MNI: Fed Must Maintain Credibility On Inflation - Schmid

The Federal Reserve must maintain credibility on its inflation mandate as prices rise under President Trump's tariffs, even as trade policy will likely also hurt economic activity and jobs, Kansas City Fed President Jeff Schmid said Thursday.

"Policy will need to remain nimble as the FOMC balances the two sides of its mandate. While the tariffs are likely to push up prices, the extent of the increase is not certain, and likely will not be fully apparent for some time. Likewise, the extent of the drag on growth
and employment is also unclear," Schmid said in remarks prepared for a banking conference at the Fed bank. 

"As the FOMC balances its mandate, I intend to remain focused on the importance of maintaining credibility on inflation."  

While theory might suggest that the central bank should "look through a one-time increase in prices" from tariffs, "I would be uncomfortable staking the Fed’s reputation and credibility on theory," Schmid said.  

The pandemic showed that when strong demand growth meets supply chain disruptions, prices can increase rapidly, he said. "Though the recent inflation data has been subdued, the expectation is that tariffs will start to show through to prices in the
coming months." 

That most measures of long-term inflation expectations remain anchored so far is not a signal to "let our guard down," Schmid said. 

"Inflation expectations should not be viewed as an input into Fed decision making, but rather as an output of the decisions that the Fed makes. Anchored expectations reflect the Fed’s credibility and the public’s trust in the Fed’s willingness to make hard decisions when it has to." (See: MNI INTERVIEW: Fed Will Face ‘Tough Calls’ In H2-Holtz-Eakin)