In statements to CFA Kansas City, the Federal Reserve chairman stated that he considers the current monetary policy stance only slightly restrictive, which, in his opinion, is appropriate. He also noted that, since inflation remains too high, monetary policy should counteract demand growth to allow supply to grow and reduce prices.
Jeffrey Schmid warned that, in the current context, an aggressive push for demand, possibly through interest rate cuts by the Fed, could increase the risk of a massive price surge. The Fed chairman anticipates a relatively moderate effect of Trump's tariffs on inflation. However, he believes this will be due to how they adjust monetary policy, rather than a signal of a drastic reduction in the official interest rate.
The Fed chair joins other Fed officials, such as Lorie Logan, president of the Dallas Fed, who recently urged caution regarding rate cuts, citing inflation risks. Like Schmid, Logan stated that she does not believe current monetary policy is more than moderately restrictive. She added that this was appropriate, as their goal should be to push inflation down.
In his comments, Schmid suggested that it was time to prioritize the fight against inflation over concerns about the labor market. He stated that at the September FOMC meeting, he voted in favor of a 25 basis point Fed interest rate cut. The Fed chairman explained that, in light of signs of a slowdown in the labor market, he considered the cut an "appropriate risk management strategy," as it balanced the risks to inflation and employment.
The president of the Federal Reserve highlighted the limitations they faced in determining policies that would allow them to meet their dual mandate on inflation and the labor market. He admitted that policies that boost the labor market often detract from higher inflation and vice versa.
However, to balance these limitations, Schmid opined that the Fed must maintain its credibility on inflation, also suggesting that it may not support further rate cuts for now. Despite the Fed chairman's stance, there is a probability that the Fed will make another 25 basis point rate cut at the October meeting, with a current probability of 94.1%, according to CME FedWatch.
The president of the Federal Reserve Bank of Kansas City stated that he plans to continue taking a data-driven approach to any further policy adjustments. He expressed hope that the government data influencing his decision will soon be available. The ongoing government shutdown has delayed the release of this data.
Meanwhile, Schmid plans to monitor alternative labor and price data ahead of the FOMC meeting, which will take place between the 28th and 29th of this month.
