Fed's Schmid Says More Cuts Could Drive Inflation Pressures

Federal Reserve Bank of Kansas City President Jeff Schmid said additional interest-rate cuts could do more to ingrain higher inflation than shore up the labor market.

“I do not think further cuts in interest rates will do much to patch over any cracks in the labor market — stresses that more likely than not arise from structural changes in technology and immigration policy,” Schmid said Friday in Denver. “However, cuts could have longer-lasting effects on inflation as our commitment to our 2% objective increasingly comes into question.”

Schmid, speaking at an annual energy conference hosted by the Kansas City and Dallas reserve banks, said this rationale is guiding his thoughts ahead of the Fed’s December policy meeting, though he added he remains open to new information in coming weeks.

Policymakers cut interest rates at each of their last two meetings in an effort to support the labor market, where hiring has weakened significantly in the past few months.

Schmid dissented from the vote to lower rates in October, preferring to hold steady, and argued that still-strong economic growth could reignite inflation pressures. He reiterated Friday that interest rates are only putting modest pressure on the economy at this point, which he called appropriate.

He’s been joined in recent days by a number of other Fed officials who have expressed indecision over, or opposition to, another rate cut in December.

Schmid said businesses in the Kansas City Fed district have voiced continued concern about inflation. He added that inflation appears to be more widespread than simply a tariff-driven phenomenon.

“It is not just tariffs — or even primarily tariffs — that has people worried,” Schmid said. “I hear concerns about rising health care costs and insurance premiums, and I hear a lot about electricity.”

The Kansas City Fed chief said that while he supported policymakers’ decision to end the runoff of their balance sheet — set to stop in December — he repeated his preference for the smallest and least distortive balance sheet possible in the long term.

He said the Fed could explore ways to offset bank reserve demand, a factor that drives the balance sheet higher, including easing access to Fed facilities like the Standing Repo Facility or lowering the interest rate it pays on reserves.