Federal Reserve "Hawkish Winds Blow"! Another official signals: Current high inflation is a more critical issue

Caixin News, February 26 (Editor: Huang Junzhi) Kansas City Fed President Jeff Schmid said on Wednesday that high inflation remains a more critical issue that the central bank needs to address urgently, but he did not specify how monetary policy should respond.

That day, during a speech at the Colorado Economic Club, Schmid stated: “I believe we still have a lot of work to do on inflation,” and “I think our employment situation is quite good.”

However, he did not explain how these factors influence his views on monetary policy. The Federal Reserve last fall cut interest rates three times in a row, lowering the target range to 3.5% to 3.75%. Schmid expressed skepticism about this move. These rate cuts aimed to boost the sluggish labor market while maintaining enough policy restraint to curb inflation.

Currently, the market widely expects the Fed to cut rates further this year, but Fed officials have provided little guidance, with many focusing on whether inflation is moving toward the Fed’s 2% target. At the January policy meeting, the Fed decided to hold steady, citing signs of labor market stabilization. According to futures market pricing, investors currently expect at least a mid-year rate cut.

In fact, earlier this month, Schmid warned that given the still-strong economic growth and persistent high inflation, the Fed should maintain a tight monetary policy. He emphasized that premature or further rate cuts could prolong high inflation.

Coincidentally, this week, Fed officials have issued hawkish signals, indicating that inflation is the biggest problem and that rate cuts should be put on hold for now. Chicago Fed President Goolsbee said Tuesday that further rate cuts are not appropriate until there is more evidence that inflation is continuing to decline.

He added that policymakers have learned lessons from past mistakes, such as misjudging inflation as temporary, and should not repeat them.

Fed Governor Lisa Cook pointed out that traditional rate cuts may not effectively address the current rise in unemployment caused by the proliferation of artificial intelligence (AI) technology. Although Cook did not comment on the short-term outlook for monetary policy, she mentioned that the latest employment data released after the January meeting shows that the labor market is stabilizing.

Finally, Schmid also discussed the Fed’s balance sheet, stating that current internal discussions focus on understanding the appropriate level of reserves needed in the financial system.

He noted that the large amount of mortgage-backed securities held from past asset purchases is still suppressing housing borrowing costs. Due to the current scale of the Fed’s holdings of mortgage bonds, mortgage rates could be “75 to 100 basis points lower than they would otherwise be.”