.”

These statements from committee members came just days after the Fed’s decision to raise rates. During its regular Federal Open Market Committee (FOMC) meeting on September 16, the Fed increased the target range for the federal funds rate by 25 basis points (1bp = 0.01 percentage points) to 3.75–4.00% per annum. This hike marks the Fed's first interest rate increase since July 2023. All 12 committee members voted in favor of the increase. Chairman Kevin Warsh explained that the latest rate hike “removed some measure of accommodative policy” and emphasized the Fed’s determination to return the inflation rate to its 2% target.

This tightening trend was already evident in Japan and the eurozone. The Bank of Japan (BOJ) previously raised its benchmark interest rate to 1.25% per annum, the highest level in 31 years, while the European Central Bank (ECB) also increased rates to 2.50% per annum, marking its second hike of the year.

Markets currently view the likelihood of additional U.S. rate hikes as high. According to Bloomberg, the two-year U.S. Treasury yield, which is sensitive to Fed policy, recently rose to 4.75%, its highest level in several years. The current futures market is reflecting the possibility of roughly 80 basis points of additional tightening over the next year, according to the outlet. The Wall Street Journal has also noted that it is rare for the Fed to limit itself to just one rate adjustment once it has set a new direction.

Amid these developments, market attention is turning to the September Purchasing Managers’ Index (PMI) releases for Japan and the eurozone, set to be announced on September 23. Foreign media report that key issues include whether economic expansion can withstand the twin pressures of high oil prices and elevated interest rates, as well as the extent to which surging oil prices will be passed on from corporate costs to consumer prices.

This content was produced with the assistance of AI translation services.