Two Federal Reserve officials offered mixed views on whether the oil price shock could be considered transitory, with Michelle Bowman in favor of looking through such developments and Jeffrey Schmid saying inflation is too hot to ignore.
While the US economy has been resilient, inflation -- as measured by personal consumption expenditures -- has increased mainly due to higher energy prices amid the US and Israel war with Iran, said Bowman, who is vice chair for supervision at the Fed.
"Economic research suggests that, in response to temporary adverse energy supply shocks, policy should not be overly aggressive at stabilizing total inflation to keep employment close to our maximum-employment goal," Bowman said in remarks prepared for delivery in Iceland. "Reacting to temporarily elevated energy price inflation would add unwarranted policy restraint, weighing unnecessarily on economic activity and labor market conditions."
Meanwhile, Kansas City Fed President Schmid said that inflation is "too hot" and that higher oil prices are contributing to elevated consumer inflation.
"With inflation running above the Fed's 2% definition of price stability for over five years, now is not the time to let down our guard," Schmid said in prepared remarks, also for delivery in Iceland. "We must continue to signal our commitment to price stability and our willingness to take the actions necessary to achieve our mandate."
On Thursday, official data showed the US PCE price index jumped 3.8% year over year in April, the largest print since May 2023. PCE inflation, excluding food and energy, accelerated to 3.3% last month from 3.2% in March.
Excluding one-off factors, core PCE inflation would have continued to hover just above 2%, reflecting no pressures from the labor market and weakness in market rents, Bowman said Friday.
"It still seems early to assess the size and persistence of the economic effects from the Iran conflict," Bowman said. "I am optimistic that, once the conflict is resolved, supply disruptions will ease, leaving a temporary imprint in PCE inflation and minimal impacts on domestic economic activity."
The Iran war that started at the end of February has disrupted shipments through the Strait of Hormuz. The narrow waterway is the world's most important chokepoint for crude flows.
Annual consumer inflation accelerated in April to the fastest pace in almost three years, Bureau of Labor Statistics data showed earlier this month.
Schmid said even after excluding energy, CPI increased 2.8% over the past year.
"I place little stock in assuming that the most recent run-up in prices is transitory within an acceptable time horizon," Schmid said Friday. "As such, my focus remains on inflation in setting the correct course for policy."
Markets largely expect the central bank's Federal Open Market Committee to leave interest rates unchanged next month, which would mark its fourth straight pause, according to the CME FedWatch tool.
US President Donald Trump said Friday he was holding a meeting in the White House Situation Room to make a "final determination" after outlining certain demands that Iran must agree in order to bring the war to an end.
