Kansas City Fed’s Schmid Pushes Back on Further Cuts

In a statement made on Monday, October 6, Kansas City Federal Reserve President Jeffrey Schmid stated that he would not support further interest rate cuts

ContentsSchmid Warns Against Overly Loose PolicyInflation Concerns Divide Fed OfficialsFed Faces Balancing Act Amid Economic StrengthSchmid asserted that the Federal Reserve needs to concentrate on reducing the risks of inflation as it balances policy amid a slow economy.

Schmid Warns Against Overly Loose Policy

Schmid stressed that the Fed should never be too eager to increase its policy. He said that the central bank ought to continue its emphasis on the persistent inflation pressures instead of making additional rate cuts. His remarks were made after the Fed made a move in September to reduce rates by 0.25, which he had encouraged as a restraint and corrective action to job market weakness.

In a speech at the CFA Society Kansas City, Schmid mentioned that although companies are hesitant to hire due to the ambiguity surrounding President Donald Trump’s prospects regarding tariff rates and the role of AI in the job market, the labor market remains stable. The unemployment rate stands at 4.3%, indicating that there is strength, even though job growth is slow, as he noted.

Inflation Concerns Divide Fed Officials

The inflation level is high, and according to the latest figures, the inflation rate for services stands at approximately 3.5% in recent times, which is significantly higher than the target of 2% set by the Fed. According to Schmid, the percentage of all categories of inflation that had experienced a price increase rose to about 80% during August, compared to 70% in earlier months of the year. He has characterized this as an indication that inflationary pressures are widespread.

Dallas Fed President Lorie Logan and others, such as Beth Hammack, the president of the Cleveland Fed, have also expressed concern about additional rate cuts. They contend that further reduction would trigger back inflation. Fed Governor Stephen Miran, however, differed with this and demanded more rate cuts to help the dwindling job market. This position has been supported by Michelle Bowman, the Vice Chair, and Mary Daly, the President of the San Francisco Fed, who considers rate relief as the only way to avoid further deterioration of the labor market.

Fed Faces Balancing Act Amid Economic Strength

Schmid argued that policymakers are having difficulty striking a balance between the two risks: high inflation and increasing unemployment. A reduction in rates can encourage employment, but it would lead to an increase in prices, and maintaining current rates would slow down growth. He reiterated the statements of Fed Chair Jerome Powell, noting that these trade-offs are becoming increasingly more challenging as the economy adapts.

Schmid has also observed that despite such difficulties, the economy remains robust. He highlighted the increasing investment in AI-related technology, robust equity market, and narrow corporate bond spreads as indicators of underlying momentum.

Schmid emphasized that the Fed should focus most on maintaining its credibility on inflation. He feels that the current monetary policy is rightly balanced and cautions against being too aggressive in cutting down rates. Nonetheless, financial markets still expect a quarter-point reduction at the following two Fed meetings in October and December.