Kansas City Fed president Jeff Schmid suggested Tuesday that the Fed should not look through the oil price shock from the Iran war.
“Recent developments in the Middle East are likely to add further pressure to inflation,” Schmid said in a speech in Oklahoma. “Under different circumstances, a case could be made to look through the rise in energy prices as a transitory increase in inflation. However, this oil shock comes at a time when inflation already has been too high for too long.”
Schmid, who had voiced concerns before the war about complacency on inflation expectations, reiterated that point Tuesday.
“With inflation already running hot, now is not the time to assume that the inflation from higher oil prices will be transitory,” Schmid said.
Before energy prices jumped, inflation based on the Fed’s preferred gauge, the Personal Consumption Expenditures index, was running at 3%. Inflation has run above the Fed’s 2% goal for five years. Schmid said progress toward that target appears to have stalled, with inflation running near 3% for several years now.
Read more: How oil price shocks ripple through your wallet, from gas to groceries
Schmid’s comments come after Fed Chair Jerome Powell said Monday that the central bank has traditionally looked through oil price shocks and not taken action, but Powell acknowledged that the increase in oil prices is hitting during a prolonged period of higher inflation.
Oil prices have surged more than 50% over the past month, raising expectations for higher inflation in the next few months.
Schmid said that, right now, it looks like the economy will be able to absorb a significant increase in oil prices. While large oil price increases have historically had a negative impact on economic growth dating back to the 1970s, Schmid said he expects the current spike in prices will hurt growth less now because the economy is more energy-efficient.
When it comes to the job market, Schmid said he’s not too concerned about smaller payroll growth because the working-age population hasn’t grown much, so the economy doesn’t need to add as many jobs to keep the unemployment rate stable.
“With many cross-currents in the economy, some of which are pushing employment and inflation in different directions … I’m more focused on the risks to inflation at this time,” he said. “In part, this reflects the conditions we faced heading into this shock.”
Jennifer Schonberger is a veteran financial journalist covering markets, the economy, and investing. At Yahoo Finance she covers the Federal Reserve, Congress, the White House, the Treasury, the SEC, the economy, cryptocurrencies, and the intersection of Washington policy with finance. Follow her on X @Jenniferisms and on Instagram.