Federal Reserve officials are beginning to signal that a return to rate hikes—while still a remote scenario—is not off the table as inflation risks persist, particularly amid rising oil prices and ongoing geopolitical tensions.
Comments delivered at the Reykjavík Economic Conference and the 2026 Bank of Japan-Institute for Monetary and Economic Studies Conference reflect a more cautious tone among policymakers, who are increasingly focused on how sustained energy price increases could complicate efforts to bring inflation back to target.
Fed Vice Chair for Supervision Michelle Bowman, often viewed as one of the more dovish members of the Federal Open Market Committee, suggested that a prolonged conflict with Iran could shift how she evaluates policy risks.
"In particular, the more persistent higher oil prices are — or if we start to see broader effects of higher energy prices on PCE inflation — the more likely I will consider shifting my approach to thinking about the balance of risks," she said at the Reykjavík meeting.
That evolving risk assessment is shared by other Fed officials who are closely watching how energy costs are feeding into broader inflation measures. Kansas City Fed President Jeffrey Schmid pointed to recent data showing inflation remains above the central bank's target.
"While the effect of oil prices on economic activity may be unclear, what is clear is that higher prices are contributing to higher inflation," Schmid said at the conference in Iceland. He noted that year-over-year CPI inflation reached 3.8 percent in April, with gasoline prices "a big part of this," while core inflation, excluding energy, was 2.8 percent year over year.
Schmid emphasized that he does not expect inflation pressures to fade quickly. "My primary concern is inflation," he said, adding that it "is too hot and has been above target for too long." He also said, "I place little stock in assuming that the most recent run-up in prices is transitory within an acceptable time horizon," and noted that "as such, my focus remains on inflation in setting the correct course for policy."
He further cautioned that it was not time "to let down our guard," underscoring that inflation has remained above the Fed's 2 percent target for an extended period.
At the Bank of Japan conference, Fed Vice Chair Philip Jefferson highlighted the broader global implications of higher energy costs. "The rise in crude oil prices poses downside risks to growth and upside risks to inflation around the globe," he said.
Jefferson noted that while the United States is somewhat insulated as a net energy exporter, it remains vulnerable to global supply disruptions. "Gasoline prices in the U.S. increased significantly since the onset of the conflict and remain notably elevated," he said, adding, "I am watching whether higher energy prices will start to weigh on consumer spending."
The shift in tone represents a subtle but notable evolution from the Fed's position following its April meeting. At that time, Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari and Dallas Fed President Lorie Logan supported holding rates steady but opposed language suggesting a shift toward easing policy.
In the weeks since, officials' public remarks suggest a growing reluctance to pivot toward rate cuts, with inflation risks—particularly those tied to energy—remaining front and center, leaving open the possibility —however unlikely —that further tightening could be considered if price pressures intensify.
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