Fed Uncertain on Extent of Future Rate Cuts: Schmid

Federal Reserve interest rate cuts are a sign of growing confidence that inflation is heading towards the central bank’s 2% target, but it remains unclear how far rates can fall, Kansas City Fed President Jeffrey Schmid said on Tuesday in his remarks prepared for delivery to the Omaha Chamber of Commerce, reports Reuters.

Schmid acknowledged that recent progress toward the 2% inflation target justifies the current rate-cutting cycle. However, he emphasized the uncertainty surrounding the ultimate extent of future rate reductions.

"The decision to lower rates is an acknowledgement of the ... growing confidence that inflation is on a path to reach the Fed's 2% objective - a confidence based in part on signs that both labor and product markets have come into better balance in recent months," Schmid's prepared remarks stated. He stressed that while the progress is encouraging, "it still remains to be seen how much further interest rates will decline or where they might eventually settle."

Schmid, who will be a voting member of the Federal Open Market Committee (FOMC) next year, refrained from commenting on his preference for a rate cut at the upcoming December 17-18 meeting. The majority of his prepared remarks focused on long-term factors like demographics and productivity that could shape monetary policy by influencing underlying inflation dynamics.

Addressing the issue of large federal government deficits, Schmid asserted that "large fiscal deficits will not be inflationary because the Fed will do its job" to maintain the 2% inflation target. However, he warned that this could necessitate "persistently higher interest rates," underscoring the importance of the Fed's independence in setting monetary policy.

"Political authorities could very well prefer that deficits not lead to higher interest rates, but history has shown that following through on this impulse has often resulted in higher inflation," Schmid said.