Kansas City Fed's Schmid Urges Caution on Rate Cuts, Emphasizes Inflation Risk

Kansas City Fed President Calls for Caution on Interest Rate Cuts

Kansas City Federal Reserve President Jeff Schmid said on Monday that he is reluctant to make further cuts to interest rates. He argued that when addressing the dual risks of policy being too tight versus too loose, the Fed should maintain its focus on the lurking dangers posed by high inflation.

Schmid voted in favor of the Fed’s September decision to cut interest rates by 25 basis points, saying the move was appropriate risk management given a cooling labor market. But his hesitance about further easing highlights the difficulty Federal Reserve Chairman Jerome Powell faces in building consensus for the Fed’s next rate decision later this month.

At least a few other Fed policymakers have voiced concerns that further rate cuts could reignite inflation, including Dallas Fed President Lorie Logan and Cleveland Fed President Beth Hammack. Meanwhile, the Fed’s newest governor, Stephen Miran, who voted against the decision last month, has made six public appearances since then, calling for substantial rate cuts at the next few meetings.

While Miran’s view is not widely shared, several other Fed policymakers, including Vice Chair for Supervision Michelle Bowman and San Francisco Fed President Mary Daly, do support further rate cuts to prevent further softening of the labor market. Recent data shows the number of new jobs being created each month has declined substantially.

In response to those concerns, Schmid told the CFA Society of Kansas City that he believes businesses are delaying hiring because of the uncertainty surrounding President Trump’s tariff policies and in an effort to study how artificial intelligence will impact their future labor needs.

However, he noted that multiple indicators, including a 4.3% unemployment rate, suggest the labor market overall remains healthy.

At the same time, he pointed out that inflation levels remain too high, with services inflation holding steady at around 3.5% in recent months, well above the Fed’s 2% inflation target.

“One concerning sign is that the breadth of price increases is also expanding,” Schmid told the CFA Society of Kansas City. He noted that as of August, nearly 80% of the tracked categories in the official inflation data saw price increases, up from 70% at the start of the year. “Overall, I expect the impact of tariffs on inflation to be relatively small, but I do think it suggests the current policy adjustment is appropriate, rather than that policy rates should be cut substantially.”

Schmid pointed out that Fed policymakers face trade-offs: cutting interest rates to bolster the labor market runs the risk of fueling inflation; but setting interest rates high enough to bring down inflation could drive up unemployment. Powell has also alluded to this balancing act.

“Various constraints make decisions difficult when balancing competing objectives, and the Fed has the task of making these tough decisions when addressing inflation and employment issues,” Schmid said on Monday. He bolded the word “must” in his prepared remarks, emphasizing: “I believe the Fed must maintain its credibility on the issue of inflation when balancing this constraint.”

Schmid said that U.S. economic momentum is good, and that software spending related to artificial intelligence is boosting business investment (corporate investment is typically soft when interest rates are high). He pointed out that the stock market is near all-time highs, and corporate bond spreads are narrow.

“Overall, looking at current economic and financial market conditions, I believe the current policy stance is only modestly restrictive, and this stance is appropriate,” Schmid said.

Financial markets currently expect the Fed to cut interest rates again by 25 basis points at the next two scheduled meetings in October and December.