Federal Reserve Officials Turn Hawkish: Inflation Risk Rises, Further Rate Hikes Not Ruled Out

May 7 — As the Iran conflict continues driving up oil prices and straining supply chains, multiple Federal Reserve officials have warned U.S. inflation risks are reemerging. Future interest rates may need to stay elevated for an extended period, with potential for further hikes. St. Louis Fed President Mester said policy risks have clearly tilted toward inflation. Rates may need to hold steady “for a period of time” and could be raised further if needed. He noted rising prices of key industrial inputs like aluminum, helium and diesel are fueling broader cost pressures. Chicago Fed President Evans warned sustained high oil prices over several months would gradually hit global supply chains, potentially replicating the pandemic-era inflation transmission path. He said it’s not yet “stagflation,” but the situation would grow “increasingly tense” if it persists. Data shows U.S. average gasoline prices have climbed above $4.50 a gallon, while the New York Fed’s Global Supply Chain Pressure Index hit its highest level since July 2022. Markets widely expect the Fed will have limited room to cut rates next year. The latest PCE figures show U.S. March inflation reaccelerated to 3.5% year-over-year, with core PCE rising to 3.2%. Internally, the Fed is increasingly open to the possibility of “re-tightening when necessary.”