Schmid Insists Elections Must Not Disrupt the Fed: October Will Be Determined by Data, Not Politics

The Federal Reserve is once again facing a test that comes not only from inflation and the bond market, but also from U.S. politics. Ahead of the November midterm elections, investors are focused on the possibility that political agendas could influence monetary policy. However, Jeffrey Schmid, president of the Federal Reserve Bank of Kansas City, delivered a firm message: the elections should not influence the Fed’s decision at the October meeting.

This statement is increasingly important because the Fed is now in a far more complicated situation than it was several months ago. Inflation remains above the 2% target, several officials have begun opening the possibility of a rate hike, while the stock and bond markets are highly sensitive to every change in policy expectations.

Schmid: Monetary Policy Must Be Based on the Economy

Schmid had previously taken a relatively hawkish stance. In an interview with Bloomberg Television in Jackson Hole on August 27, he said monetary policy may currently be accommodative rather than restrictive. He assessed that interest rates of 3.50%–3.75% were not restricting the U.S. economy—“short-term interest rates may even have an accommodative nature,” he said. Schmid stressed that inflation remained “stubborn” and “sticky,” and that “we have to continue looking for ways to break through it.” He explicitly rejected the idea that the October 28 meeting could not be scheduled because of the elections, stressing that the political calendar must not be a consideration in monetary decision-making.

Schmid’s message about the elections is actually part of a larger issue: the Fed wants the market to believe that interest-rate decisions are determined by economic data, not the political calendar.

Why Is October Important?

The FOMC calendar shows the next meetings scheduled for September 15–16, then October 27–28, and December 8–9. The October meeting will take place only a few days before the November elections. This timing makes the Fed’s independence even more sensitive. If the Fed raises interest rates ahead of the elections, the decision could be perceived as political. If it holds rates or cuts them, the opposite question will also arise. Schmid essentially reaffirmed the principle that the Fed must not adjust policy solely because the elections are approaching.

The Problem: Inflation Has Not Provided Comfortable Room

The latest data released on August 26 by the Bureau of Economic Analysis showed that the PCE price index, the Fed’s preferred inflation indicator, stood at 3.7% YoY in July 2026 (unchanged from June) at the headline level and 3.3% YoY on a core basis, still far above the 2% target. Price pressures remain persistent.

In addition to inflation, the labor market is showing weakness. Data released on August 7 showed that the U.S. economy lost 23,000 jobs in July, far below expectations for an increase of 80,000. The unemployment rate stood at 4.1%. On August 28, the annual benchmark revision to nonfarm payrolls showed a decline of 79,000.

Under these conditions, the Fed has reason to remain cautious about easing. Several officials have begun speaking more forcefully: Cleveland Fed President Beth Hammack said it was time to act because inflation had been above target for more than five years, warning that “the longer inflation remains above target, the harder it is to bring down.” Chicago Fed President Austan Goolsbee said his biggest concern was uncontrolled inflation, with factors including the war in the Middle East driving up energy costs and volatile tariff policies. Boston Fed President Susan Collins gave a firm conditional statement: if the data showed inflation was not falling as expected, she would support a hike “in the next one or two meetings.” Thus, while the market may be hoping for cuts, some Fed officials are instead considering the possibility of hikes.

The Fed Is Already Divided

At the July 28–29 FOMC meeting, the Fed kept interest rates at 3.50%–3.75%, but the decision received only 9–3 support. Three members, including Hammack, voted for a 25 bps hike. This is not a minor detail; the internal debate over the direction of interest rates is already quite strong. Even before October, the market must contend with two possibilities: dovish (inflation falls, the economy weakens, and the Fed considers cuts) or hawkish (inflation persists, demand remains strong, and the Fed holds or raises rates). Schmid is clearly closer to the latter camp.

Elections vs. Inflation: Which Matters More?

From a monetary-policy perspective, the answer is simple: inflation and economic conditions. The Fed has a mandate to maintain price stability and support healthy labor-market conditions. If inflation remains too high in October, the Fed should theoretically make its decision based on the data even if the elections are only a few weeks away. Conversely, if inflation falls convincingly and the labor market weakens, the Fed must also have the freedom to ease policy even if the decision happens to come ahead of the elections. The election date should not be a variable in the monetary-policy equation.

The Market Begins to Price in the Risk of a Hike

After Fed Chair Kevin Warsh’s speech in Jackson Hole on August 28, market expectations for an interest-rate hike surged dramatically. The probability of a September hike jumped from ~35% to ~57-60%, while the probability for December remained above 70%. In his speech, Warsh mentioned “inflation” 25 times, saying inflation was still “too high” and that if it did not fall at a “fast enough pace,” then “there is still work to do.” He reaffirmed the Fed’s commitment to the 2% target. Capital Economics analysts said they were “now more confident that the Fed will raise interest rates before the end of the year, likely by 25 bps in December.” The market no longer views a hike as an extreme scenario.

