2025 FOMC voting member and Kansas City Fed President Jeffrey Schmidt said on Tuesday that while the Federal Reserve's first rate cut is a vote of confidence that the inflation rate is returning to the 2% target, it remains uncertain how much interest rates can decline.
"The decision to lower interest rates is an acknowledgment of the growing confidence that the inflation rate is likely to reach the Federal Reserve's 2% target, a confidence that is partly based on signs of balance in the labor market and product market in recent months," Schmidt said in a speech to the Omaha Chamber of Commerce.
He said that while progress toward the 2% target indicates that now is the appropriate time to lower interest rates, "how much further interest rates will decline or what the final level will be remains to be seen."
Schmidt will have voting rights on the Federal Reserve's interest rate policy next year, and he did not comment on whether he supports a 25 basis point rate cut at the FOMC meeting on December 17-18.
His remarks focused mainly on issues such as demographics and productivity, which could have a long-term impact on monetary policy by changing the fundamental dynamics of inflation.
However, on the more practical issue of federal government spending, Schmidt stated, "Massive fiscal deficits will not lead to inflation because the Federal Reserve will do everything in its power" to keep the inflation rate at the established target of 2%. However, this may mean "interest rates will continue to rise," Schmidt said, which is why the Federal Reserve must maintain its independence when formulating monetary policy.
He said, "Political authorities are likely to wish that deficits do not lead to rising interest rates, but history shows that adhering to this impulse often results in rising inflation." He mentioned that upcoming tariffs and immigration policies, if they affect employment and inflation, will be related to the Federal Reserve.
Schmidt said that interest rates are still somewhat constraining, but not overly strict. The fight against inflation is not over.
Article forwarded from: Jin Shi Data