Inflation reignites pressure on the doves to "defect"! Federal Reserve Vice Chairman Bowman releases rate hike signal, policy balance shifts towards tightening again.

On Friday, Federal Reserve officials continued to signal that the institution may need to raise rates in the future if the Middle East conflict leads to further inflation on top of already elevated levels. Even Fed Vice Chair of Supervision Michelle Bowman, who has a traditionally dovish stance, acknowledged the potential shift in monetary policy outlook. Speaking at a conference in Iceland on Friday, Bowman said that the conflict and the resulting energy shocks could change her view on the outlook for interest rates. She stated, "It seems premature to assess the scale and persistence of the economic impact of the Iran conflict right now." However, she added, "If supply disruptions persist into the second half of this year, we may start to see broader impacts on inflation." Bowman pointed out that in such a scenario, she would be more likely to "consider changing the way I think about risk balance," implying the possibility of a rate hike. Several of Bowman's Fed colleagues are concerned that the current energy shock may not be temporary and could have lasting effects, especially since inflation has been above the Fed's 2% target for many years. This view has led these officials to consider raising rates to bring price pressures back to normal. Minneapolis Fed President Neel Kashkari said, "I think it's premature to conclude that we need to raise rates immediately, but this makes me more concerned about the risk of inflation continuing to rise and inflation expectations becoming unanchored." Kashkari was one of three officials who dissented in last month's Fed policy decision. Financial markets are betting that the Fed's next move will be to raise its benchmark interest rate, possibly raising it from its current 3.50%-3.75% range before the end of the year. Prior to the outbreak of the US-backed war against Iran, Fed officials had been focused on cutting interest rates. This war has led to significant supply chain disruptions and soaring energy prices. Philadelphia Fed President Patrick Harker said on Friday in New Jersey that given the unacceptable high inflation pressures and economic uncertainty, monetary policy is currently "poised to act." Harker added that the Fed is prepared to "react." While she believes that US monetary policy is in the right place, she said, "I think market participants have priced in a scenario in which the federal funds rate remains unchanged for a long time and the possibility of further tightening, which is healthy." However, as San Francisco Fed President Mary Daly said in an interview, there is no urgent need to adjust rates. "Policy is in a good place," she added - a phrase frequently used by Fed policymakers to indicate their willingness to keep policy rates at current levels - and suggested that any future actions may depend on when the Iran war actually ends. Oil futures fell more than 2% on Friday and are on track to post the largest weekly decline since early April, following reports that the US and Iran have reached an agreement to extend the ceasefire by another 60 days. Concerns about inflation data Daly said that if oil futures prices "begin to drift higher due to prolonged conflict, that will change my view on the economic outlook in terms of inflation." She will also closely monitor whether the services sector begins to raise prices, which is a worrying sign that inflation may become more persistent. So far, she has seen little evidence of this outside of industries where fuel costs make up a large part of their business. Nevertheless, inflation risks are clearly rising for the Fed, at least in the short term. According to data released on Friday, the New York Fed's measure aimed at capturing underlying inflation dynamics jumped from 3.5% in March to 4% in April. Prices of goods and services excluding housing accelerated in April compared to the previous month. In addition, data released by the US government on Thursday showed that the personal consumption expenditures (PCE) price index rose 3.8% year-on-year in April, higher than the 3.5% in March. Kansas City Fed President Jeffrey Lacker and Bowman made speeches at the same conference, expressing concerns about inflation that is too hot and has been above the target for too long. Lacker added that the textbook strategy of ignoring energy shocks as not having a lasting impact is not viable in the current situation. Lacker also mentioned the possibility of using the Fed's balance sheet to help curb price outlook. "At this stage, our constraints are not great, and I think there are some conversations ... we need to start thinking about what tools we have that can really make it more restrictive," depending on how the oil shock evolves. "Perhaps we will again view the balance sheet as another ... tool to create some restrictions," Lacker said. His view on the balance sheet may differ from that of the new Fed Chair Kevin Warsh, who is skeptical about using the central bank's bond holdings to complement its rate policy.