NEW YORK, Feb 25 - Federal Reserve Bank of Kansas City President Jeffrey Schmid said on Wednesday that the persistence of inflation above desired levels remains the key issue confronting the central bank, while he judged employment to be in a relatively good position.
Speaking before the Economic Club of Colorado, Schmid said, "I think we have work to do on the inflation side of things," and added that "I think we’re in a pretty good place for employment." He stopped short, however, of linking that assessment to a definitive course for monetary policy.
Schmid has previously expressed skepticism about the Fed's campaign last year to reduce short-term borrowing costs. That campaign resulted in officials trimming the target federal funds rate range to between 3.5% and 3.75%.
Markets have priced in the possibility of additional rate cuts this year, but Fed officials have provided little explicit guidance about the path of policy. Many observers are watching for clearer evidence that inflation is trending down toward the Fed's 2% objective.
Officials said last year that rate reductions were intended to support a softening labor market while maintaining sufficient policy restraint to keep inflation moving lower. Schmid did not offer a specific assessment of how the current mix of relatively high inflation and steady employment should drive future rate decisions.
On the Fed's balance sheet, Schmid described ongoing internal discussions focused on determining the appropriate level of reserves for the financial system. He also noted that the Fed's still-large holdings of mortgage-backed securities from previous purchase programs are exerting downward pressure on home borrowing costs.
Quantifying that influence, Schmid estimated mortgage rates are "probably 75 to 100 basis points lower today than they would otherwise be" because of the present scale of the Fed's mortgage-bond holdings.
Context and implications
- Schmid prioritizes inflation control while acknowledging labor market resilience.
- He refrained from prescribing specific policy moves despite earlier skepticism about last year’s rate cuts.
- The Fed's balance-sheet composition is a live topic, with sizeable mortgage-bond holdings affecting mortgage rates.