MNI: Fed Easing Would Raise Risk of Price Increases - Schmid

Kansas City Fed President Jeff Schmid said Tuesday a modestly restrictive monetary policy stance remains appropriate for the time being and interest rate cuts could be counterproductive, with an economy still showing momentum, growing business optimism, and inflation stuck above target. 

"My support for a patient approach to changing the policy rate is based on two connected arguments. First, while monetary policy might currently be restrictive, it is not very restrictive," he said in prepared remarks. "And second, given recent price pressures, a modestly restrictive stance is exactly where we want to be." 

Schmid expects a "relatively muted" effect of tariffs on inflation, and that is a "sign that policy is appropriately calibrated rather than a sign that the policy rate should be cut." 

"The current environment is one where aggressively boosting demand could raise the risk of an outsized increase in prices, as firms gain pricing power and increase the passthrough of tariffs to consumers," he said. 

While increased tariffs seem to be having a limited effect on inflation, the Kansas City Fed chief views this as a rationale for keeping policy on hold rather than an opportunity to ease. 

NOT WAIT-AND-SEE

If Schmid sees indications that demand growth is weakening significantly, he will adjust his views accordingly, he said. "Instead of puzzling over potential tariff effects, I intend to remain data dependent."

"Importantly, I would not characterize my view on tariffs and inflation as 'wait-and-see,'" Schmid said. "I see no possibility that we will know the effect of the tariffs on prices, either as a one-off shock to the price level or a persistent inflation impetus, over the next few months." (See: MNI INTERVIEW: Inflation Could Stifle 2025 Fed Cuts-George)

Payroll growth was weak over the summer, but a broader set of indicators suggest a labor market that is in balance, he said. "The unemployment rate remains low, wage growth remains solid, and the ratio of reported job vacancies to available unemployed workers is about one-to-one, a matching that suggests a labor market close to balance." 

On the other side of the mandate, inflation remains too high, he said. "Overall, my expectation is that the economy will show continued resilience."

"Consumption will continue to benefit from growing disposable income, supported by both low unemployment and solid wage increases. Another support is the strength of household balance sheets. While certainly not true for all households, in the aggregate household net worth remains historically high."