Kansas City Fed chair backs cautious approach on rates

Kansas City Federal Reserve Bank President Jeff Schmid said Monday that inflation remains above the Fed’s goal and backed current interest rate policy — even as the labor market cools and housing costs remain a key driver of inflation.

Speaking to the CFA Society Kansas City, Schmid said he voted in favor of the Fed’s September quarter-point rate cut but sees no need for aggressive easing.

“Constraints lead to difficult decisions over how to balance competing objectives, and the Fed has been tasked with these difficult decisions when it comes to inflation and employment,” he said. “In balancing this constraint, my view is that the Fed must maintain its credibility on inflation.”

He said inflation expectations remain stable but warned that could change quickly if policy loosens too fast.

“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.

Schmid told the room he will continue to take a “data-dependent” approach ahead of the next Federal Open Market Committee (FOMC) meeting Oct. 28-29.

“While I am hopeful that the government data that underpins Fed decision-making will soon become available again, in the meantime, I will be monitoring alternative labor market and price data closely,” he said. “[That includes] data we gather from District surveys and reports from our network of contacts as we approach our next FOMC meeting at the end of the month.”

Inflation pressures

Turning to the economy, Schmid said the Fed is “relatively close” to achieving its dual mandate of price stability and full employment — but “still not there yet.”

“Inflation is too high,” he said. “The Fed has defined price stability as an inflation rate of 2%. Over the 12 months ending in August, prices increased 2.7%. Looking through the effects of a recent decline in gas prices, the rate of inflation was closer to 3%.”

Schmid pointed to persistent price pressures in both goods and services — citing housing costs, utilities and electricity as key contributors. He also noted that tariffs have pushed durable goods prices higher than historical trends.

One worrying sign is that price increases are also becoming more widespread.

“At the start of the year, 70% of consumption categories reported price increases. By August, almost 80 percent of categories had increasing prices,” he said.

Labor market cooling but balanced

On employment, Schmid said the labor market has cooled considerably this year, which may help ease inflation pressures while carrying a level of risk.

“Job growth has slowed dramatically since April,” he said. “On average, employers have added about 25,000 jobs a month compared to an average of above 200,000 per month in the three years going into April.”

Still, the job market remains fundamentally stable, Schmid added.

“The unemployment rate is 4.3%, which is low relative to most of its history,” he said. “Another common indicator, the vacancy ratio, or the number of posted job openings per person reporting themselves as unemployed, remains near one — right in line with the level consistent with a healthy balanced labor market.

“Looking across the range of labor data included in the Kansas City Fed’s aggregate Labor Market Condition Indictors suggests a labor market that has cooled but remains healthy.”

Policy ‘only slightly restrictive’

Schmid said that while the labor market’s slowdown suggests policy is restrictive, financial conditions remain fairly loose.

“Equity markets remain near record highs, corporate bond spreads are very narrow, and junk bond issuance is high,” he said. “None of this suggests that financial conditions are particularly tight or that the stance of policy is restrictive.”

He added that investment in artificial intelligence and other technology continues to bolster growth — with software spending reportedly growing at the fastest pace on record in the second quarter.

“Overall, given the state of the economy and financial markets, I view the current stance of policy as only slightly restrictive, which I think is the right place to be,” Schmid said.