Fed's Schmid says rates are 'appropriately calibrated'

By Ann Saphir (Reuters) -Kansas City Federal Reserve Bank President Jeff Schmid on Monday signaled he is disinclined to cut interest rates further, arguing that as the Fed navigates between the twin risks of overly tight and overly easy policy, it should stay focused on the danger of too-high inflation.  Schmid voted for the Fed's September quarter-percentage-point interest-rate reduction, calling it appropriate risk management given the cooling in the labor market. But his hesitation about easing policy further shows the difficulty Fed Chair Jerome Powell faces in building a consensus for the Fed's next rate-setting decision later this month. At least a couple of other Fed policymakers have voiced concern that further rate cuts could reignite inflation, including Dallas Fed's Lorie Logan and Cleveland Fed's Beth Hammack. Meanwhile, the Fed's newest governor, Stephen Miran, dissented last month and has made half a dozen public appearances since then calling for sharply lowering rates over the next couple of meetings. Though Miran is alone in that view, several other Fed policymakers, including Vice Chair for Supervision Michelle Bowman and San Francisco Fed President Mary Daly, do support some further rate cuts to head off more weakening in the labor market. Recent data has shown monthly job gains have plummeted. In a nod to those concerns, Schmid told the CFA Society Kansas City that he believes businesses are delaying hiring while they deal with the uncertainties of President Donald Trump's tariff policies and try to work through the implications of artificial intelligence for their future labor needs.  Still, he said, a wide range of indicators – including an unemployment rate of 4.3% – suggest the job market overall remains healthy. Meanwhile, inflation remains too high, he said, with services inflation looking to have settled in at around 3.5% in recent months, well above the Fed's 2% target for inflation.  "One worrying sign is that price increases are also becoming more widespread," Schmid told the CFA Society Kansas City, noting that by August almost 80% of categories tracked in official inflation statistics had increasing prices, up from 70% at the start of the year. "Overall, I am anticipating a relatively muted effect of tariffs on inflation, but I view that as a sign that policy is appropriately calibrated rather than a sign that the policy rate should be aggressively lowered." Schmid noted that Fed policymakers face tradeoffs – if they cut rates to boost the labor market, there is a risk of higher inflation, but if they set rates high enough to lower inflation, that could push up unemployment. It is a balancing act that Fed Chair Powell has also noted. "Constraints lead to difficult decisions over how to balance competing objectives, and the Fed has been tasked with these difficult decisions when it comes to inflation and employment," Schmid said on Monday. "In balancing this constraint, my view is that the Fed must maintain its credibility on inflation," he said, using bold font in his prepared remarks to emphasize the word "must."   The economy has momentum, Schmid said, and AI-related software spending has bolstered business investment, which usually weakens when interest rates are high. Equity markets are near records, and corporate bond spreads are narrow, he noted.  "Overall, given the state of the economy and financial markets, I view the current stance of policy as only slightly restrictive, which I think is the right place to be," Schmid said.  Financial markets are currently pricing in a high likelihood of another quarter-point interest-rate cut at the Fed's next two meetings, in October and December.  (Reporting by Ann Saphir in Berkeley, California; Editing by Matthew Lewis)

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