Kansas City Federal Reserve Bank Update

(Reuters) – Kansas City Federal Reserve Bank President Jeff Schmid, one of the U.S. central bank’s more hawkish policymakers, stated on Thursday that recent “encouraging” data gives him more confidence that inflation is cooling, setting the stage for a potential reduction in the Fed’s interest rate.

“Given the multi-decade shock to inflation that we have experienced, we should be looking for the worst in the data rather than the best,” Schmid remarked, noting that prices can be volatile and that the Fed needs “longer periods” to be sure of inflation’s trajectory.

However, he added, “if inflation continues to come in low, my confidence will grow that we are on track to meet the price stability part of our mandate, and it will be appropriate to adjust the stance of policy,” during prepared remarks for the Kansas Bankers Association’s annual meeting in Colorado Springs, Colorado.

With inflation at around 2.5% and the Fed’s target being 2%, Schmid indicated that the Fed is “close, but we are still not quite there.”

Last week, the Fed decided to maintain the policy rate in the 5.25%-5.50% range, where it has remained for over a year, but indicated potential reductions in borrowing costs next month, should inflation and employment risks begin to balance.

A weak jobs report following the recent policy decision raised concerns in financial markets that the Fed may need to act aggressively to shield the economy from a recession.

Schmid countered this perspective, describing the economy as resilient, noting strong consumer demand, and pointing out that while the labor market is cooling, it remains “quite healthy” when taking into account factors beyond the rise in the unemployment rate.

Under these circumstances, he remarked that the Fed’s current policy stance “is not that restrictive.” He also noted that for inflation to decline further, the labor market needs to cool down further.

“This story could change if conditions were to weaken considerably more,” he mentioned, signaling that he continues to observe the situation closely.

“The path of policy will be determined by the data and the strength of the economy,” Schmid concluded. “Given the tremendous shocks that the economy has endured so far this decade, I would not want to assume any particular path or endpoint for the policy rate.”