MNI: Fed's Schmid Says Lower Rates Risk Fueling Inflation

Kansas City Federal Reserve President Jeff Schmid said Friday an interest rate cut will not do much to address stresses in the labor market that are likely arising primarily from structural changes in technology and demographics, and would and instead keep feeding inflation pressures. 

Schmid, who voted this week against cutting the fed funds rate by 25 basis points and preferred holding steady, said inflation is still too high, and monetary policy should lean against demand growth to allow the space for supply to expand and relieve price pressures in the economy.

"By my assessment, the labor market is largely in balance, the economy shows continued momentum, and inflation remains too high," he said in a statement. "I view the stance of policy as only modestly restrictive. In this context, I judged it appropriate to maintain the policy rate at this week’s meeting." 

WIDESPREAD CONCERN

In the Kansas City Fed’s district, Schmid is hearing widespread concern over continued cost increases and inflation. "Rising healthcare costs and insurance premiums are top of mind," he said.

"Inflation has been running above the Fed’s 2% objective for more than four years. As I have said before, I take small comfort in most measures of inflation expectations having not moved up. I view inflation expectations not as an input into Fed’s decisions, but as the outcome of the policy decisions that the Fed makes," Schmid said. 

U.S. monetary policy is only modestly restrictive, Schmid said. Financial market conditions appear to be easy across many metrics. Equity markets are near record highs, corporate bond spreads are very narrow, and high-yield bond issuance is high. (See: MNI POLICY: Fed Set To Keep Cutting Rates Despite Missing Data)

"None of this suggests that financial conditions are particularly tight or that the stance of policy is restrictive," he said. 

Likewise, the economy is showing continued momentum. Consumption remains solid, and data for July and August suggest an acceleration through the summer, Schmid added.