Fed’s Schmid Says Policy in Right Place to Bring Down Inflation

Jeffrey Schmid

(Bloomberg) -- Federal Reserve Bank of Kansas City President Jeff Schmid signaled the US central bank may not need to lower interest rates again soon, citing the need to keep bringing down inflation.

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“I viewed the 25-basis point cut in the policy rate last week as a reasonable risk-management strategy,” Schmid said Thursday in prepared remarks for an event in Dallas. “That said, my view is that inflation remains too high while the labor market, though cooling, still remains largely in balance.”

He added that he views the current stance of policy as only “slightly restrictive, which I think is the right place to be.”

Schmid, who votes on monetary policy this year, joined most of his colleagues in opting for a quarter percentage point reduction in interest rates last week in a bid to support the labor market. That was the first rate cut since December. Fed officials had held rates steady this year to assess how new policies, including tariffs, would impact the economy.

Fed officials are split on how many more rate cuts will be needed this year. While the median of their projections shows two more quarter-point cuts this year — one at each of the remaining two meetings — a large number of participants expect one or no cuts.

The Kansas City Fed chief said that while a cooling in the labor market this year would probably help curtail price pressures, recent data showed an increased risk of a more sustained or abrupt slowdown.

“I will continue to take a data-dependent approach to any further adjustments in the policy rate,” Schmid said. “I will be watching the incoming inflation and labor market data closely as I continue to assess the balance of risks to the Fed’s dual mandate.”

In a speech that focused largely on the Fed’s role in supervising and regulating banks, Schmid emphasized the importance of central bank independence in that sphere.

“We often discuss how crucial the Fed’s insulation from political interests and its regional structure are to effective monetary policy,” Schmid said. “However, the Federal Reserve system’s independence and the regional reserve banks’ close connections to local economies are just as central to sound supervision and regulation.”

Supervisors and regulators that are independent from political considerations can make decisions that focus on financial stability in the long term, Schmid said, adding that it also allows for agility when responding to instability and fosters public trust in the banking system.

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Schmid, who worked both as a bank regulator and as a bank director before joining the Fed in 2023, lamented the support by some for removing these functions from the Fed altogether — or putting those divisions of the central bank under more direct control of the president. Some White House officials have voiced support for this, including Governor Stephen Miran, the Fed’s newest policymaker whom President Donald Trump appointed last month to fill a vacant seat.

“I think this view is misguided and could lead to unintended consequences that are often not sufficiently considered,” he said.

On bank supervision, Schmid said the Fed should reexamine the static asset thresholds that it uses to categorize banks.

“These have likely become outdated given that they have not been calibrated to consider inflation or a rapidly changing industry with a wide range of business models,” he said.

He echoed Vice Chair for Supervision Michelle Bowman’s calls for more tailoring, suggesting the Fed could consider alternatives including adjusting asset thresholds for inflation and taking the complexity of a bank’s business model into account.

(Updates with additional Schmid comments in last three paragraphs.)

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