Impact on U.S. Stocks

If Schmid and other hawkish officials succeed in shifting expectations toward “higher for longer,” growth and technology stocks will be the sectors requiring the closest attention. Technology valuations are highly sensitive to discount rates: when yields rise, future cash flows are discounted more heavily, putting pressure on valuation multiples. The market reaction on August 28 was fairly clear: the Nasdaq fell 0.52%, the S&P 500 fell 0.25%, and the Dow fell 0.02%. However, Wall Street still posted a weekly gain. Hawkish Fed → Treasury yields rise → capital costs increase → growth valuations come under pressure → the Nasdaq faces downside risk. Dovish Fed → yields fall → financial conditions ease → growth stocks gain room to rise.

Bitcoin and Crypto

Bitcoin is not immune to changes in Fed policy. After Warsh’s speech, Bitcoin fell below $80,000, briefly touching $78,442, down around 1% on the day, with more than $488 million in long positions liquidated. Bitcoin eventually stabilized around $79,000 after previously touching $81,330. The decline occurred even though U.S. spot Bitcoin ETFs recorded inflows for nine consecutive days ($242 million on August 28). The relationship between the Fed and crypto is not always linear: a hawkish Fed is usually negative for crypto liquidity, but concerns over fiscal policy and the dollar can create a different bullish narrative.

Gold Also at a Crossroads

Gold’s movement provides an interesting example. On August 27, spot gold recovered to around $4,625 per ounce. After Warsh’s hawkish speech, spot gold closed down 3.2% at $4,454 per ounce. In theory, higher interest rates increase the opportunity cost of holding gold. However, gold continues to receive support from policy uncertainty, geopolitical risks—particularly the war with Iran—concerns over U.S. government debt, which has surpassed $40 trillion, and dollar uncertainty. The gold market is not only asking, “Will the Fed raise or cut?” but also, “Why does the Fed have to keep interest rates high?”

Fed Independence Is an Asset

Schmid’s comments carry greater weight than a mere view on interest rates. If investors believe the Fed can make decisions without political pressure, inflation expectations will remain better anchored. However, if the market begins to believe that monetary policy is influenced by elections, fiscal pressure, or short-term political interests, the consequences could be much greater: bond yields would rise, risk premiums would increase, the dollar would come under pressure, and the government’s funding costs would become more expensive. The 10-year Treasury yield is currently around 4.67%, while the 30-year yield is approaching 5.2%, its highest level since 2007. Fed independence is not merely a political issue, but part of financial-market stability.

The Market Needs to Watch More Than Just Schmid

Schmid is hawkish, but one official does not determine FOMC policy alone. Investors need to monitor the evolving views of the entire committee, especially Fed Chair Kevin Warsh, whose Jackson Hole speech became the primary focus; members of the Board of Governors; regional Fed presidents with voting rights; inflation data (PCE, CPI); labor-market data (payrolls, unemployment rate); economic growth (Q2 2026 GDP stood at 1.5%); and bond-market conditions. Interestingly, the market’s attention on August 28 was focused instead on Warsh’s first speech at Jackson Hole, which gave a more hawkish signal than many expected, and the market responded quickly. Schmid sent a hawkish signal, while Warsh reinforced it with a clear and firm speech.

Three Scenarios Heading Into October

Bullish scenario for stocks: inflation begins to fall consistently (core PCE below 3%), the labor market weakens further, Warsh avoids signaling further hikes, expectations for cuts increase, and yields fall → the Nasdaq and growth stocks have room to strengthen.

Sideways scenario: inflation remains high but does not worsen (core PCE holds at 3.3%), the Fed keeps interest rates unchanged, officials send mixed signals, and the market waits for the next data releases; volatility increases, but no major direction emerges.

Bearish scenario: PCE and core inflation rise again, the labor market remains strong, inflation expectations increase, more officials support a hike, and yields surge → technology stocks, crypto, and risk assets face pressure. In this scenario, the elections would not be a reason for the Fed to hold back; Schmid’s statement instead shows that the political calendar is not a policy consideration.

Conclusion: October Will Test the Fed’s Independence

Jeffrey Schmid’s statement carries a message larger than simply saying that “the elections will not influence interest rates.” The message is that the Federal Reserve wants the market to believe monetary policy is determined by inflation, labor, growth, and financial conditions—not short-term political interests.

The situation heading into October: Fed interest rates at 3.50–3.75%; headline PCE at 3.7%; core PCE at 3.3%; Q2 2026 GDP at 1.5%; unemployment at 4.1%; the 10-year yield at ~4.67%; the probability of a September hike at ~57-60%; the probability of a December hike at 70%; and the July FOMC vote at 9–3 (with three supporting a hike). The October meeting is scheduled for October 27–28, 2026, only a few days before the elections.

The real battle is not the Fed vs. the elections, but inflation vs. interest rates vs. growth. If inflation wins, interest rates could remain high or even rise. If growth weakens, room for easing opens up. If both occur simultaneously, with high inflation alongside a weakening economy, the Fed will face one of the most difficult policy dilemmas. For investors, the most important signals are not the election date, but PCE, payrolls, Treasury yields, Fed expectations, and comments from Warsh and Schmid. Because when October arrives, the Federal Reserve’s decision will likely be determined by one thing: not who is campaigning, but what the American economy is doing.
#WarshJacksonHolePreviewMarketsFocusOnRates
$BTC ‌