MNI: Schmid Says Fed Must Maintain Credibility On Inflation

Kansas City Fed President Jeff Schmid said Monday that monetary policy must remain restrictive in the face of an inflation path that remains unacceptably elevated.  

"With inflation still too high, monetary policy should lean against demand growth to allow the space for supply to grow and relieve price pressures in the economy," Schmid said according to prepared remarks. "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." 

Schmid is "anticipating a relatively muted effect of tariffs on inflation" but that is merely a "sign that policy is appropriately calibrated rather than a sign that the policy rate should be aggressively lowered." 

Services inflation seems to have settled in at around 3.5% in recent months, higher than its average pace in recent decades and higher than has been consistent with the Fed meeting its 2% target, Schmid said. The cooling labor market suggests that the stance of monetary policy "is restrictive, but I would argue that it is only modestly so." 

"In balancing this constraint, my view is that the Fed must maintain its credibility on inflation," he said. (See: MNI INTERVIEW: Fed Right To Remain Cautious On Rate Cuts-Kohn) 

Financial market conditions seem fairly loose, with equity markets remain near record highs, corporate bond spreads very narrow, and junk bond issuance high, Schmid said in a speech to the CFA Society Kansas City. "None of this suggests that financial conditions are particularly tight or that the stance of policy is restrictive." 

Schmid isn't taking much comfort from measures of inflation expectations that have not moved up. "I view inflation expectations not as an input, or signal, for the Fed to respond to, but as the output of the policy decisions that the Fed makes," he said.