Fed's Schmid Warns Against Rate Cuts in Wake of a Weaker Outlook

Kansas City Federal Reserve President Jeffrey Schmid warned Thursday that the central bank should carefully consider any decision to lower interest rates in response to potential economic weakness.

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As a voting member of the Fed’s interest-rate committee this year, Schmid expressed growing concern about the inflation outlook.

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“In a speech I gave in early January, I expressed optimism that inflation would continue to ease. However, I have become more cautious,” Schmid remarked during an agricultural conference in Washington, D.C.

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He pointed to recent increases in inflation expectations as a cause for concern. Specifically, he highlighted the University of Michigan’s consumer survey, which showed that long-term inflation expectations in February reached their highest level in nearly 30 years.

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While inflation appears to remain "sticky," Schmid acknowledged that recent data and feedback from business contacts indicate the economy may slow due to heightened uncertainty.

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This suggests the Federal Reserve could face a difficult task of balancing the risks of persistent inflation with concerns about weakening economic growth, Schmid explained.

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He also emphasized two critical lessons from history: easing monetary policy too soon, before inflation is fully controlled, can embed inflation in consumer expectations and the price-setting process. Once this happens, bringing inflation down becomes more challenging and costly.

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Schmid’s comments reflect an ongoing debate within the Federal Reserve about the appropriate timing for potential interest rate cuts. While some policymakers believe rate reductions may be necessary to support economic growth, others worry that moving too quickly could reignite inflationary pressures.

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His remarks align with recent statements from other Fed officials who have also signaled a cautious approach toward cutting rates. The Fed’s primary concern remains achieving its 2% inflation target while avoiding an economic slowdown.

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Schmid’s cautious tone suggests he is inclined to keep interest rates higher for longer, especially if inflation expectations continue to rise. This stance reinforces the message that the Fed will not rush to cut rates without clear signs that inflation is under control.

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In recent months, financial markets have been speculating about when the Fed might begin lowering rates, with many investors anticipating cuts later this year. However, Schmid’s comments indicate that persistent inflation could delay such moves.

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The Fed raised interest rates aggressively throughout 2022 and 2023 to combat surging inflation, which reached a four-decade high. While inflation has since moderated, recent data indicates that price pressures remain stubborn in certain sectors.

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Schmid’s concerns about inflation expectations are significant because they influence consumer behavior and business decisions. If people expect prices to rise in the future, they are more likely to demand higher wages and accept price increases, which can fuel a self-reinforcing inflation cycle.

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At the same time, Schmid acknowledged that economic growth could face headwinds from uncertainty. Businesses and consumers may pull back on spending and investment if they are unsure about future economic conditions, which could slow the broader economy.

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The challenge for the Federal Reserve is to strike a balance between managing inflation and supporting growth. Schmid’s warning suggests that the central bank may prioritize controlling inflation, even if it means maintaining higher interest rates for an extended period.

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His remarks come as policymakers prepare for the next Federal Open Market Committee (FOMC) meeting, where they will assess the latest economic data and decide on the future path of interest rates.

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Schmid’s position reflects a broader caution among Fed officials who want to avoid the mistakes of the past, when premature rate cuts allowed inflation to become entrenched. His emphasis on the lessons of history underscores the Fed’s commitment to ensuring that inflation remains under control before considering any policy easing.

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Overall, Schmid’s comments signal that the Federal Reserve is unlikely to move quickly to cut interest rates unless there is clear evidence that inflation is on a sustainable downward path and the risks to economic growth become more pronounced.

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