Fed’s Schmid: Path and destination of rate cut yet to be determined

Kansas City Fed President Jeffrey Schmid highlighted in a speech overnight the decision to lower rates this year as a reflection of the “growing confidence” in inflation’s moderation.

This optimism, he explained, stems from signs that “both labor and product markets have come into better balance in recent months.”

While acknowledging this progress, Schmid cautioned, “It still remains to be seen how much further interest rates will decline or where they might eventually settle.”

Schmid also addressed concerns about the implications of large fiscal deficits on monetary policy. He emphasized that such deficits are not inherently inflationary, as long as Fed maintains its commitment to the 2% inflation target.

However, he warned that this approach could necessitate “persistently higher interest rates,” creating tensions with political authorities. He noted, “History has shown that efforts to avoid higher interest rates by accommodating deficits often result in higher inflation.”