Jeffrey Schmid, President of the Federal Reserve Bank of Kansas City, said on Thursday that continued inflation is the most pressing risk to the economy. He said inflation remains too high.
Speaking at a banking industry conference, Schmid said the US economy is less vulnerable to global oil disruptions than in the past. He said high oil prices reduce household spending power and raise costs for businesses.
He said the US economy has shown resilience and that economic fundamentals remain sound. He also said the job market is functioning effectively.
Schmid said consumer spending remains the biggest driver of activity. He said wealth gains are leading many households to increase spending.
He said business investment remains strong, especially in technology and AI buildout. He also said conditions in the banking sector are fundamentally sound.
The Federal Reserve’s message is that inflation remains the number one enemy, and the fight is not over. The latest April 2026 CPI report confirmed this, coming in at a stubborn 3.4% year-over-year, which means we should not expect interest rate relief anytime soon. This points to a continuation of the high-rate environment that has defined the market for the past few years.
This hawkish stance suggests that derivative trades betting on higher-for-longer interest rates will remain in play. We’ve seen CME FedWatch data shift dramatically, now showing less than a 15% chance of a rate cut by September 2026. This makes positioning for a flat or even slightly rising yield curve through SOFR options a logical strategy for the coming weeks.
We also have to consider the impact of high oil prices, which add another layer of inflationary pressure. With WTI crude holding stubbornly above $90 a barrel due to tight OPEC+ supply, this is a direct drag on consumer spending. Traders could use options on energy sector ETFs to hedge against further price spikes or bet on a pullback if demand shows signs of weakening.
The stated strength in the jobs market and business investment, especially in AI, creates a mixed signal for equity traders. This suggests a market where tech and other high-growth sectors may continue to perform, while rate-sensitive sectors like utilities and real estate lag. Using index options to play this divergence, such as buying calls on the Nasdaq 100 while buying puts on the Russell 2000, could be an effective approach.
Looking back, we must remember the difficult lessons learned in bringing inflation down from its 2023 peaks. From the perspective of 2025, we saw several false starts where it seemed inflation was defeated, only for it to prove sticky. The Fed’s current reluctance to signal any policy pivot reflects a deep-seated fear of repeating those mistakes.
