Kansas City Fed President Signals No Further Rate Cuts

By Michael S. Derby

NEW YORK (Reuters) – Kansas City Federal Reserve President Jeff Schmid indicated on Thursday a hesitance to cut interest rates further, as the U.S. central bank enters the new year with a resilient economy and inflation above the 2% target.

“We are currently pretty close to meeting our dual mandate of price stability and full employment,” Schmid stated in a speech before the Economic Club of Kansas City. He noted that with inflation near the target and sustained economic growth, it is time for a neutral monetary policy.

In the current context, Schmid mentioned, “interest rates might be very close to their longer-run level now,” advocating for gradual adjustments in policy only in response to significant changes in economic data. He added that the economy’s strength permits a patient approach.

Last month, the Fed lowered its benchmark overnight interest rate by a quarter percentage point, setting it between 4.25% and 4.50%. Officials signaled fewer rate cuts are expected in 2025 than previously anticipated, along with a rise in inflation expectations and ongoing uncertainty about the economic outlook.

Schmid expressed optimism regarding the economy’s condition, stating, “I am optimistic about employment and the strength of the economy,” while noting that the job market remains healthy despite some loosening. He described economic growth as solid, hovering around 3%.

Addressing the Fed’s balance sheet reduction, known as quantitative tightening (QT), Schmid highlighted its decrease from roughly $9 trillion in 2022 to just under $7 trillion currently. He expressed a desire for further reductions this year and indicated a move toward an all-Treasuries portfolio, aiming to minimize impacts on relative asset prices by exiting mortgage-backed securities.