March 3 (Reuters) – Kansas City Federal Reserve President Jeffrey Schmid on Tuesday signaled his continued opposition to further interest-rate cuts, saying the U.S. labor market is in balance and inflation is too hot.
“Inflation has been above the Fed’s objective for nearly five years now,” Schmid said in remarks prepared for delivery to the Metro Denver Executive Club, noting that demand is outpacing supply and is pushing up the price of services too fast to be consistent with a return to the Fed’s 2% inflation goal. “I don’t think we have room to be complacent.”
Schmid did not address the economic impact of the conflict in Iran in his prepared remarks, though at least in the short term the volatile situation in the oil-rich Middle East would seem to add to his concerns about price pressures.
Schmid has opposed further Fed easing for a while now, dissenting on two of the Fed’s rate cuts last year and supporting the central bank’s decision last month to leave short-term borrowing costs in their current 3.50%-3.75% range.
Inflation is running near 3%, he noted, adding that a one percentage point increase in inflation reduces U.S. household purchasing power by $300 billion.
Financial markets had expected labor market deterioration, subsiding inflation, or a combination of the two to move the central bank to cut rates again by midyear, but since the U.S. and Israel’s attack on Iran began on the weekend traders have pushed expectations for another rate cut deeper into the year.
Schmid said he shares the optimism about economic growth in the coming year that he hears from his business contacts, and said he believes the Trump administration’s tax reforms will act as a tailwind to growth.
But he rejected the idea that artificial intelligence is boosting productivity fast enough to allow faster growth without inflationary pressures, a key argument for those who feel the Fed still has room to cut rates.
“I remain open to the possibility, and I’m even optimistic, that AI and other innovations will eventually lead to a non-inflationary, supply-driven growth cycle,” he said. “However, based on the current rate of inflation, we are not there yet.”
(Reporting by Ann Saphir; Editing by Andrea Ricci)
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